BofA and the Lesson of Assets Sales (BAC, AIG, XLF, FAS)

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Shares in Bank of America Corp. (NYSE: BAC) are up more than 5.5% today following reports that the bank selling some assets to raise cash. There is also some speculation that the bank is considering bankruptcy filing for Countrywide, which it bought from American International Group Inc. (NYSE: AIG) in 2008. Whether or not these moves will save BofA remains to be seen.  We are seeing big moves in the key ETFs of the Financial Select Sector SPDR (NYSE: XLF) and particularly in the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) in conjunction.

Reuters reported that the bank is in negotiations to sell half of its $17 billion investment in the China Construction Bank (CCB) to the investment arms of the governments of Qatar and Kuwait. BofA’s shares in CCB are locked up until August 29th, after which the bank is free to sell some or all of its investment. It is believed that the bank needs an infusion of about $50 billion in cash to meet new capital requirements.

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BofA has not commented on the report other than to say that the bank intends to continue its “important long-term alliance with CCB.” The bank has already sold its warrant rights to acquire more shares of CCB.

The bank has also sold its servicing rights to some 400,000 residential mortgage loans to Fannie Mae for $500 million. The total value of the portfolio is $73 billion, but what BofA gave up was only the right to collect the loans, not the entire portfolio itself. According to Forbes, the delinquency rate on the loans is 13%, and more than 50% are loans made on homes in troubled US real-estate markets.

Fannie Mae could well have overpaid for the collection rights, according to Forbes. If that’s the case, then BofA just received a small bailout package of sorts, from a federally-backed agency that is itself receiving billions in bailout funds. And for a portfolio that is losing value at a rapid pace.

The possible bankruptcy filing for Countrywide may be a case of closing the barn door after the horses have all left the stable. BofA took a charge of more than $20 billion last quarter to account for losses from Countrywide. AIG is suing the bank for $10 billion for losses primarily on the Countrywide loans.

A post on the Dealbook blog at the New York Times provides details on what BofA actually owns and doesn’t own of Countrywide’s assets and liabilities.  The short version is that even if BofA does file for bankruptcy on its Countrywide unit, the bank “still has residual exposure to Countrywide in a bankruptcy and a hefty litigation bill to fight off such claims.”

BofA’s investors must find this all to be good news. In the time it took to write this, BofA’s shares rose nearly another 2%, for a gain early in the afternoon of more than 7%, to $7.26, in a 52-week range of $6.31-$15.31.

Financial Select Sector SPDR (NYSE: XLF) is up 4.5% at $12.74 and the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) is up 11.5% at $13.92 with its triple-leverage.

Paul Ausick

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