Monday, January 3, 2011


BAC is up 31% in one month (read that sentence again very slowly).  Today the stock popped 6% today alone (worth noting about 70% of today's move was a gap at the open).  Today's news was that BAC had settled with the GSE's regarding reps and warranties on RMBS.  Two things strike me as odd though.  First is the timing.  Was this breaking news?  Did BAC & GSE Corporate staff work over a two week holiday to hammer out a deal?  Perhaps the Sunday Night football game was so lame (first time a sub 500 team made the playoffs) that they did in fact work the final holiday weekend in the best interest of the shareholders and taxpayer.  I highly doubt that.

From a timing standpoint today was a great day to announce this "deal" and squeeze any remaining short positions.  Question is now do they gap over the 200MA tonight and really get shorts (like me via call spreads) scrambling believing things at BAC have truly turned a corner?  

The other piece requires reading behind the headlines here and understand what was really announced today.  BAC agreed to pay $3 billion to settle 44% of the $7.7 billion in put back requests from the GSEs.  That is about 40 cents on the dollar they are paying.   They are also taking a 2 billion hit to goodwill.   BAC is on the hook for far greater amounts of RMBS put backs.   The put back request with the GSEs, Blackrock and other others is north of 40 billion alone.  This does not include the non GSE put back requests.  

BAC CEO Brian Moynihan had vowed the bank would litigate put backs on a loan by loan basis but a recent ruling against the bank in another lawsuit will allow a statistical sampling versus loan by loan analysis to determine net damages (MBIA vs BAC, NY ruling).  In settling with the GSEs today BAC dealt with higher quality RMBS.  The highest quality of RMBS was held by BAC, the next lower grade sold to the GSEs and finally the "creme de la creme" sold to private investors, pension funds, anyone looking for yield.  

In a recent court filing by Allstate regarding put back requests, Allstate shows clear evidence that Countrywide Financial was selective in what RMBS they sold and what they held at the corporate level.  

BAC is clearly not out of the woods and it could be argued that today's announcement sets precedence for future put back litigation.  So was today true longs adding to their positions?  The volume and price action would make you think so.  Personally I am very suspect by this move and remain short.

The below chart is a six month daily of BAC.  The orange horizontal bars are gaps yet to be filled.   Notice this the bearish divergence on the MACD and the oversold levels on the RSI and slow stoch.


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