Bank of America Corporation 
(BAC)
Buffetos, the god of Wall Street, lies placidly on a cloud, nonchalantly blowing bubbles into the wind. Dipping his bubble wand into the soap solution, he inspires someone to pursue a brilliant idea, and a company fated for enormous success is born. As Buffetos blows into the wand, the bubble expands and the business begins to see the rapid growth it could have never imagined. The bubble grows and grows, swiftly lifting away into the sky. Then it pops.
Wall Street goes into a frenzy. Red arrows flood the New York Stock Exchange as investors scream into the phone, demanding the sale of everything but the clothes on their backs. All of Buffetos’ bubbles fall from the dark sky in drops, the businesses that “could not fail” shaken to their cores. In a torrential downpour, bits of Bank of America splash down onto the green earth below.
Yes, this makes for a creative story; but like all myth, there is some truth to be discerned. Bank of America has experienced this “bubble” effect, with tremendous, unsustainable growth, followed by financial crisis and a restructuring of the company’s fundamentals. Where Bank of America deviates from the story, however, is how it has become more resilient and auspicious as a result of its financial difficulties.
We have all seen Bank of America’s financial collapse evident before our eyes. The overconfident banking giant threw money at anyone who walked in its doors.
“You have a job? Great! Take this wad of cash and go buy yourself a house. Am I forgetting something . . . oh yes! Please make sure to pay us back.”
More than $55 per share in its prime, BAC stock sunk to less than three dollars per share in the depths of the recession, worth less than 1/18 of its greatest value. With billions of dollars in bad assets (basically arising when people do not repay their loans), Bank of America had no option but to accept $45 billion in TARP funds. In other words, it received a government bailout. A leading financial institution and a staple in our economy, Bank of America fell, and it fell hard.
But of course, the government would not have loaned $45 billion to Bank of America if it did not expect the company to eventually succeed. Well, now we are seeing the flow of bad assets onto BAC’s books thin out and analysts predict BAC to profit in the next two quarters, $0.09 per share and $0.18 per share, respectively– a reversal from the devastating loss it suffered last quarter of $0.60 per share.
Here, the principle of “buy low, sell high” comes into play. Should Bank of America return to its peak of prosperity, which trends indicate it will within the next several years, BAC stock will be worth more than 363% its current value, $15.18 per share. Since our government refuses to let Bank of America fail and the company’s stock is at a bargain price, BAC is one of the few stocks that puts up little risk while offering humongous returns.
Furthermore, in light of the recent economic disaster attributed to the failures of our financial system, our government has imposed new banking regulations, inhibiting a plethora of risky investments and treacherous loaning practices. True, this does limit Bank of America’s ability to expand; however it also stabilizes the banking industry and instills confidence in investors, eventually driving up BAC’s stock value. Apparently, Buffetos has recycled the remnants of Bank of America back into the bubble solution and sent the company back on its way– this time with a protective layer of common sense.
-Marc Bernstein
Sources:
Cramer, Jim. “Mad Money.” Broadcast the week of January 18.
Moynihan, Brian T. Letter to Bank of America Stockholders. 20 Jan 2010.
Scottrade.com
“The Wall Street Reform and Consumer Protection Act (sidebar).” Issues and
Controversies. N.p., 18 Jan. 2010. Web. 29 Jan. 2010.
“Too Big to Fail?” Issues and Controversies. N.p., 18 Jan. 2010. Web. 29 Jan.
2010. <http://www.2facts.com/
