Category Archives: Bodenkreditanstalt

Considering the Crisis at Bank of America

As a former NLO dividend watch list stock, Bank of America (BAC) has fallen on hard times that in many respects were predestined.  In a posting titled Financial Panic Chronicles dated May 9, 2009, we pointed out the similarities of the October 1929 forced merger between Austria’s number two bank BodenKreditAnstalt with number one ranked CreditAnastalt and the forced mergers between Bank of America/Merrill Lynch, Wells Fargo/Wachovia, and J.P. Morgan/Bear Stearns in 2008.
Our point of making the comparison between distinctly different institutions in different eras was to show what the hazards might be when an ailing bank isn’t allowed to fail.  It was only two years after the merger of BodenKreditAnstalt with CreditAnstalt that the remaining “super bank”, CreditAnstalt, collapsed which resulted in the worldwide banking crisis. 
The failure of CreditAnstalt in 1931 did not arrive without a fight. F.M. Rothschild committed enormous amounts of money from 1930 to 1931 in an effort to use his name and financial largess to sway public opinion of the health of CreditAnstalt, not unlike Warren Buffett’s most recent “investment” in Bank of America.  As noted in our previous article:

London banks, the Bank of England, Germany's Reichsbank, Bank for International Settlement and the Bank of Austria all threw money at CreditAnstalt starting in May of 1930 in a failed attempt to shore up the problem.

 The current travails of Bank of America (BAC) and Citigroup (C) may prove too enormous for market forces to bear.  Talk of possible capital raises and divesting individual units through bankruptcy speak largely of the dire risk to the banking system the zombie banks pose.  Bank of America, in particular, through “too big to fail” policies has become THE bank of America.
We wouldn’t be surprised if Bank of America, or another of the current top ten banks in the U.S., in an effort to stave off certain failure, will be partially or fully nationalized as CreditAnstalt before its collapse.  However, such actions will only demonstrate for the investing public that band-aids should not be used to deal with hemorrhages.
Because we rely heavily upon the markets to tell us what the investing public believes will come next, we are presenting the Dow Theory downside targets for Bank of America.
According to Dow’s Theory, the following are the long-term downside targets for Bank of America (BAC):
  • $18.59
  • $13.44 (1/3)
  • $10.865 (fair value)
  • $8.29 (2/3)
  • $3.14 (3/3)
Already, BAC has managed to decline below the 2/3 resistance level of $8.29 per share.  This typically indicates that Bank of America stock will go to $3.14 (3/3 resistance level).  In four prior peak-to-trough periods since 1982, Bank of America has managed to fall close to, or below, the previous low three times as demonstrated in our September 15, 2008 Dow Theory analysis of the stock.
Because we don’t want to assume that the Bank of America will automatically go to the prior low of $3.14, we have provided short-term Dow Theory targets for BAC.
Dow Theory on the $8.29 to $3.14 price levels ($1.73):
  • $8.29
  • $6.65
  • $5.72
  • $4.83
  • $3.14
 
These targets are in hopes that the stock does not actually go below $3.14. Already, Bank of America has fallen below the $6.65 level leaving only $5.72 and $4.83 as possible support levels before the bank reaches $3.14.
If the voting machine known as the stock market continues on its current downward trajectory, any decline of BAC below $3.14 would require nationalization in the “best” case scenario.  The worst case scenario might reveal that safety nets like FDIC insurance are the root cause of how our financial system got to where we are today.  In the words of Citigroup (formerly National City) when FDIC was first proposed:

"The element of character in the choice of bank is eliminated, and the competitive appeal is shifted to other and lower standards, such as liberality in making loans. The natural result is that the standards of management are lowered, bankers may take greater risks for the sake of larger profits and the economic loss which accompanies bad bank management increases."
Grant, James. Mr. Market Miscalculates. Axios Press. 2008. page 202.

Our focus on the merger of BodenKreditAnstalt and CreditAnstalt in 1929 and the subsequent failure in 1931 that led to a worldwide banking crisis should give good reason for all individuals to be concerned.  The safety nets that were created as an outgrowth of failure of the banking system are not prepared to handle what may come if the perception grows that Bank of America needs to be nationalized.

Citigroup (C) Continues to Struggle

Below is a second look at an article that I published back in November 2008. This lays bare the extent of the problems faced by Citigroup. I hope anyone interested in Citigroup finds this article helpful. We can only hope that the Citi situation doesn't go the way of CreditAnstalt as described in previous articles. -Touc

The term that is the basis of all discussions in elementary economic modeling, especially when comparing two factors, is ceteris paribus. Ceteris paribus means "with other things the same" and represents the best guess as to what is likely to occur provided all thing remain unchanged. Let us take an overly simplistic view of the situation with Citigroup's government rescue plan and determine the potential outcome ceteris paribus.

According to the Wall Street Journal, in an article by David Enrich, the federal government has agreed to absorb $277 billion of $306 billion of losses that Citigroup has identified as "troubled" assets. Additionally, the Treasury is adding $20 billion on top of the $25 billion recently injected into Citigroup as part of the TARP plan. Remember, the $277 billion is separate from the $700 billion bailout package. Again, this current approach with Citi is counter to the early arguments that there needs to be a comprehensive solution, not an individual approach, to the bailouts after the fall of Fannie, Freddie, Lehman, Merrill and WaMu which spawned the TARP plan to begin with.

Now, let's look at only the off-balance sheet portion of Citigroup. The off-balance sheet portion is called an asset by Citi but isn't included on the books. The off-balance sheet items are valued at $1.23 trillion. I don't know why Citi wouldn't include these items on their balance sheet but if the U.S. government is any indication then the off-balance sheet is probably more like liabilities instead of assets.

If the government is going to front Citi $277 billion (a whopping 40% of the total TARP package for only one company) then that would leave $953 billion remaining on the off-balance sheet portfolio. If we split the $953 billion in half and conservatively assume this portion is "troubled" then we have a figure equal to $476.5 billion. Remember when Merrill Lynch auctioned off $30 billion of CDOs or "troubled" assets back in July 2008? Here's what Bloomberg.com said of that auction on July 29, 2008:

In yesterday's statement, Merrill said it agreed to sell $30.6 billion of collateralized debt obligations -- the mortgage-related bonds that have caused most of the firm's losses -- for $6.7 billion. The buyer is an affiliate of Lone Star Funds, a Dallas-based investment manager.

At the time, Merrill was only able to get $6.7 billion, a loss of 78% or $0.22 cents from every dollar originally invested. Therefore, my assumption of a 50% loss for Citi isn't so far fetched.

Ceteris paribus, this leaves Citi with at least $476.5 billion in losses to write down at some point in the future. This assumes that the economy remains in a slight recession, that earnings are the same, that the dividend for this company has been all but eliminated, that there are no further losses in the housing market. All things being equal, Citi is in for hard times. However, if we take 78% of the entire $953 billion then we get a total loss of $743 billion. A sum exceeding the amount of the entire TARP program even after a $277 billion direct injection to Citi from the government.

Clearly our government under Bush/Obama has severely underestimated the extent of how much damage has been done to our financial system. Along with the lack of knowledge that has been demonstrated, the only policy reaction is to have a blank check approach to dealing with the problem. This is what I meant when I said that chaos will ensue when and if Bank of America falls below $14.00.

Previous articles on Citigroup

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