To say that the situation had become painful at Bank of America (NYSE: BAC) would be the understatement of the year. Shares were trading at $10.22 on July 21, before the meltdown started and shares closed out July at $9.70. This came to a drop of more than 15% for the month and a drop of 20% from the July 21 date. The only good news is that shares literally started challenging $6.00, so if you can imagine it, there has been a bounce of 35% from the extreme trough.

To say that BofA is similar to JPMorgan Chase (NYSE: JPM) is just a farce these days. BofA is arguably now in a worse spot than former DJIA component Citigroup (NYSE: C) and is still in a worse boat after the Warren Buffett investment than Buffett’s true favorite bank stock of Wells Fargo (NYSE: WFC). Still, BofA was in a much better light up until the mortgage issues started coming back to haunt the company.

While there are caveats on almost every issue, we have identified roughly ten items that could help BofA stock climb back up to $10.00 and then higher.

More on Mortgages … The first thing that Bank of America can do is to expedite the exit of the mortgage business. The recently announced plan to sell or wind down the mortgage lending business (announced on August 31) needs to be an expedited exit as it would seem that there would be very few buyers for an operation of this size in the current mortgage environment. Investors gave very little reward for this move and it seems a bit underappreciated. The bank included that this will create an exit from wholesale lending, as well as what had been an exit from reverse mortgages and Balboa Insurance. It may seem too soon to tell the bank to hurry up here, but this is addressed further in other areas below.

A Quarantine of Countrywide … BofA seems to go out of its way to avoid using the word Countrywide, despite the obvious mortgage mess that it took upon itself. Moving to sell or shutter the mortgage lending operation is one thing, but the bank needs to clearly show that it plans to quarantine the old Countrywide operation’s liabilities rather than holding on to them. While there were crazy rumors on BofA in August, the one that seemed the most credible was that BofA would seek a total reorganization, which would somehow quarantine the liabilities that were put on the books from Countrywide and Angelo Mozilo’s lending standards from 2005 to 2007. Is that a unit Chapter 11? Possibly, but using a court-assisted reorganization is not easy for a giant company to pull off for just one unit. The risk of enjoinment is always present and the ultimate method for BofA to further quarantine Countrywide is up to its attorneys. That “basement” acquisition will become textbook case study of error as this has added on many more times the liabilities. The cost paid for Countrywide is a drop in the bucket compared to the expenses the bank will have taken by the time all is said and done.

Continued Shrinkage … BofA has made some select branch closures and made some select layoffs of close to 3,500 workers. Wall St. and Main Street want a more focused BofA, and the bank will have around 284,000 employees after these cuts. The bank needs to better communicate that it is reviewing further cuts for say up to 5% of its least profitable operations and branches. This cannot occur overnight, but the bank can score a win here. The bank would argue that it is already accomplishing this via the recently announced mortgage unit exit. Bank of America’s website lists roughly 5,900 retail banking offices and approximately 18,000 ATMs. It has online banking with 29 million active users and supports about 4 million small business owners. The company also claims operations in more than 40 countries. A more focused strategic review would help here, but cuts do not exactly have to be assured. Imagine if the bank said, “We have completed a newer and more thorough review and have found very few operating locations that fall under our profitability threshold.”

States and Regulators … It seems as though BofA cannot secure a single win on its legal front. When it announces a settlement, that settlement is challenged by a new state, regulator, or group of mortgage investors. What was supposed to be a $8.5 billion settlement over mortgage-backed securities seems to be challenged by more entities than can easily be counted. Perhaps this comes back under a quarantine of these operations noted above, but BofA has to find a friendly regulatory hand in this matter. All of these challenges and suits act to only keep that massive black hole present as an ongoing threat. Realistically, this feels as though it may linger for what Ben Bernanke would describe as “for an extended period of time.”

The Dividend — Actually a Hint of the Dividend … A dividend hike approval, considering the recent turmoil, may seem a bit unrealistic. The Federal Reserve rejected a dividend hike back in March and the current climate challenges any real hope of a current dividend hike. What might help is for Brian Moynihan to get the Federal Reserve to actually hint that it is considering allowing a return to a normalized dividend of more than $0.01 per share. Getting back to the old $0.64 per quarter per common share may not be seen in our lifetime, but if the bank can get the Federal Reserve to even act for a second like some form of a return to normalcy on the dividend front is being considered, then it would be a huge signal that regulators feel the bank can adequately cover its obligations. Sadly, the chances that the Federal Reserve extends any further helping hand would seem unlikely. We do not expect that BofA will get to boost its dividend in the midst of the current mess, but again we are talking only about a “hint” from the Federal Reserve.

Preferred Stock Buybacks … While BofA might not be able to easily convince the Federal Reserve to ease up on its dividend policy, the company might have more luck buying down the balances on its preferred shares as these carry high payouts. The bank could easily argue that using a portion of its reserve capital would be an excellent use of its capital to lower its ongoing shareholder liabilities. The problem is that some of these may be harder to pay down due to individual securities statutes, but other banks have bought down and retired some of their preferred share issues. The most recent quarterly dividends declared were as follows:

