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Bank of America to Fall Off Cliff, Then Bounce: Analyst

Mosby said that his firm's Washington Research Group "currently estimates a 65% probability that the U.S. economy is pushed over several of the initial Fiscal Cliffs."

According to the Washington Research Group's report from Nov. 21, despite the wave of optimistic media reports, that the Republican leadership in the House of Representatives and the Senate are ready to cave on their stance against any tax increases, even for higher-income taxpayers, several major sticking points need to be addressed before "there can be real optimism on a deal to prevent December ending like Thelma and Louise."

These issues include, but are certainly not limited to the following:

  • President Obama's insistence that marginal tax rates rise for individuals making over $200,000 a year, and for couples earning $250,000. Some conservative political pundits have cheerfully pointed out that the GOP may wish to give in on this point, since "protecting the rich" from tax increases doesn't seem to be helping the Republicans win elections.
  • Elimination of deductions and tax loopholes. Guggenheim's senior political analyst Chris Krueger said in the Nov. 21 report that a different way to soak higher-income tax payers could be possible, "if effective rates (capping and/or limiting deductions) will be enough for Democrats, or if statutory rates (reverting back to 39.6% for those households making over $250K) will be required."
  • Entitlement reform. Krueger said that "what is missed by several media organizations who run headlines similar to 'Republicans Willing to Deal on Revenue' is the IF in that pledge." Krueger, who said "there is bi-partisan support to cut the providers," including hospitals and drug companies, "but beneficiary reform produces a scorched-earth defense for penny one."
  • Spending Cuts. There have been no details yet on negotiations over spending cuts, although media reports on defense procurement activities show that the Pentagon is anticipating a major budget reduction.
  • Debt ceiling. Here we go again. There's no denying that $16 trillion is a very ugly figure.

Mosby singled out Bank of America for several reasons. "Since this correction started earlier this fall, the Large Cap Banks have experienced an average 5% decline in stock prices. During this same time, BAC's stock price has actually increased 3%, he said." Bank of America also has major legacy mortgage risk, mainly from its acquisition of Countrywide in 2008.

In its quarterly 10-Q filing with the Securities and Exchange Commission, Bank of America reported that the total unresolved mortgage repurchase claims against the company had risen to $25.5 billion as of Sept. 30, from $12.6 billion at the end of last year. Mosby said that "we have calculated a range for potential remaining after-tax losses of $15-50 billion. While our best-case scenario could be funded with about one year's earnings, the worst-case scenario could create a $2 haircut to BAC's year-end estimated tangible book value per share of $14."

Of course, Bank of America's mortgage putback risk could be greatly curtailed if the economic recovery strengthens, making the company's stock very sensitive to the continuing stream of economic reports, which have recently underscored a housing recovery.

Mosby said that "that until short-term rates begin to rise, BAC's earnings power is between $10 billion and $12.5 billion a year."

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