Bank of America: Financial Winner

NEW YORK (TheStreet) - Bank of America (BAC) was the winner on Tuesday among the largest U.S. financial names, with shares rising over 5% to close at $9.03.

The broad indexes showed modest gains, as investors continued to anticipate that the Federal Reserve would take further action to stimulate the economy, when the Open Market Committee releases its statement on Thursday.

Investors ignored a warning from Moody's Investor Service that the ratings agency might lower its long-term Aaa credit rating for the U.S. government to Aa1, unless Congressional "negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term."

During today's auction by the U.S. Treasury of three-year government paper, the bid-to-cover ratio was 3.94, which means that the Treasury received nearly four times as many bids as the amount of notes sold. The total number of competitive bids was $125.8 billion, while the government sold $31.9 billion in notes. One veteran Wall Street bond investor said "this is the highest bid-to-cover ratio I've ever seen."

The KBW Bank Index (I:BKX) was up 1% to close at 49.29, with 17 of the 24 index components rising for the session.

Morgan Stanley (MS) and Citigroup (C) on Tuesday announced that the companies has agreed upon a valuation for the Morgan Stanley Smith Barney joint venture, which was formed in June 2009. Morgan Stanley currently holds 51% stake in the joint venture, while Citi holds 49%.

Citigroup in June 2009 sold Smith Barney to the joint venture, booking a gain of $11.1 billion, or $6.7 billion after taxes. Morgan Stanley had the option of purchasing Citigroup's minority stake in the joint venture over a three year period, beginning this year.

After Morgan Stanley announced plans to purchase an additional 14% stake in the joint venture from Citigroup, the two companies took until Monday to arrive at a valuation of $13.5 billion for the entire joint venture, and that Morgan Stanley would buy Citigroup's entire stake, taking another 15% by June 1, 2013, and the remainder by June 1, 2015.

Morgan Stanley CEO James Gorman said "this mutually beneficial agreement gives both parties certainty and transparency on price and timing, and is a significant milestone for Morgan Stanley in the implementation of our strategy."

Citigroup CEO Vikram Pandit, Chief Executive Officer of Citi, said that "establishing certainty regarding the divestiture of this business is in the best interests of our shareholders," and that "since forming Citi Holdings, we have reduced its assets by over $600 billion, and we will continue to do so in an economically rational manner."

Wells Fargo analyst Matthew Burnell agreed that the MSSB transaction is "positive for MS (increased revenue diversification at a reasonable price) and Citi (core capital benefit and potential for capital return in 2013)."

The analyst estimated that "Citi will record a $4.2B pretax (noncash) charge to its valuation of MSSB in its Q3 2012 results," and said "the resulting $1.00 reduction to Citi's [tangible book value] (2% of TBV) is a relatively minor reduction," that would be overshadowed by "greater certainty on future buybacks 2012," a "modest" benefit to Basel III Tier 1 capital, and "greater certainty with regulators," heading into the Federal Reserve's next round of bank stress tests early next year.

Citigroup's shares rose 3% to close at $32.66.

Regarding Morgan Stanley, Burnell said the pricing of the joint venture was "a slight positive," it was "was a positive for MS, it is largely the result of reduced profitability driven by a sluggish market and economic environment that reduces the intermediate term contribution of profits from [global wealth management] to MS, undermining its strategy to diversify its revenue and earnings base, which may prompt more aggressive trading related retrenchment."

Morgan Stanley's shares rose 4% to close at $17.25.

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