Bailout

BofA chart of the day

By Felix Salmon

Jonathan Weil has a great column on Bank of America, noting that it’s trading at a price-to-book ratio of just 0.54. That’s not because it’s losing money, but rather because no one believes the bank’s numbers. And it’s easy to see why that might be, when BofA insists that its Countrywide goodwill — all $4.4 billion of it — remains unimpaired, even as the brand name has been dropped.

Bank of America releases a new number for its book value every quarter; here’s a graph that the fabulous Frank Tantillo put together showing how the ratio of BofA’s market cap to its book value each quarter.

Clearly there’s been a rebound from the worst days of the financial crisis, but back then there was no end in sight to BofA’s losses. Today, one would imagine that with a steep yield curve (banks love steep yield curves, since they mean that their core business of maturity transformation becomes very profitable) and too-big-to-fail status, BofA should be insanely profitable.

If a bank is profitable, and if it’s not lying about the value of its assets, then it should trade above book value. But BofA hasn’t come close to that level in over two years. Something is wrong, and Weil puts his finger on exactly what it is:

The only certainty is there is none, aside from the knowledge that Bank of America?s top executives have no idea what goes on inside the bowels of their company.

BofA isn’t just too big to fail, it’s also too big to manage. And the stock market is punishing it for that fact. Unless and until that price-to-book ratio goes back above 1, the market simply doesn’t trust what BofA is saying.

Full post as published by Macroprudential on November 04, 2010 (boomark / email).