The Real Reason Behind Bank of America's Rally (Update 1)

Bank of America story updated with Friday's share price movements in final paragraph.

NEW YORK (TheStreet) -- Bank of America (BAC) bulls are feeling brilliant, as their bank is up 47% year to date, making it best performer in the S&P 500 year to date.

They should be congratulated, assuming they didn't buy the shares on Sept. 8, 2008 at $34.37. That's where Charlie Peabody, analyst at Portales Partners, told them to buy. Peabody, who no doubt had plenty of bullish company at that time, finally reversed that long-held conviction this week, downgrading the stock to "hold."

Bank of America still has plenty of things going for it. It still trades for a fraction of book value. It has over a trillion dollars in assets that it can use to borrow short at super-low rates and lend long at slightly higher rates, pocketing the difference. That's the banking business at its simplest, and when you have $1 trillion in assets you can make a lot of money doing that.

The bank also has a powerhouse investment banking operation, and that still counts even in these dark days of finance. There aren't many U.S. institutions that big companies can go to if they want a big loan to fund an acquisition or an expansion, and so Bank of America will always be able to capture some of this business. The bank also has plenty of assets, such as real estate, that it can sell if it needs to.

As for the bank's biggest problem--its exposure to problem mortgages underwritten by Countrywide Financial prior to Bank of America's acquiring it in 2008--many analysts believe Bank of America now has that issue under control.

After all, it has recognized or reserved against a total of $35 billion in losses, and even in a worst case would not see more than $32 billion more, according a report from to Citigroup analyst Keith Horowitz.

What's more, the bank's shares seemed to get a lift on Thursday from a giant $25 billion settlement involving it and the other four largest U.S. mortgage servicers, including Wells Fargo (WFC),Citigroup (C), JPMorgan Chase (JPM)and Ally Financial.

While no one thinks this deal is the answer to the banking industry's mortgage headache--least of all Bank of America's, it appears to be a step in the right direction.

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