Using accounting for goodwill as a proxy, we conclude there is reasonable basis to question the integrity of the balance sheets of at least 70% of 50 of the largest banks trading in the United States. This suggests widespread and sizable write-downs remain to be taken.The analysis is particularly interesting due to its observations on today's cuplrit of the day, Bank Of America. Incidentally, Egan-Jones had the following objective disclosure on BAC's earnings - no S&P-type cheerleading found here:
Our thesis is simple. The credible assessment of fair value is a critical component of price discovery for investors. Yet, despite the staggering loss of market value in the sector, which typically compels write-downs, the evidence is persuasive that the goodwill balances of banks appear inflated and widely unimpaired. We get it. As an intangible asset, goodwill isn’t critical to valuing a bank. But if banks are not even using reasonable expectations to fairly value their non-cash intangible assets, like goodwill, we argue it becomes that much harder to rely on the assumptions and judgments they used to value their very tangible Level 2 and Level 3 assets and to establish sufficient allowances for loan losses.
BAC probably needs $100B in equity to stabilize credit (BAC is too big to fail). Another way to increase capital is to convert the Treasury's $45B preferred to common shares (market cap is only $56B) and reduce debt - the Bank is likely to sell any assets where the market value is above book value. BAC's purchase of Merrill placed pressure on BAC's credit quality; the $15B capital injection and the $118B asset backstop from the FED are not enough. A key item to watch is the net charge-off ratios which jumped from 1.25% of assets last year to 2.85% this year while non-performing assets jump from .9% to 2.65% of assets. Excluding one-time items, the Bank broke even for March, 2009. We are affirming our rating at "BBB+"
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