More good news for Merrill: BofA priced 'as if it's going out of business'

Bank of America Corp. (BAC) is on track to be this year's worst performer in the Dow Jones Industrial Average as concern about mounting mortgage losses and a global economic slowdown weighed on the second-biggest U.S. lender. The 59 percent decline through yesterday erased almost $80 billion of shareholder value at Charlotte, North Carolina- based Bank of America. It's the firm's largest drop since a 66 percent plunge in 2008, when a U.S. bailout staved off a collapse. The bank probably will also end 2011 last in the Standard & Poor's 500 Financials Index and the KBW Bank Index. “What you have is like a three-ring circus, and in all the rings for Bank of America, the show isn't any good,” said Greg Donaldson, chairman of Evansville, Indiana-based Donaldson Capital Management LLC, which oversees $500 million including Bank of America shares. He cited new regulations, mounting costs of bad loans and a lack of confidence in management. “You just got one surprise after another this year,” Donaldson said. Chief Executive Officer Brian T. Moynihan, 52, told his staff in a year-end progress report last week that his effort to boost the company's value “is not yet translating into returns for our shareholders.” Moynihan said he has prepared for turmoil ahead by selling assets, reducing mortgage and credit- card loans and pledging to lower annual costs by $5 billion, including about 30,000 job cuts. The Dow Jones Industrial Average gained 6.1 percent this year through yesterday, led by McDonald's Corp. (MCD)'s 31 percent advance, while the 80-company S&P Financials (S5FINL) slid 18 percent and the 24-member KBW Bank Index lost 24 percent. Larry DiRita, a Bank of America spokesman, declined to comment. List of Laggards Some of Bank of America's biggest peers also made the list of laggards, with Citigroup Inc. (C), the third-biggest U.S. bank by assets, dropping 43 percent. JPMorgan Chase & Co. (JPM), the largest lender, slid 21 percent. American International Group Inc. (AIG), the insurer owned mostly by the U.S. after its near-collapse in 2008, fell 52 percent for the second-worst showing in the S&P Financials, and Goldman Sachs Group Inc. (GS) lost 46 percent. Moynihan is trying to reverse a stock decline that began soon after he replaced Kenneth D. Lewis at the end of 2009, when the bank also repaid $45 billion of U.S. bailout funds. The company's shares, which reached $19.48 in April 2010, closed at $5.46 yesterday as settlements with mortgage-bond investors and insurers failed to stanch losses tied to the 2008 takeover of subprime lender Countrywide Financial Corp. The status of an $8.5 billion accord resolving some claims from mortgage-bond buyers including BlackRock Inc. and Pacific Investment Management Co. is being contested by outside investors and may be tied up in courts through 2012. Meanwhile, U.S.-owned mortgage firm Fannie Mae has stepped up demands that Bank of America repurchase defective loans. Subprime Mortgages “They have this big exposure to subprime mortgages (DLQTDLQT), to potentially settling with buyers of securitized subprime and buying back loans that were improperly” bundled into bonds, said Steven Persky, who oversees $1.4 billion in equities and distressed debt as CEO of Los Angeles-based Dalton Investments LLC. “Bank of America is too big to fail, but I'm not sure I'd want to be an equity holder.” Banks are grappling with more stringent requirements for capital and new limits on fees at the same time the European sovereign debt crisis threatens to derail the global economic recovery. A $5 billion investment by Warren Buffett's Berkshire Hathaway Inc. announced in August only temporarily arrested a slide triggered that month after markets were roiled by Standard & Poor's downgrade of the U.S. government's debt. The stock's drop has stung investors including Bruce Berkowitz, whose Fairholme Capital Management LLC owned 105 million shares as of Sept. 30, and John Paulson, whose hedge fund held 64.3 million shares, according to Bloomberg data. Five Dollars This month, Bank of America shares sold below $5 for the first time since March 2009 as concern over Europe's debt crisis intensified. A sustained decline below $5 in 2012 could reduce the bank's appeal to investors, said Eric Teal, chief investment officer at First Citizens Bancshares Inc., which manages $4 billion in Raleigh, North Carolina. Moynihan has said that while he is confident the bank can withstand fallout from Europe, growth in the U.S. may be slowed if a European nation defaults on its debts. Bank of America had about $363 billion of cash as of Sept. 30, enough to fund operations for two years without going to the markets. The company also has been reducing risk related to the weakest European nations, Chief Financial Officer Bruce Thompson said in October. “The market has given up on Moynihan, given up on their story,” Donaldson said. “I may start buying Bank of America shares soon. It's priced as if it's going out of business, and it's not going out of business.” --Bloomberg News--