Good Bank Bad Bank (BAC)

After the markets closed on Friday, Bank of America announced the creation of a new department (mini-bad bank). This new department will handle some 1.3 million delinquent outstanding loans they have on the books from their Countrywide Financial mortgage unit. In Q4 of 2010, B of A took $2 billion non-cash charge against the value of those loans. Furthermore, they made a $4.1 billion provision to cover the potential buyback of certain mortgages and loans that government agencies and other investors bought from Countrywide. B of  A could face even higher potential losses ($10 billion) should more mortgages made prior to the housing bust turn sour. However, as large as these numbers seem, B of  A appears to be well covered. They have a whopping $500 billion in outstanding/performing mortgages and HELOC's ( home equity loans ) to cushion them against their non-performing loans. Credit trends are improving on both consumer and commercial loans. Charge-offs in both categories are falling - all pointing to improved earnings power ahead for B of A. The bank also noted on Friday, that they will discontinue their business of reverse mortgages to focus on more "critical areas" of their operation - another good move.

By having this new unit deal head-on with the "bad" loans and streamlining other less profitable operations, I expect the market to perceive these changes as positive going forward. With operating conditions improving and strengthening earnings power combined with improved perception by the street should bode well for shareholders. B of A is a good bank. I'll continue to add to BAC on weakness.

Disclosure: Long BAC, Long Green Bay Packers

WikiWallstreet - Bank of America (BAC)

You have no doubt heard the news about Wikileaks "spilling" sensitive information regarding politicians, government agencies and public companies. Recently, Bank of America was a target, with Wiki alleging they are sitting on 5 gigabytes of harmful documents. The documents allegedly involve Countrywide ( mortgage lender BAC bought ) and Merrill Lynch ( investment bank BAC bought ) and their activities over the past 3 years. When Wiki broke the news BAC stock only sold off 3%, only to gain 10% over the next 3 trading days.The large American banks have been severely out of favour over the past two years. Much of the "bad news" is already priced which is why BAC only had a temporary pull back on the Wiki news. BAC has been on the receiving end of a continuous stream of bad news. Many of the big U.S.banks are under owned. That will change.

During the last week of November BAC was trading at a market cap of 110 billion. They currently have 140 billion in cash and 350 billion in short term securities backed by Uncle Sam. Yes, they still have a whopping loan book that could go sour. However it's unlikely that the whole book is toxic. BAC is trading for less than it is worth if they closed the doors tomorrow. BAC holds 10% of all the deposits in America. They are tightly woven into the economic fabric of America. If you think the U.S. economy with eventually restore itself, than BAC is good value ( but not at any price ) with limited risk. But, there will be plenty of volatility -  which is OK.

http://business.financialpost.com/2010/11/30/wikileak-megaleak-from-unnamed-us-bank-wont-offer-new-news-says-dick-bove/

Disclosure: Long BAC