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The Bank of America Surprise


A smart friend made an interesting point to me today. If you had been trading on insider information on the stress tests, you would have gotten your shirt handed to you. Learning a week in advance that Bank of America would need $35 billion would probably have left you thinking they were pretty deep in the hole. Worse than that, in fact. $35 billion? They'd be a ward of the state.

But that's not what happened at all, as you can see in the graph of Bank of America's stock price up top. Shares shot up after the stress tests (which came out on the sixth and seventh). The stock resettled at a point far higher than its previous trough. Investors bought $13.5 billion worth of shares in the company. They've sold off billions in other holdings. It's been a pretty surprising performance. And the lesson, my friend said, is simple. "A lot of what we're seeing," he sighed, "are things that we simply didn't predict."

By Ezra Klein  |  May 22, 2009; 5:30 PM ET
Categories:  Financial Crisis  
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I'm not sure why you're surprised. The fact that they're in the hole means they're a ward of the state. Shareholders are almost certainly banking on the idea that they won't be wiped out as Bank of America gets recapitalized by the government. A Bank of America that isn't allowed to fail is a whole lot more valuable than a Bank of America that might be taken into receivership, or taken over, or broken up. And so far, Geithner hasn't shown that he is willing to any of these big banks fail.

Posted by: PatrickEarnest | May 22, 2009 6:08 PM | Report abuse

Can we work on our cliches, please? When you write a bunch of words that you want us to read, is it too much ask that you know what they mean?

You have your hat handed to you. It comes from the days that men wore hats as a matter of course, and took them off indoors. It means that you're being kicked out of someplace - "here's your hat, it's time for you to go."

You lose your shirt. The idea is that you've gambled away everything you've got, down to the shirt on your back.

But to have your shirt handed to you? By whom? your mother? your girlfriend? What's so bad about that?

Posted by: Bloix | May 23, 2009 2:14 PM | Report abuse

I think he wanted to say that you'd get your hindquarters handed to you.

But I also think that a smart investor would have predicted this. The government has made it clear that it's not going to nationalize, and it's not going to let them fail. All that's left is socializing the losses, and the shareholders are certainly going to be quite fond of that idea.

Posted by: DemosthenesofPaeania | May 23, 2009 6:31 PM | Report abuse

The stock price ran up on the stress test news because: (1) the requirement of $35B in extra capital was not as much as expected, and (2) BofA is not required to raise as much of that in cash as was expected.

Your post implies than the $35B was a shock that the market should have reacted negatively to; it wasn't.

Posted by: MisterSavannah | May 26, 2009 3:21 PM | Report abuse

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