BAC's results

Bank of America’s results just scream to be shorted, see below. And if that is not enough to get bearish on the financials then comments by Senior Presidential advisor Axelrod this weekend should (they are similar to what Guithner had said a couple weekends back). Axelrod said “some banks will show serious problems and will likely need substantially more federal financial assistance, but the government doesn’t foresee a scenario whereby an institution will be seized entirely by regulators. We're confident that, yes, some are going to have very serious problems, but we feel that the tools are available to address these problems.” Can you say Citi like preferred to common conversion, more government infusion or having to come with hat in hand to the public markets. Any way you slice it the call option of the capital structure, common stock, should get hammered at BAC and WFC over the next month. JPM and GS should be safe and I don’t have a specific call on the other 15 institutions going through the stress tests.

BAC’s results. On the surface a $.44 number vs. $.04E looks pretty good. However if you strip out the gains from their China Construction Bank sale (-$.15), Security Gains (-$.12), Merrill Mark to Market gains on MER structured notes because of a widening in credit spreads (-$.17) and then add back merger related charges from MER (+$.06) then you get $.06 vs. $.04E. Okay so that is better than expectations, but BAC’s loan loss reserve currently stands at 3.00% of loans. That compares to JPM at 4.5% and C at 4.1%. JPM is the most conservative of the group in terms of reserving, is the best positioned in terms of their loan mix and was much less aggressive in terms of underwriting on a relative basis over the past few years. So you tell me where BAC should be relative to JPM? HIGHER is the answer. If BAC were to reserve like it should their results this quarter or over the past year should not have been anywhere near what they were = equity value lower than where it is now. BAC saw Net Charge Offs of 2.85% of loans vs. 2.35% last quarter, which was worse than expected, and they saw Non Performing Assets of 2.65% vs. 1.96% last quarter, also worse than expected. Doesn’t that also call for a greater loan loss reserve? To put the 2.85% net charge offs in perspective, the worst period ever for the banking industry was the 3.4% charge off rate in 1934 during the GREAT DEPRESSION! Lastly 50% of the NPAs was due to resi construction, no surprise, but 25% was from commercial real estate. That is an area to really watch over the next 1-2 years. Solwold is there a double/triple short commercial real estate play? I know you have mentioned the triple short real estate name before but I want to make sure that is all commercial and no residential. I can argue we are much closer to a bottom in resi vs. CRE.