Bank of America: Obama Makes Everything Worse Loser

NEW YORK ( TheStreet) -- Bank of America ( BAC) was the loser among the largest U.S. financial names on Wednesday, with shares falling 4% to close at $8.99.

The broad indexes all saw declines of over 1% and the KBW Bank Index ( I:BKX) was down over 2% to close at 46.68, with all 24 index components seeing declines for the session.

Financial stocks were weak early, but fell much harder after President Obama discussed the "fiscal cliff" during a White House press conference in the afternoon.

The president and the Republican majority in the House of Representatives are negotiating over which "revenue enhancements" and spending cuts will be agreed upon, to avert the expiration of the tax cuts enacted when George W. Bush was president and extended by President Obama in 2010, as part of an agreement to increase the federal debt ceiling. Without a compromise, in addition to the expiration of the tax cuts, there will be major federal budget cuts, which many economists have said could push the U.S. economy back into recession.

President Obama said during the press conference that "we face a very clear deadline that requires us to make some big decisions on jobs, taxes and deficits by the end of the year. Both parties voted to set this deadline and I believe that both parties can work together to make these decisions in a balanced and responsible way."

According to a Washington Post transcript, the president said "I am open to compromise and I'm open to new ideas, and I've been encouraged over the past week to hear Republican after Republican agree on the need for more revenue from the wealthiest Americans as part of our arithmetic if we're going to be serious about reducing the deficit."

President Obama then outlined "two pathways" for federal income taxes: "Option one, if Congress fails to act by the end of this year, everybody's taxes will automatically go up, including the 98 percent of Americans who make less than $250,000 a year, and the 97 percent of small businesses who earn less than $250,000 a year. That doesn't make sense. Our economy can't afford that right now. Certainly, no middle class family can afford that right now. And nobody in either party says that they want it to happen."

"The other option," according to the president, "is to pass a law right now that would prevent any tax hike whatsoever on the first $250,000 of everybody's income. And by the way, that means every American, including the wealthiest Americans, get a tax cut. It means that 98 percent of all Americans and 97 percent of all small businesses won't see their taxes go up a single dime."

The president continued to make his case by saying "We should not hold the middle class hostage, while we debate tax cuts for the wealthy. We should at least do what we agree on, and that's to keep middle class taxes low."

While the Republicans -- who have signaled a softening position on tax increases for people earning over $250,000 a year -- will no doubt wish to discuss federal budget cuts, or the slowing of federal spending increases as part of the fiscal cliff negotiations, the president made no mention of any spending cuts during the press conference, where questions from the media were mainly focused on the scandal surrounding General Petraeus and the murder of Ambassador Christopher Stevens in Benghazi, Libya.

KBW analyst Melissa Roberts on Wednesday said that "there may be increased portfolio repositioning in the coming weeks from retail investors, given the looming expiration of tax cuts impacting both capital gains and dividends," and that "if tax rates rise in 2013, retail investors may opt to realize capital gains in 2012, particularly for stocks with meaningful dividend yields."

Bank of America's shares have now returned 62% year-to-date, following a 58% decline during 2011.

The shares trade for The shares trade for less than 0.7 times their reported Sept. 30 tangible book value of $13.48, and for nine times the consensus 2013 earnings estimate of 97 cents a share. The consensus 2014 EPS estimate is $1.27.

While the fiscal cliff is certainly important to Bank of America, the company has been focused on what it can control, which is building capital, while navigating the storm of mortgage putback demands springing mainly from the activity of Countrywide Financial, before that company was acquired by Bank of America in 2008.

When the Basel III capital requirements are fully phased in, in 2019, the large "global systemically important financial institutions," including Bank of America, JPMorgan Chase ( JPM), Citigroup ( C), Goldman Sachs ( GS), Morgan Stanley ( MS) and others, will be required to hold additional capital buffers of up to 3.5%, beyond the required Tier 1 common equity ratios of 7.0%. On Nov. 1, the international Financial Stability Board updated its list of GSIFIs, and listed the additional capital buffer requirements of each.

Wells Fargo analyst Matthew Burnell on Nov. 2 said that "the biggest surprise was that BAC's GSIB core capital buffer requirement was 150 bps, 100 bps below the level of the two other U.S. based universal banks Citi and JPM (which were placed at 250 bps). The buffers for GS and MS were set at 150 bps."

Burnell rates Bank of America "Market Perform," and said that the lower Basel III capital requirement for the company was driven by its "international retreat" and efforts to lower its risk-weighted assets. "More importantly, the lower buffer could fan hopes for faster capital repatriation than expected in 2013 and beyond though we expect its placement on this list will have relatively little effect on BAC's capital return in 2013."

Still, following the completion of the next round of Federal Reserve stress tests late in the first quarter, the analyst expects an increase in Bank of America's quarterly dividend on common shares to five cents from its current nominal level of a penny, along with $1.0 billion in share buybacks during 2013, for "a 30% total payout ratio."

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-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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