Can Bank of America Buy Credibility? Global Bank Liquidity Issue or Solvency Issue?


I am somewhat in awe (in a negative sense) of the silliness of analysts and executives who think banks in the US and Europe are being hit with liquidity issues, not solvency issues.

Here is a case in point, from a Telegraph article: Market crash ‘could hit within weeks’, warn bankers.

Insurance on the debt of several major European banks has now hit historic levels, higher even than those recorded during financial crisis caused by the US financial group’s implosion nearly three years ago.

Credit default swaps on the bonds of Royal Bank of Scotland, BNP Paribas, Deutsche Bank and Intesa Sanpaolo, among others, flashed warning signals on Wednesday. Credit default swaps (CDS) on RBS were trading at 343.54 basis points, meaning the annual cost to insure £10m of the state-backed lender’s bonds against default is now £343,540.

The cost of insuring RBS bonds is now higher than before the taxpayer was forced to step in and rescue the bank in October 2008, and shows the recent dramatic downturn in sentiment among credit investors towards banks.

“The problem is a shortage of liquidity – that is what is causing the problems with the banks. It feels exactly as it felt in 2008,” said one senior London-based bank executive.

Not a Liquidity Issue

Did you catch the silly quote? If not here it is: “The problem is a shortage of liquidity – that is what is causing the problems with the banks. It feels exactly as it felt in 2008,” said one senior London-based bank executive.

This is not a liquidity issue. Banks are undercapitalized. I am not sure who that bank executive is, but he sounds like Rochdale Securities’ analyst, Dick Bove.

I recently commented on Dick Bove, Bank of America, and undercapitalization in  Hello Richard Bove, Repeating Nonsense Does Not Make It True; Bank of America Will Not Survive in One Piece.

On the chance you need a second opinion about Dick Bove, please consider Dick Bove – Open Mouth Insert Footon the Big Picture blog, from April 17, 2010.


At 9:43  AM ET on CNBC, Dick Bove (Rochdale Securities) said Goldman  would pay a  fine and this will pass (3:00).  He also called the stock  an aggressive  buy  at $171 (4:45).  At 6:00 minutes Mark Haines begged  him to reconsider  his position arguing that fraud is a big deal.  Bove  was undeterred and  reiterated his buy recommendation  stating a second  time this was a short-term issue (7:00).


Then  at 6:35 PM ET with the stock at $160.70 ($11 below his aggressive buy  recommendation this morning) …

Bloomberg.com  – Goldman Sachs Executives Should Resign, Bove Says

Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein and   finance chief David Viniar should resign over fraud allegations,  according to Dick  Bove, an analyst at Rochdale Securities. “Will Lloyd  Blankfein, CEO, and David Viniar, CFO, maintain their  positions in the  company? I do not think so,” Bove wrote in a note to  clients today.  “Someone must ‘fall on their swords’ for the devastating  decline in  this company’s persona and they  may be forced to do so for public  relations reasons.”

Just six months ago  Bove stuck his foot in his mouth by offering instant  analysis on Wells  Fargo by exciting giving a positive instant reaction  to their earnings  only to change his opinion to a sell for clients six  hours later.As a result of this  embarrassment, Bove told Dow Jones newswires:

“I’m not  going to do it anymore. I’m going to  have to  see the  numbers before I go on air,” Bove told Dow Jones  Newswires Thursday.  “It creates an untenable situation.”

Dick, maybe you should  expand your self-imposed gag order beyond  numbers and not offer an  opinion on a SEC complaint until you actually  read it, or at least the  three paragraph  summary.

Goldman Sachs Weekly

The very best someone could have done on that recommendation  is get out break even, after a substantial initial loss. Those who held on are in  far worse shape.  Perhaps in a couple years they too can get back to even.

Dick Bove: Bank Of America Shares Could Rocket To $32

Flashback December 16, 2010: Dick Bove: Bank Of America Shares Could Rocket To $32

Bank of America(BAC) will likely hit $32 per share, according to the latest bullish forecast by Rochdale Securities analyst Richard Bove.

Bove has been touting bank stocks for several months now, and in May he argued Citigroup(C) and Bank of America would sextuple by 2015.

Bove said in a voice message left with TheStreet that he estimates it will take roughly three years for Bank of America to reach $32.

Can Bank of America Buy Credibility?

Bloomberg reports Bank of America ‘Buying Credibility’ With Buffett’s $5 Billion Investment

The Bank of America cash injection may have little impact on capital and doesn’t resolve mounting legal claims linked to mortgages, many of which stem from the 2008 acquisition of Countrywide Financial Corp. Shares of the Charlotte, North Carolina-based bank pared their initial gains today, rising 9.4 percent to $7.65 in regular New York trading.

“He’s buying credibility,” Richard Bove, an analyst at Rochdale Securities LLC in Lutz, Florida, said of Moynihan.

Still, Moynihan cut a “bad deal for Bank of America shareholders,” Bove said.

“It’s an excessive price to pay if, in fact, he didn’t need capital,” he said. “There’s no way in hell that he can make 6 percent after tax on any investment he can make.”

I do not believe one can buy credibility. However, let’s assume you can. Can you still buy credibility if you

  1. “Pay an excessive price”
  2. “Cut a bad deal”
  3. “Raise capital when you do not need to”

Bove makes all those statements. I want to know how a company can make three major mistake and still “buy credibility”.

Bank of America Needed to Raise Capital

Actions speak louder than words.

Regardless, of what anyone says, Bank of America needed to raise capital or they would not have done this deal on extremely onerous terms. Bank of America has problems somewhere, perhaps multiple problems.

Statements to the contrary by Moynihan are meaningless. They remind me of statements by Bear Stearns,  Lehman, and Morgan Stanley, lies, lies, and more lies by all three companies.

Dick Bove An Embarrassment to Rochdale Securities

In general, do not care about bad calls. Everyone who makes predictions is going to have a number of them. I certainly have made a number of them over the years. It is extremely difficult to get both timing and direction correct every time you say something. Indeed, it’s impossible.

What’s important are thought processes, sheer recklessness, and a repeated history of  horrendously inept calls with few good ones.

In this case, it’s crystal clear Dick Bove is an embarrassment to Rochdale Securities, and if Rochdale had any common sense they would fire Bove immediately, if not sooner. That they have not done so, just may say something about Rochdale Securities.

Mike  “Mish”  Shedlock

Global Economic Analysis