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11/2/2010 9:51:12 AM - Bank(ruptcy) of America

Following is a post that I wrote on the Yahoo financial boards in 2009. An analyst announced today that Bank of America might seek bankruptcy protection for its Countrywide unit. Everyone - even Ken Lewis, who refused to listen to the warnings and concern voiced by so many when the purchase hadn't yet been finalized because - should now be able to see the deal for what it was - an absolute, unmitigated financial disaster of epic proportions.

Bank of America stock is trading in the low $11s nowadays. My average purchase price was about $45 or so several years ago. I'm glad that I bailed in the upper $30s...just like I did with Wachovia...and Washington Mutual...and US Bancorp. Ack. If I'd have held on to those things I'd have taken a pummeling. Of course, I don't intend to ride anything down to zero. If I make a bet and it starts to go dramatically wrong for unforeseen reasons, or because certain unlikely possibilities begin to appear more possible, I usually close the position and look to shift into something with a better risk/reward ratio. You always run the risk that you might bail just as the investment is bottoming, but I think that the avoidance of significant losses is far more important than being "proven right" on every bet that you make. Hanging on and hoping to win every single bet that you make is a fool's game. Not only will you occasionally lose, but you'll occasionally lose big and that can decimate your overall return. In the end, I think that investing is a game of probabilities. You shouldn't become emotionally attached to any single bet, should quickly close those in which you've lost significant confidence, and should always - always - keep a close eye on the markets since I think that the future will see a lot of volatility.

- TZ


9/30/2009 @ 7:29 PM:

Ken Lewis is an overpaid, empire-building idiot.

It says something that during his CEO tenure shareholders lost a considerable amount of money while he pocketed somewhere in the range of $200 million. Congratulations on a job well done, Ken. You surely deserved it.

Imagine how much housing information the CEO of the largest bank in America had at his disposal. Did he see that American consumers had dropped to a zero percent savings rate? Check. Did he see that mortgage expenses had skyrocketed in percentage terms for the average household? Absolutely. Did he notice that more and more homeowners were putting less and less down on their houses? Yep.

What was Ken Lewis' response when the house of cards began to fall and it was already painfully apparent that we were in a huge housing and economic downturn?

First, he invested billions into Countrywide. When housing and the economy continued to deteriorate, he doubled down and bought the whole thing. When things fell off a cliff, he tripled down and bought Merrill Lynch for a mind-boggling 50% premium. Merrill Lynch closed in the $19s the Friday before Lehman Brothers went down. Lewis paid $29+ that weekend (in BofA stock value - roughly $50 billion) for Merrill Lynch. If he'd have waited until Monday, he probably could have sealed the deal for half of that. Shareholders hated the Merrill Lynch deal so much that they instantly vaporized almost 30% of BofA's value when the market opened.

Bank of America was my largest investment - by far - a few years ago. I sold it all when they did the original Countrywide deal (at about $39, losing roughly $6 a share.) No one back then bought BofA because they wanted to make 30% in a year, and thus Lewis' risky strategy of trying to "buy assets on the cheap" was ill considered and of no interest to the long-term value shareholders that used to be attracted to BofA. I wasn't the only one that felt that way. I remember reading about people standing up and pleading with him at a BofA shareholder's conference not to buy Countrywide outright, but he was convinced that he was right...and that he was so right, it was worth betting the company...repeatedly.

If I still owned BofA, I would have been infuriated when Lewis said that if they didn't go along with the Merrill Lynch deal - despite the fact that he thought that a materially adverse event had occurred and that they could legally terminate the merger - he and the board of directors might have been kicked out of the company by the government. So what, dimwit - how many millions do you need before you'll finally stand up and do the right thing for shareholders? Whether you were legally obligated to disclose the fact that Merrill's losses were accelerating or not, I'm pretty sure that most of your shareholders would have really liked to have known that information before the merger vote.

I think that the BofA shareholders from years ago just wanted a nice, steady, growing dividend and a conservatively managed company that wouldn't foolishly "bet the farm" while trying to dramatically increase the company's earnings per share in one shot. I used to get $0.64 per share per quarter. BofA now pays $0.01 per quarter and owes the government over $45 billion. Congratulations, Ken. There's your legacy.

- Roulette

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