Bank of America Corporation (NYSE: BAC) has found itself as the king of the mortgage mess after it decided to acquire Countrywide. By acquiring the company’s corpse rather than trying to just buy the skeleton’s remaining assets, BofA now has potentially billions of dollars of mortgage exposure due to the process or foreclosure, bad loan criteria, repackaging loans into CDOs and mortgage-backed securities, and on and on. We have wondered how bad that exposure might be in reality and we are starting to get more color on that front now that earnings season’s dust has settled.
What is interesting is that the opinion of how bad this will ultimately be can vary greatly from source to source. Our guess is that if you asked ten different members of the top brass at BofA what they thought their ultimate mortgage exposure is, you would probably get ten very different answers.
It turns out that Barron’s noted some of the banks trading close to book value, or under book value, this last weekend. We have previously noted that both Bank of America Corporation and Citigroup, Inc. (NYSE: C) are both trading under book value but that still has not prevented a slide in the stocks. That might not matter if that book value keeps getting eroded even as BofA remains profitable.
We have also seen how shares of Comerica Incorporated (NYSE: CMA), New York Community Bancorp, Inc. (NYSE: NYB), Northern Trust Corporation (NASDAQ: NTRS), Regions Financial Corp. (NYSE: RF), State Street Corporation (NYSE: STT), and U.S. Bancorp (NYSE: USB) have also mostly fallen since earnings season, but these are now all much closer to (or under) their implied book values reported with earnings. Wells Fargo & Company (NYSE: WFC) and J.P. Morgan Chase & Co. (NYSE: JPM) have also been under fire but these are now at much lower premiums to book value.
The pure-play for any bounce, if one is coming, in the banks is the Financial Select Sector SPDR (NYSE: XLF) ETF as it has the most exposure to the top banks in its tracking index. The derivative tracking ETF is the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and it is the most leveraged and liquid of all leveraged bank ETFs with three-times the intraday moves. Keep in mind that it does have tracking error if held over longer periods of time.
Sanford C. Bernstein’s John McDonald issued a report on the mortgage woes at Bank of America Corporation (NYSE: BAC) this week with an outlook of $27 billion in new mortgage-related losses through the end of 2013. How much? The Charlotte-based bank has already booked $46 billion in mortgage losses during the financial crisis.