Friday morning, Bank of America Chairman Ken Lewis was served with a subpoena by New York Attorney General Andrew Cuomo over the Merrill Lynch bonus affair. On this news the stock prices sharply slid downwards. However, this news stands no ground. Lewis received a subpoena; he has not testified yet! Just because the man is served with a subpoena does not mean he did something wrong. Perhaps when he testifies he will have an opportunity to set it clear for the last time that he was not involved with the Merrill payout. Merrill Lynch was an independent company at that time led by John Thain. If anyone should be held responsible, it is completely Thain’s responsibility because he allowed it, paid it, and received it! Lewis has consistently stood up against high executive pays and set a $500,000 cap on Bank of America’s executive salaries. Additionally, Lewis and his direct reports did not receive a bonus for 2008. Why would Lewis allow Thain’s team to be paid out and not his own, especially when he will be the one paying for it? Talk can be cheap, but his disapproval of Thain’s decisions were proved when Thain was forced to leave Bank of America under pressure.
Second reason why BAC hit its annual low was because the entire market was down. BAC may be increasingly volatile, but it moves with the market and Wall Street ended another depressing week on Friday, leaving major indexes down more than 6 percent. Stocks tumbled as investors worried about the term of the recession and showed mixed confidence in Obama’s new stimulus.
Moreover, Bank of America received a series of negative publicity on Friday. Beginning with the subpoena order, which affected the stock prices to drop in an already falling market. Then assumptions of nationalization surfaced and led to further drops in stock prices hitting its annual lows below $3. Although, it’s important to notice the bounce back in this volatile stock as it still managed to close at $3.79 with only 3.56 percent negative change even after surviving all the negative publicity.
Rule of the thumb is buy low and sell high. Eventually the stocks will rise after hitting rock bottom. However, investor’s confidence right now depends on if Bank of America will or will not be nationalized.
Here are all the reasons why Bank of America will NOT be nationalized:
First and the most important reason is that Bank of America is still profitable, has strong capital, is solvent, and actively lending. Mid-quarter it’s hard to specify numbers, but there has been indications that business has improved over the fourth quarter after absorbing Merrill’s loss. There seems to be no reason why a company that is profitable and has strong capital and liquidity levels would be considered for nationalization. “Speculation about nationalization is based on a lack of understanding of our bank’s financial position as well as a lack of appreciation for the adverse ramifications for our customers and the economy,” said Lewis.
Next, Lewis has confidently announced that he does not need any more government assistance. Once again he proved this by action, when Bank of America made its first TARP payment of $402 million to the government earlier this week.
Additionally, federal support for Bank of America has been indicated. Bank of America was a team player when they purchased Merrill Lynch after having second thoughts. Bank of America was rushed into the deal by the government when they were suggested that it would pose a systematic risk on the economy if Bank of America did not go through with the deal. The feds also indicated that they would back up the deal and provide protection against losses in troubled assets. A deal that caused Bank of America to see its worst days was rushed into for the good of not posing further risks on the economy and backed by the federal government. It is unlikely that the federal government will let Mr. Lewis fail.
Finally, late Friday White House indicated that they are not trying to take over the banks. When asked about nationalization, Press Secretary Robert Gibbs said, “This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government.”