Investors get nervous ahead of employment report, despite B of A news
December 3, 2009 by admin
Investors got cold feet ahead of Friday’s critical non farm payroll report. The market sold off sharply in late trading on Thursday as investors looked to hedge their positions prior to the critical report. The market has been riding a wave of good news over the last week and was up sharply to start the day as news from Bank of America lifted the global markets. Less than nine months after receiving $45 Billion dollars of emergency loans from the government through the TARP program the company announced it would be paying the loan back to the government. The company indicated they have the potential to realize up to four billion dollars worth of annual savings by eliminating interest and dividend payments on the current loans. The savings was deemed significant enough that the board of directors will allow the company to pursue a capital raise of nearly $18 Billion dollars through a common stock offering and the balance of the funds to come through cash and other readily available equivalents. The company has been in the process of searching for a replacement to CEO Ken Lewis, and speculation that the governments oversight on potential compensation may deter potential candidates may have been a residual impact on their decision to pay back the loan early.
Bank of America was forced to borrow money from the government to shore up its core capital ratios last year. During the panic that followed the collapse of Bear Stearns and Lehman Brothers, the capitals markets were in complete disarray primarily as investors lost confidence in the financial system and their accounting standards. The impact of diminishing loan portfolios (Bank of America being one of the largest) thanks to their earlier acquisition of Countrywide Home Loans put the company in a perilous position with the markets. Investors and counterparties lost confidence that the company would be able to adequately weather the upcoming financial recession as their capital positions were called into questions. Large banks have traditionally been able to operate with core capital ratios of 8 to 1, thus leveraging their deposits and assets with future lending. As the values of their assets diminished, the banks were forced to write down these assets by billions of dollars, further straining the markets and raising doubts to their viability. Over the last year over one hundred banks in the U.S. have been forced into receivership by the FDIC, including IndyMac Bancorp, which resulted in a three billion dollar charge to the agency.
Declining home values and bank foreclosures have been extremely challenging to the banking industry. The real estate markets have shown signs of stabilization over the last six months as buyers have started to regain confidence in the markets. Historically low mortgage rates, combined with government tax credits have been a major boost to buyers confidence. The banking industry still faces a significant challenge with the rise in foreclosures as unemployment has yet to show signs of stabilizing. This weeks non farm payroll report, combined with the news from Bank of America could help provide further stability and lead to another push in the equity markets.