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Bank Of America's Stock Plunges By 6% After $4 Billion Capital Plan Blunder

This article is more than 9 years old.

Bank of America CEO Brian Moynihan runs a financial firm that has 263,000 employees and $2.2 trillion of assets and investors on Monday appeared to wonder once again whether anyone can manage a bank of such enormous size.

Shares of Bank of America fell by 6.2% and changed hands for less than $15 on Monday after the bank announced it had previously disclosed incorrect calculations of its regulatory capital because of a mistake related to its treatment of structured notes it acquired in its deal for Merrill Lynch in 2009. Specifically, Bank of America did not properly adjust regulatory capital for losses linked to the structured notes when they became realized, improperly raising the bank’s capital position by about $4 billion. As a result, the Federal Reserve has forced Bank of America to scrap its plans for a dividend increase and plans to repurchase $4 billion of shares. The bank will now have to resubmit its capital plan to the Federal Reserve within 30 days.

Brian Moynihan, President and Chief Executive Officer, Bank of America (Photo credit: Wikipedia).

Bank of America revised down its regulatory capital ratios with its estimate of the common equity tier 1 capital ratio under the Basel 3 advanced approach falling 29 basis points to 9.6%. Morgan Stanley called the reaction of investors “overdone,” pointing out that Bank of America figured out the error itself and self-reported it to the Fed. “We feel this is too punitive given BAC’s high level of capital from which they’re starting from (9.9% revised down to 9.6%) and the fact that they self-reported this mistake,” wrote Morgan Stanley analyst Betsy Graseck.

But while the size of the math blunder might not warrant such a big selloff in its shares, the incident seems to have yet again spooked investors. “Fundamentally, the news today tells us simply that BAC has $4 billion less excess capital today than what we thought yesterday,” Citigroup’s Keith Horowitz wrote in a note. “The market appears to be pricing in 1) higher likelihood of additional one timers to arise in the future and 2) a potential impact on 2015 CCAR in that BAC will need to be more conservative.” Horowitz doesn’t think today’s move in Bank of America’s shares is “overdone” short-term, but says the incident “does not materially change our views on the internal controls at BAC.”

According to Credit Suisse, the best case scenario for investors going forward is that Bank of America keeps its dividend at 5 cents a share and gets rid of any serious share buyback in its revised capital plan. But there is always the chance that the dividend could also be lowered. “We would also note the possibility that the Fed could determine that this represents enough of a procedural weakness and object to BAC’s capital plan,” Moshe Orenbuch of Credit Suisst wrote on Monday.