No. of Recommendations: 1
In a June 5 note, Bove wrote: 'Mr. Moynihan indicated twice [during a recent presentation] that the bank has excess cash that apparently could not be invested profitably. Possibly he is unaware that the cost of deposits at the bank in [the first quarter of] 2023 was 1.38% while the yield in the Fed Funds market can be as high as 5.25%.' In other words, the bank could earn a high spread at little risk with overnight deposits with the Federal Reserve.
That is a very simple example, but if Bank of America had grown its loan book more quickly over recent years while focusing less on buybacks, it might not face the prospect of a near-term capital raise, which would dilute current shareholders' stakes in the company and reduce earnings per share.
The justification by Moynihan would no doubt be, even with high mortgage and loan interest rates, the so-called cost of equity for BAC is higher.
He is a banker. He will always justify reducing equity and increasing leverage. He knows if BAC blows up, we the American taxpayers will bail him out. Meanwhile, guess who gets bigger bonuses if BAC does well.
Meanwhile, without buybacks, BAC price would be even lower (one presumes), as its existing assets are marked down to market while the liabilities like deposits and BAC bond/notes are costlier.
Really, "The Bankers' New Clothes" by Admati and Hellwig explains it all. Moynihan, Dimon, DJ Sol, all vampire squids.
