Bloomberg News

BofA Drops 16% on AIG Lawsuit, Speculation on Capital Raise

August 08, 2011

(Updates with analysts’ comments and downgrade starting in the third paragraph.)

Aug. 8 (Bloomberg) -- Bank of America Corp. dropped to its lowest level since March 2009 in New York trading after American International Group Inc. disclosed plans to sue over faulty mortgages and analysts speculated about a capital raise.

The bank slid $1.28, or 16 percent, to $6.89 as of 1:26 p.m. in New York Stock Exchange composite trading, after falling as much as 18 percent during the session. It was the biggest drop since April 2009, and left the stock shorn of almost half its value since the start of this year.

“Investors are dumping financials because there’s so much confusion about what could be on their books,” Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore, said in an interview. “You’ve got a perfect storm against Bank of America.”

AIG, the insurer rescued by U.S. bailouts during the 2008 financial crisis, contends Bank of America caused more than $10 billion in losses to AIG, which had specialized in investments and insurance tied to mortgage bonds. Bank of America, which repaid its own government bailout in 2009, rejected the assertions of New York-based AIG.

Credit-default swaps on Charlotte, North Carolina-based Bank of America soared to the highest since May 2009. The cost to protect against a default by U.S. banks jumped after Standard & Poor’s cut the AAA rating on the government’s debt.

Pressure on Moynihan

The suit is the latest legal pressure faced by Moynihan, 51, who took over as CEO last year. Last month, former Countrywide investors including BlackRock Inc. sued Bank of America after opting out of a $624 million settlement. Plaintiffs said the subprime lender misled shareholders about its finances and lending practices.

Bank of America shares have been dogged by concerns that mortgage expenses and a stagnating U.S. economy will crimp profit and force it to bolster capital by selling new shares. Moynihan has repeatedly said this year that the firm won’t need to issue common stock.

“The bias that exists, and that is gaining credibility, is that a double dip is ahead of us,” said Charles Peabody, an analyst at Portales Partners LLC in New York. “If that’s the case, then something like Bank of America is going to have to raise substantial equity externally.”

Capital Debate

Mike Mayo, the Credit Agricole Securities USA analyst who said July 20 he didn’t foresee the need to raise funds, downgraded the stock today to “underperform” from “outperform” and said investors “can no longer rule out a capital raise.” Keith Horowitz at Citigroup Inc. reiterated his buy recommendation, saying there’s “significant value here” and that Bank of America doesn’t need to raise capital.

“Even as we have been building our reserves, we have improved our capital levels and our liquidity,” the bank said in a memo distributed to employees and dated Aug. 7. “Our tangible common equity ratio -- the most basic measure of capital strength -- has risen to 5.87 percent on June 30, 2011 from 5.05 percent on December 31, 2009, higher than JPMorgan Chase.”

As for the AIG case, the bank rejects the insurer’s “assertions and allegations,” said Larry DiRita, a spokesman for the lender, the biggest in the U.S. by assets.

“AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets,” DiRita said. “It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors.”

--With assistance from Shannon D. Harrington in New York. Editors: Rick Green, William Ahearn

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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