Bank of America: Is Nationalization Next?

As a former NLO dividend watchlist stock, Bank of America (BAC) has fallen on hard times that in many respects were predestined. In a posting titled Financial Panic Chronicles dated May 9, 2009, we pointed out the similarities of the October 1929 forced merger between Austria's number-two bank BodenKreditAnstalt with number-one ranked CreditAnastalt, and the forced mergers between Bank of America/Merrill Lynch, Wells Fargo/Wachovia, and J.P. Morgan/Bear Stearns in 2008.

Our point of making the comparison between distinctly different institutions in different eras was to show what the hazards might be when an ailing bank isn't allowed to fail. It was only two years after the merger of BodenKreditAnstalt with CreditAnstalt that the remaining "super bank", CreditAnstalt, collapsed which resulted in the worldwide banking crisis.

The failure of CreditAnstalt in 1931 did not arrive without a fight. F.M. Rothschild committed enormous amounts of money from 1930 to 1931 in an effort to use his name and financial largess to sway public opinion of the health of CreditAnstalt, not unlike Warren Buffett's most recent investment in Bank of America. Buffett's (BRK.A) announcement that he'll invest up to $5 billion may be a significant win for the Oracle of Omaha, and has temporarily boosted the share price of Bank of America by nearly 13%. However, even the biggest money interests cannot forestall the inevitable consequence of forced mergers if hobbled banking institutions. As noted in our previous article:

London banks, the Bank of England, Germany's Reichsbank, Bank for International Settlement and the Bank of Austria all threw money at CreditAnstalt starting in May of 1930 in a failed attempt to shore up the problem.

The current travails of Bank of America and Citigroup (C) may prove too enormous for market forces to bear. Talk of possible capital raises and divesting individual units through bankruptcy speak largely of the dire risk to the banking system the zombie banks pose. Bank of America, in particular, through "too big to fail" policies has become THE bank of America.

We wouldn't be surprised if Bank of America, or another of the current top ten banks in the U.S., in an effort to stave off certain failure, will be partially or fully nationalized as CreditAnstalt before its collapse. However, such actions will only demonstrate for the investing public that band-aids should not be used to deal with hemorrhages.

Because we rely heavily upon the markets to tell us what the investing public believes will come next, we are presenting the Dow Theory downside targets for Bank of America. According to Dow's Theory, the following are the long-term downside targets for Bank of America:

• $18.59
• $13.44 (1/3)
• $10.865 (fair value)
• $8.29 (2/3)
• $3.14 (3/3)

Already, BAC has managed to decline below the 2/3 resistance level of $8.29 per share. This typically indicates that Bank of America stock will go to $3.14 (3/3 resistance level). In four prior peak-to-trough periods since 1982, Bank of America has managed to fall close to, or below, the previous low three times as demonstrated in our September 15, 2008 Dow Theory analysis of the stock.

Because we don't want to assume that the Bank of America will automatically go to the prior low of $3.14, we have provided short-term Dow Theory targets for BAC.

Dow Theory on the $8.29 to $3.14 price levels ($1.73):

• $8.29
• $6.65
• $5.72
• $4.83
• $3.14

These targets are in hopes that the stock does not actually go below $3.14. Already, Bank of America has fallen below the $6.65 level leaving only $5.72 and $4.83 as possible support levels before the bank reaches $3.14.

If the voting machine known as the stock market continues on its current downward trajectory, any decline of BAC below $3.14 would require nationalization in the best-case scenario. The worst-case scenario might reveal that safety nets like FDIC insurance are the root cause of how our financial system got to where we are today. In the words of Citigroup (formerly National City) when FDIC was first proposed:

The element of character in the choice of bank is eliminated, and the competitive appeal is shifted to other and lower standards, such as liberality in making loans. The natural result is that the standards of management are lowered, bankers may take greater risks for the sake of larger profits and the economic loss which accompanies bad bank management increases.

Grant, James. Mr. Market Miscalculates. Axios Press, 2008, page 202

Our focus on the merger of BodenKreditAnstalt and CreditAnstalt in 1929 and the subsequent failure in 1931 that led to a worldwide banking crisis should give good reason for all individuals to be concerned. The safety nets that were created as an outgrowth of failure of the banking system are not prepared to handle what may come if the perception grows that Bank of America needs to be nationalized.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.