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Bank of America has cut short both its dividend and credibility. Too bad Chris Cox, the SEC, and 'Investment Banking Inc.' is banning us from pricing this stock efficiently...

When grocer Amadeo Giannini founded the Bank of Italy in a saloon in San Francisco at the start of the last century he had limited capital with which to take on the established banking community. It was a crisis, the great earthquake of 1906, which allowed Amadeo to build the reputation that defined his franchise by providing liquidity: he lent to small business owners that needed to rebuild when other banks couldn’t or wouldn’t. Later, after several mergers and a name change to Bank of America, Giannini again found opportunities to grow in crisis –this time the great depression, when he again provided loans at a time when others were unable or unwilling. Ingenuity, hard work and a willingness to take calculated risks on borrowers who were worthy made him a giant of the US credit market. When he died just in 1949, Bank of America was the largest bank in the US.

Today the enormous financial institution that bears the name Bank of America has little resemblance to Giannini’s bank. In the current crisis, instead of being a steadfast lender providing liquidity, it stands in line with the other Wall Street supplicants seeking capital injections from the equity markets and government handouts. The name on the door may still commands respect on Main Street -during the flight to quality spurred by bank failures in August and September BAC’s retail deposits swelled by nearly 10%, but make no mistake: this is no longer Amadeo Giannini’s bank, this is Ken Lewis’s bank –large, generic and weak. With yesterday’s announcement of a 50% dividend reduction and the need to raise $10 billion in a common stock offering, Lewis is starting the long process of shoring up the balance sheet while preparing to digest the massive Merrill Lynch acquisition. It remains to be seen if $10 billion will be sufficient or if Lewis will need to return to the trough again.

Prior to the Merrill announcement, BAC had seemingly abandoned the investment banking and brokerage business. Little or nothing now remains of the firm’s only marquee investment franchise, John Sandelman’s team of “boy wonders” that made NationsBank a risk trading power house in the mid 90’s before the merger with BAC. Lewis sold the last vestige of the NationsBank platform -its prime brokerage unit, to BNP Paribas’ Todd Steinberg (one of Sandelman’s original traders) for $300 million in June. The Merrill Acquisition therefore sits as an abrupt reversal of strategy, backed by the logic that Merrill’s retail focus will be better suited to a financial supermarket model than a trading franchise was. When the deal was announced the same Lewis that had abandoned organic efforts just months before gushed at the opportunity to buy the enormous floundering brokerage and re-enter the market. “We would have been frustrated for quite some time, and this just changes that. I like it again.”

Lewis may suddenly like his bank again but the market doesn’t. As of the close yesterday BAC was trading below our short term trade level of $32.78 and our long term trend line of $35.23 (see the chart below) and selling pressure on the bank’s shares intensified in Europe overnight.

When the great Amadeo Giannini died, it is reported that his estate was valued at a respectable, but miniscule by bank CEO standards, $500,000. This was part of his way. As a manager he abhorred excessive executive salaries and as a person he was decidedly non materialistic. Ken Lewis –whose initial claim to fame was his focus ending the non-stop roll up strategy employed by his immediate predecessors and better focus on risk, received $20.4 million in total compensation for his services in 2007, the same year he announced his intention to purchase Countrywide Financial.

Only in America.

Andrew Barber
Director