• $0.38775 per depositary share on the 6.204% Non-Cumulative Preferred Stock, Series D;
• $0.255560 per depositary share on the Floating Rate Non-Cumulative Preferred Stock, Series E;
• $0.5125 per depositary share on the 8.20% Non-Cumulative Preferred Stock, Series H;
• $0.4140625 per depositary share on the 6.625% Non-Cumulative Preferred Stock, Series I;
• $0.453125 per depositary share on the 7.25% Non-Cumulative Preferred Stock, Series J;
• $0.191670 per depositary share on the Floating Rate Non-Cumulative Preferred Stock, Series 1;
• $0.191670 per depositary share on the Floating Rate Non-Cumulative Preferred Stock, Series 2;
• $0.3984375 per depositary share on the 6.375% Non-Cumulative Preferred Stock, Series 3;
• $0.255560 per depositary share on the Floating Rate Non-Cumulative Preferred Stock, Series 4;
• $0.255560 per depositary share on the Floating Rate Non-Cumulative Preferred Stock, Series 5;
• $0.418750 per depositary share on the 6.70% Non-cumulative Perpetual Preferred Stock, Series 6;
• $0.390625 per depositary share on the 6.25% Noncumulative Perpetual Preferred Stock, Series 7;
• $0.5390625 per depositary share on the 8.625% Non-Cumulative Preferred Stock, Series 8.

Ongoing Strategic and Unit Reviews … BofA already has exited units that were under profit thresholds or that were losers that added liabilities. The fact that it operates in more than 40 international markets might have some units that are less profitable. The flip side is that those international units may be more profitable. The bank has already announced that it will exit the international credit card business, and that was before the Buffett investment and before the sale of part of its stake in China Construction Bank. BofA announced the sale completion of the Balboa Insurance unit back in June. Pressing a harder review with more strict profitability and growth thresholds would be more than welcomed.

Another Analyst Day? … BofA has won praise and also taken criticism because they maintained over and over that the bank did not need to raise capital. The market was telling BofA that it needed to raise capital but the bank only did that in the past two weeks with the Buffett stake and with sale of its China Construction Bank stake. Some argue that the bank needs more capital. BofA actually has a very light calendar ahead on its investor presentations. Brian Moynihan could consider calling a new analyst meeting, even after his most recent call led by Bruce Berkowitz. The bank needs Mr. Buffett to come in and talk up his position as well, and considering that Buffett could make close to $2 billion if BofA stock goes above $10.00, then it would be worth his time to come shake his pom-pons. If BofA can somehow manage to convince Wall St. that it can (and will) quarantine that mortgage damage, then the firms can only be upset about holding all the mortgage securities.

A Change of Tone by Management, or Even More … Some are asking whether Brian Moynihan is the right man for the job as CEO at BofA. Frankly, Moynihan did not cause the woes and he was not the one who decided to buy Countrywide. He inherited a mess that was there under Ken Lewis. What Moynihan needs to do is change his tone when talking to the media and to analysts, even if he is not as firm as Jamie Dimon. On a recent CNBC interview (and in the recent financial call), it seemed a bit too much like “It’s all good. We don’t need capital. We are just going to try to keep executing on our plan.” That is opinion of course. Coming out strong after Labor Day with a renewed tone of bolting down the hatches, coming across as ready to slash and jab, and communicating that more change is coming would probably do wonders and would quell the anti-Moynihan calls. To claim that a young CEO can immediately turn around a bad situation is probably not fair, even if the stock was under fire. Still, a more forceful tone is needed. This may sound silly on the surface, but it is an observation.

Killing Chatter and the CDS Market… Before Buffett invested into BofA, the credit default swap market was indicating that BofA was on its way back into the abyss. The problem is that the CDS market is apparently easily to manipulate. At a minimum, it doesn’t take all that much to create a big move in the CDS market spreads. BofA might not be able to directly influence that market, but it has to watch it. Keeping a lid on rumors is another issue and that also will overlap into the CDS spreads. If BofA manages to find some smoking guns that rumors were manufactured and/or spread around maliciously, then it may have a much better public image compared to last month.

The analyst community is very divided over Bank of America’s stock and its future price. Some have grown very negative while others remain bullish. S&P Equity Research raised the rating to “Buy” after Buffett invested. As recently as August 30, the bank was maintained as “Outperform” and it had a whopping $14.00 price target at Credit Suisse. Thomson Reuters actually still has a consensus price target objective of $12.70. While targets and estimates have cratered, there is still an expected upside here from analysts and researchers at firms that interface with and trade with BofA daily.

After BofA shrinks itself, takes its charges and gets its books more and more focused and in order, our bet is that the book value is still going to come down for a little while. We noted back with earnings that its tangible book value per share was $12.65, down from $13.21 in the first quarter of 2011 and up from $12.14 in the second quarter of 2010. And the stated book value per share was listed as $20.29 as of June 30, down from $21.15 in the first quarter and down from $21.45 in the same period of 2010.

As you can see, some of the issues that can be a win for BofA are also full of current risks. The huge risk of the mortgages is that it could literally be a black hole and August might have proven that the “event horizon” was very close in proximity in August. Future asset sales and divestitures may also be called stealth capital raising efforts or may fail to accomplish the real value. If a recession does come back into swing, then expecting credit metrics to continue improving will be off the table. That recession scenario also would likely drag tangible and stated book value down further rather than higher. There are just no assurances that BofA will escape its woes nor that it will be able to quarantine its financial exposure. There are also certainly no assurances that BofA just cannot fix its woes and recover.

The most important thing to note is that the tangible book value is the new target rather than the stated book value. If Bank of America can normalize that tangible book value closer to a base of $12.00 or so, and can manage to quarantine its black hole of the mortgages and mortgage securities woes, then the bank probably will be able to convince Wall St. and Main Street that it can trade closer to that tangible book value. The market has voted so far that the tangible book value is going to be far less than what BofA is saying. If BofA can catch one positive break on that front, it might face a far less stormy outlook.

JON C. OGG

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