Bank America Bonds
I am a very stupid investor- I listened to Edward Jones rep. who advise me
to buy A Bank America bond for $15,000.. As of March 16th 2009 it had
dropped 50 % to $ 7500, with a $3,000 drop in 1 day (MArch 16th) Should I
eat my loses and sell or hang in there.
Sorry to hear that. It’s effectively insolvent, bankrupt. In a normal world that means low level debtholders, let alone shareholders, get nothing. On pure economics, the bond should be worth 0. Holding the bond means you’re betting the government will ensure it is saved and returned to solvency. I think that’s a safe bet…it’s clearly one of the few chosen banks that will be saved with all our tax money, but it may not return to true solvency and standalone survivability in the marketplace for a long, long time. Nobody knows how much of a drain on its balance sheet its derivatives exposure is. So, it’s still a risky bet. I’d be curious what the broker’s incentive was to sell those bonds…ask if he bought any for his own portfolio…I bet he didn’t.
To net it out:
If you’re hoping it returns to >$15k so you can sell it for a capital gain, that’s a bad bet.
If you’re just going to hold it to maturity like a CD and take the payments, then that’s probably a safe bet because BAC is apparently going to survive (no guarantee though). In this case, just don’t look at it as an investment that lost money. Look at it as a place you parked $15k for a small interest payment in return. That’s ok in this environment…it’s actually smart to park some cash until deflation runs its course (your risk in this case is if inflation comes back too quickly). Getting even a 0% return on your cash is much better than putting it at risk in equities and losing 50%. But if you want to park more cash in the future for a low return, it would be better to buy Treasuries (you do that without your broker!).
Hope you don’t need the money anytime soon. Most of the damage is done, you might as well hold to maturity, but I’d have to think this is a junk bond. I hope the bond pays a very high yield! strabes’ comments are right on. I would add one more…if you haven’t figured it out already…find a new financial advisor.
Why do you think that BAC will survive? They have the worst balance sheet of American banks outside of Citi.
I’m not trying to scare our friend hear who’s holding the bond, but I would like to hear your reasoning. Of course anything is possible.
Only because Treasury has apparently chosen it as one of the big banks it will continue to prop up to keep financial power centralized in the US. But there’s no guarantee….the govt can do whatever it wants and screw the little guys in the process.
No question its balance sheet is a disaster. As I said, it would’ve gone bust long ago had it not been for the ruling class good ole boys in DC and Wall St cooperating to steal our money and give it to themselves.
Then again, and I don’t mean this as a way of challenging your position, but more as means of getting a clarification from you, but what causes you to reach that conclusion that they’ve been chosen (ahead of other banks) to be propped up?
No doubt the govt is trying to prop up the whole financial system, but with so many banks internationally that are insolvent, how long can this go on? The public is getting fed up with all of these bailouts. On the other hand Congress and the administration postures a lot and ultimately ignores what the populace wants (Iraq is a case in point), we’re 2 years from another Congressional election, so they could go on propping these banks up.
Unfortunately, as you probably know, the taxpayers are the ones taking the hit instead of the stockholders (who I do have empathy for). The bondholders could be potetially wiped out as well it they became insolvent.
Thanks for your response…
It seems that Citi, BoA, JPMorgan are the big institutions chosen as the ones to make it through this crisis so financial power in the US remains at the elite, national level. Also, any institution whose failure would cause problems for Goldman Sachs will be saved as well (i.e. AIG)…it’s the jewel of the elite and deeply embedded with DC.
I don’t think the govt is trying to prop up the whole system. The Fed is doing some of that for the national banks (not the local/state banks), but I think Treasury has picked its few. So they’re propping up the system in a way that consolidates power into fewer national hands…a lot of the remaining system will be allowed to fail or be bought up by the chosen few.
Anyway, all of this political BS is why nobody should buy bonds from commercial banks in this environment.
That make sense, I understand your logic in that. The govt was trying to consolidate everything into 4 large banks while they let the smaller regional banks go under. That’s where the notion of "too big to fail" comes into play.
From what I understand, B of A was OK, then took on Countrywide. They were still ok, bet then by adding JP Morgan on, things became a disaster.
I hate to see ordinary wage-earners lose money. A lot of retired people depend on the dividends from B of A stocks to stay afloat, so I do understand that it would hurt a lot of people who really don’t deserve it.
In the end, I think the jury is still out, that there is no foregone conclusion to the fate of that institution.
Thanks for your reply….
[quote]From what I understand, B of A was OK, then took on Countrywide. They were still ok, bet then by adding JP Morgan on, things became a disaster.[/quote]
No it was a disaster just like every bank from derivatives exposure, but it kept it quiet. Then it took on Countrywide which was a disaster as well. Then due to Treasury pressure it took on Merrill which was also a disaster. So it seems to me Treasury wanted BoA to consolidate other firms and get bigger before its insolvency was exposed to the public.
JP Morgan is still independent.
Thanks for the correction, I meant Merrill Lynch…