What you should know about Bank Of America before you buy into the hype!

Wall Street Celebrates Bank of America's Reported 4% Increase in Revenues and a $3.4 Billion Profits!

(But is it really a party? If you believe this report I have a bridge in Brooklyn to sell you!)

Dear Subscribers,

The lying and cheating on Wall Street shows no sign of stopping, even as we face what may wind up being the worst financial and credit crisis in a generation. In fact, the lies and misrepresentations seem to be getting worse.

Bank of America (BAC) reported earnings this week, and announced they're still growing their business and are still profitable. This prompted a handsome rally in financial stocks. The talking heads on CNBC, Bloomberg and the Fox business network were all thrilled with Bank of America's report that its revenues in the last quarter grew 4%, to more than $20 billion, and that its net income (profits) totaled a whopping $3.4 billion.

I wish I was a dumb as some of these gurus and analysts declaring there's finally signs of an end to the credit crisis and economic turnaround shortly ahead but in good conscience I just can't. The fact is there are over 150 banks on the verge of failing and the glimmer of hope offered by Bank of America's latest quarter report is a gross misrepresentation of the true condition.

The first thing you need to know about Bank of America's quarterly report is that they did NOT include credit losses from either its LaSalle mortgage unit or Countrywide Financial.

Both of these large Mortgage lenders are sitting with a cumulative loss potentially in the tens of billions of dollars.

Look, Bank of America bought LaSalle for $21 billion in cash last October, unfortunately just as the financial crisis started to emerge, but well before anyone realized just how big the losses would amount to. Some conservative estimates suggest Bank of America could pay at least $10 billion for LaSalle. Yet, Bank of America hasn't taken any write-offs --not a single write off!

Meanwhile, right after buying LaSalle, Bank of America turned around and in December bought what may be one of the biggest nightmares in this credit crisis: Countrywide, paying about $4 billion in stock.

The losses in Countrywide have become substantial. They mortgage lender lost $2.3 billion in the last quarter, including $4 billion in mortgage write-downs. Had Bank of America included these losses, its entire quarterly profit would have been wiped out. No wonder none of this was mentioned in their press release.

Bank of America increased its provisions for credit losses by $4 billion from a year ago, to nearly $6 billion. This is the amount of money Bank of America puts aside in expectation of defaults on its loan portfolio. In this quarter alone Bank of America charged off an astounding $3.6 billion – or 1.67% of its entire book.

To put this in perspective, if Fannie and Freddie lost a similar amount on their portfolios they would be effectively insolvent, and on the brink of bankruptcy.

Bank of America, in its press releases announcing the results of this past quarter, didn't even mention the extent of its off-balance-sheet guarantees to so-called "structured investment vehicles" (SIVs) – the investment companies set up specifically to invest in mortgage securities. These really aren't even companies at all. The truth is these are a way to hold incredibly risky high leverage mortgages without showing them on the bottom line of the quarterly earnings report.

Here's how these off-balance-sheet guarantees of SIV's work...

An investment banker raises a small amount of equity – say $10 million – and creates a company. We'll call it "Mortgage U.S.A. Lending, Inc." This newly created company then borrows $85 million via the commercial paper market, which offers 90-day senior loans. To get the best possible rate, Mortgage U.S.A. Lending, Inc., needs a good credit rating, which, of course, it should never be able to get because it's a new company with no history. But to get around this Mortgage U.S.A. Lending, Inc. pays Bank of America a fee for guaranteed access to Bank of America's credit – a "backstop" funding agreement.

In other words, if for any reason, Mortgage U.S.A. Lending, Inc. cannot get funding from the commercial paper market, then Bank of America must provide whatever liquidity is necessary to maintain the mortgage portfolio – even if the value of those mortgages has nothing to do with reality.

If Mortgage U.S.A. Lending, Inc. real estate portfolio falls in value, Bank of America takes a loss on these loans. If you assume the typical SIV has lost about 20% on its portfolio, that's $17 million in losses. The equity investors are wiped out and Bank of America get whacked with a huge portion of the loss.

According to Bank of America's annual report, the end of 2007 it had at $104 billion in funding guarantees outstanding!

To put that in perspective the total shareholder equity at Bank of America is around $150 billion. That means that Bank of America's off-balance sheet guarantees could literally wipe out two thirds of shareholder equity if this financial and credit crisis snow balls.

How could this happen? Pure, unadulterated greed!

Think about it for a. In exchange for what amounts to modest fees for these off-balance-sheet guarantees, Bank of America's risk in this business grew from $200 million a few years ago to $6.6 billion by the end of 2007. Mind-boggling. Meanwhile Bank of America executives pocket hundreds of millions of dollars in bonuses, salaries and perks, as a financial minefield was being created.

The quarterly press release makes no specific mention about these obligations. However, a sizeable discrepancy exists between the bank's net charge-offs and its total managed losses, which would include losses from its SIV guarantees.

If you listen to the talking heads the past few days, many are recommending jumping back into the financials. Yet, given Bank of America and yes, other big banking institutions, aren't saying anything about its exposure to these off-balance-sheet guarantees (SIVs), how could any investor in their right mind jump back in and buy Bank of America -- or for that matter any bank with this kind of exposure?

The fact is without knowing how big the losses are going to amount to by the end of this crisis. Bank of America closed yesterday at $32.35, up almost $4 in one day. The truth may be that after all losses are recognized, BAC could be worthless, bankrupt.

In light of the risks of LaSalle's and Countrywide's mortgage book, and the $100 billion in SIV funding guarantees Bank of America is exposed to, I find it amazing that the firm's CEO Kenneth D. Lewis is insisting that the bank doesn't need to cut its dividend and won't need to raise capital.

Bank of America shares are up about 18% from their 52 week low reached just a few days ago... and is actually heading to the top of its Bollinger Bands. I believe it's a false rally. As the realization of the true financial condition Bank of America (and for that matter some of the largest financial institutions) become apparent to investors, money managers and for that matter Central Bankers, they’ll run for the hills and the price will collapse.

As I wrote last week I think the next big shoe to fall on Wall Street is going to be a Ratings Agency scandal. It's not a question of if, but when, the reality of the S&P, Moody's and other ratings come into question. In my opinion the outright intellectual and financial fraud that exists in these ratings industry may well prove to swell the financial losses on Wall Street to the point that a great many more than 150 banks and financial institutions fail.

Okay, so there's the real potential that we won't be seeing any really good news from Wall Street for the next 6 to 18 months. A great many people are going to lose there jobs, homes, cars and savings. It's also true in every financial crisis a great many people get filthy rich. They key is to recognize not only the danger, but also the opportunity.

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Best Wishes,

James DiGeorgia, Editor

Editor Gold & Energy Advisor