BofA: When Rumors Hurt More Than Denial Adds (BAC)

Bank of America Corporation (NYSE: BAC) was the victim of a nasty rumor on Monday that sent shares south.  The stock is still at a substantial discount to book value even though the shares have literally doubled from the lows of December when the stock briefly pierced the $5.00 mark.  Book value at banks may now still be a ceiling rather than a floor, but the recovery had been more than impressive and the stock is now above consensus targets from Wall Street analysts.  Monday was also the first day that the bank’s stock price had risen above $10.00 since last August.

The rumor was that Bank of America was going to conduct a large share offering to raise more capital now that its shares had risen so much.  While the bank passed last week’s stress tests, CEO Brian Moynihan did not ask the Federal Reserve for permission to raise its paltry dividend nor did he request to start making share buybacks.

The rumor of a secondary offering seemed hard to believe.  Things were just looking far better and the tide seems to have turned at least some for the positive case.  Still, what happens when you deny that any such rumors are true and your stock only recovers a portion of what it lost?  Bank of America shares fell from what we call $10.00 and closed down at $9.53 yesterday with an intraday move down from the high to the close of more than 5%.

So far shares are only up 1.7% at $9.69 on the news so far this morning.  The rumor took away more value than the refuting of the rumor added back into the stock.  Typical.

The regulators are actively nailing people on insider trading.  Where the regulators are lax is in rumor-mongering and disseminating fresh rumors that fly around Wall Street from short sellers who get traders and trading desks to pass these rumors around on instant messengers.  Oddly enough, all of the instant messengers and emails are supposed to be logged and stored.  The regulators could try to back-track the sources that spread rumors.  Unfortunately, it may take more effort than a 35 hours a week that government and regulatory workers have to work.

If those regulatory bodies would police and crack down on the rumor mongering harder, they might just save some firms that do not deserve to die.

JON C. OGG