Bank of America Corp. (
) took a profit of $3.3 billion after selling half of its massive
stake in the China Construction Bank Corp., to unspecified buyers
for a total price of $8.3 billion.
The North Carolina-based bank will retain a 5 percent stake in the
It's pretty clear that the move is based on a perceived need for
the U.S. Bank to raise capital. Indeed, chief financial officer
Bruce Thompson said in a
that the "sale of approximately half of our shares of CCB stock is
expected to generate about $3.5 billion in additional Tier 1 common
capital and reduce our risk-weighted assets by $7.3 billion under
Over the course of the last month, BAC shares plumetted from $10 to
as low as $6, driven downwards by investor fears about the bank's
equity and the possible losses it could sustain on a massive
portfolio of mortgages acquired when Bank of America bought
Countrywide. Some aid came to the bank when Warren Buffett agreed
to invest $5 billion in BAC preferred shares through Berkshire
Hathaway (BRK.A), an action very similar to his massive investment
in Goldman Sachs (
) during the depths of the financial crisis.
That lit a fire under the bank's stock over the last week, as it
surged to close at $8.11 on Monday.
Now that the U.S. bank has reduced its stake in the Chinese bank,
CCB shares will likely have a fair bit of upward momentum, as
investors will be less concerned about a massive sale diluting
their market value.
For American investors, the bigger question is how 'safe' this
makes Bank of America. It's undoubtedly a much-needed boost to the
bank's reserves of cash, but trouble still looms over the
reports that the Federal Deposit
Corporation has formally objected to a proposed $8.5 billion
settlement that Bank of America has negotiated with investors who
lost money in mortgage-backed assets created by Countrywide. The
FDIC said it doesn't have enough information to properly assess the
settlement, which was reached with major investors like Blackrock (
) and Bill Gross' Pacific Investment Management Co. (PIMCO).
If the deal is struck down, it will become a massive headache for
Bank of America, exposing it to fresh losses.
It's now apparent that buying Countrywide was one of the worst
investments of all time.