Thursday, January 15, 2009

Bank of America: Pattern Recognition

Can't you just see exactly how the B of A situation is going to play out? I've been saying for three months, as BAC flopped around between $11 and $18 that $10 was the point of no return. All of the big financial institution failures had this same feature: if your stock crosses $10 the wrong way and doesn't bounce back, it basically loses a bid until somewhere in the $7s or $8s. Then, on the ensuing Friday, it loses a bid entirely and falls to $5-$6 or less. Then, by Sunday night ("before the Asian markets open" because heaven forbid Asia should have to worry about uncertainty in a random American company), the government announces a massive intervention. So, here's an email I sent around to friends this a.m. just after the open as BAC hit $9:

As an aside, my $10 BAC puts, which expire tomorrow, are up over 200% today. Sadly, not a huge position.

Can’t you just sense the playbook? B of A cracks the $10 and $9 barrier in the same day…a Thursday. We all know that when important financial institutions cross $10 (the wrong way) and then gap down, Sec. Paulson’s batphone rings. Friday things get really oogie; rumors abound. It falls to about $6. Over the weekend, people get really weirded out. Asia opens Sunday night, which is normally the deadline for dealing with this stuff, but the US is actually closed on Monday for MLKJr Day and reopens on the day of the inauguration of our first black president [noteworthy for coinciding with MLKJ Day]. Sundays are normally the day that this stuff is dealt with, but with Citi hitting new lows and B of A into the scary territory, there’s too much to deal with.

De facto nationalization of the banking system may not happen this weekend, but it’s coming. You can taste it. Buy gold.

So, apparently I'm not the only one that knows this is the playbook. Looks like B of A and the Feds are trying to preempt a weekend of worry, especially this weekend.

Here's an article from the WSJ on the subject. Looks like the Batphone rang and the Feds mobilized. The issue is, they are using the so-called Citibank Plan, but Citi also hit fresh lows today (below $4/share).

By the way, I know everyone railed John Thain for asking for the bonus he was contractually promised (crazy bastard!), but isn't it clear at this point that he should have been paid pretty much everything that Merrill received north of $1/share. I mean, the ML shareholders should have felt lucky to get $1, because ZERO was the other alternative. He should be given a hero's welcome by Merrill shareholders. They should all keep a bust of him on their mantle. Yet somehow he's vilified! This is a crazy, mixed-up world.

Also, have to love that BAC's market cap is now less than it intially offered for Merrill and less than all of its government capital infusions added together (including the proposed $20 billion). Pretty strongly implies that the market cap of BAC would be ZERO if not for federal intervention. Go taxpayers!

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