Friday, February 6, 2009

Should Bank Of America be nationalized

Banks are under great pressure on the stock market lately, vastly due to the rumors that some of the big ones might be nationalized.

Among those is BofA (BAC) which took 45B from the government and had a terrible last quarter recording some 16B loss.

The question is, does taking money from the government and recoding a huge loss make you a bad bank.

As with most things in life , it depends. It depends on where you want to stop your analysis.

Bank Of America saved Merril Lynch and inherited its toxic portfolio.

Rumor has it that it didn't happen without government encouragement, which only makes sense, because if nobody was to accuire Merril they were about to go bankrupt, which spelled trouble for the government. It had to either pour even more money into it and actively engage in its management or let it bankrupt, adding to the momentum created by the Lehman Brother's bankrupcy.

Excluding the losses from Merril Lync, BAC has actually preformed reasonably well, especially considering the earlier accuisition of Countrywide. Maybe not so well for the BAC shareholders (including myself) in the short run, but most certainly not a gambling or a move I would actively object.

Kenneth Lewis' taste for growing by accuisition may be debatable, but the fact is that at a time when other giants were falling his bank was not only stable, but actually positioned for shopping.

Such bank and its management must not be nationalized.

Only time will tell whether accquiring ML was for good or bad for shareholders...and if it's bad then BofA should pay the price, starting with CEO all the way to the shareholders, but in the meantime both the government, the shareholders and even ordinary taxpayers will be better off letting the current management do what it's been doing so that it could build a stable business and cusion the crash of Merill.

Disclaimer: I own BAC at the time of writing and intend to hold on whatever it takes.

No comments: