As Bank of America Goes, So Does the USA

As GM goes, so does the nation?

That was true for almost a century when GM dominated nation’s economy and was an icon for the American manufacturing industry.  Now, the GM has fallen into the rear-view mirror and its glory will stay only in the good memory.  After government rescue, GM seems to revive quickly using its advantage of huge size.  Its recent huge success of IPO was more or less an indication that GM maybe prosper again.  However, behind all the IPO buzzes, the true story is coming from the far away China, since all of the GM profits were actually from China market, not the deep loss from USA market.  At the bottom of the financial crisis, GM could easily shut down the entire North America production if there were no huge resistance from Unions and a pro-union US government.  The world would not notice that and even the US market would not notice that, since GM could have produced all its cars from China and other countries.

If GM is no longer irrelevant, you’d better not say “As GM goes, so does the nation” anymore.  What shall you say then?

As Bank of America goes, so does the USA!

First, size does matter.  In terms of the employment, banking industry is hiring a lot more people than the auto industry is.  The Big-Five Banks employ almost double the number of employees, i.e., 880,000, than the Big-Three Autos do, i.e., 450,000.  In addition, considering the major portions of the Big-Three Autos operations are actually outside of the US, the actual US employee numbers maybe only little more half of the total employees.  For banks, more than 90% of their operations are completely US based.

	Employment
GM	209,000
Ford	198,000
Chrysler	50,000
Big-Three Auto	457,000
BOA	284,000
Citibank	258,000
JPMorgan	236,000
Goldman Sachs	39,000
Morgan Stanley	63,000
Big-Five Bank	880,000

In terms of the corporation values, the combined market cap of all Big Three Autos is about $100 billion and that of the Big-Five Banks is a much bigger $500 billion.

Second, the Americans today can live a normal life without driving a single American car.  There are plenty of more reliable, more fuel efficient cars from Germany, Japan, and Korea to choose from.  In fact, the US Auto industry's market shares have been declining steadily in the past 20-30 years, from almost 100% to less than 50% today.  Besides, less than half of GM cars actually built outside of the USA.  In comparison, the banking industry is completely domestic.  The American moneys are deposited into the American banks and the banks are lending the money to American business and real estates, etc.  The nation will go paralyzed instantly if the Big-Five Banks go out of the business.  Bank of America has a total deposit of more than $1 trillion dollars or 15% of national total deposits.  Whereas GM is dispensable from the US economy, the American Banks are absolutely not.

Moreover, the US Banks are controlling the financial lending to the American big or small businesses, providing the fresh blood to power the US economy every day.  If these lendings stopped, the entire US economy would be put to a halt.  Can you imagine what it looks when the American economy halts and collapses?  No one wants to see that happen.

Now, you can say this again.

As Bank of America goes, so does the USA!

Wealth of World

If someone has enough money and wants to buy the entire earth.  How much he has to pay in dollars?  In another word, how much the world is worth today? 

$195 trillion dollars! 

That is the total worth of all the nations on earth in 2010.  The richest man on earth is either Carlos Helu of Mexico or Bill Gates of USA depending on how their stocks are faring.  Each of them has a total wealth around $55 billion dollars, nowhere near to the $195 trillions for the total wealth of world.  So we do not have to worry any human beings can afford to buy the entire earth yet.  Nevertheless, the world does have a limited wealth that can be valued.  The wealth is generally calculated by adding the real estate values and financial assets including bonds, stocks, cash, saving, and other marketable valuables, and subtracting the total debts such as mortgages and all other loans.

Although there has been a significant drop in the world total wealth from 2008 to 2010 due to the worst financial crisis that plunged both real estate values and stock markets around the globe, the world still manages to gain about 20% in total wealth since 2005.  European Union is the largest economy with almost one third of the world wealth, i.e., 33%.  USA is taking more than a quarter of the total world wealth, 28%.  The number two and three largest GDP nations, China and Japan, have another combined 20% of world wealth.  That leaves only 20% of world wealth sharing by the rest of more than 150 countries around the world.  The rapid economic growth in China and the stable economic recovery of USA and European Union will accelerate the world wealth growth rate in the next five years.  The world total wealth is expected to grow 60%, reaching $315 trillion dollars in the year 2015.  Not surprisingly, the contributing share of China and other emerging economies in the world total wealth will increase accordingly.

Whereas no rich people can afford to buy the entire earth today, the riches around the world still own most of the world wealth.  The statistics showed that top 8% of the world population controls 80% of the world total wealth.  Putting these into actual numbers, about 50 millions out of 6.8 billion people on earth own the wealth of $155 trillion dollars, or more than $3 million dollars for every rich people.  On the contrary, 6.75 billion people on the earth are sharing the remaining $40 billion dollars of wealth.  That was a miserable $6 dollars for every non-rich people.  Between rich and poor, the difference is an astonishing 500,000 times.

Like most advanced economies, the national wealth of United States is primarily consisted of financial assets in stocks, bonds, gold and other marketable assets.  The real estate or housing is worth only about half of these financial assets.  Moreover, USA carries a significant load of debts, around 20% of national wealth today.  For the emerging economies, such as China, the real estate assets contribute more than half of the total wealth.  Real estate wealth in other emerging countries can contribute even a much higher ratio to the national wealth.  However, the extremely low debt ratio of 3% for China is unique only to China.  Most of the advanced and emerging economies have a high debt ratio that can sometime surpasse its entire national GDP.

Knowing this, no one would like to buy the earth anymore.  However, China still seems a very attractive nation to buy. 

There are a lot of riches actually buying now!



Global GDP, Spending, Deficits and Debts

Imagine you were on the moon and look at this beautiful blue planet spinning with its entire view; you may want to know how the Earth is doing?  Financially? 

You have to take a global perspective to check how the earth is doing and how its major countries are doing.

There are about 6.8 billion human beings living on the earth today, still non on the moon.  The four largest economies on this planet are European Union, United States of America, China, and Japan.  The European Union is composed of 27 countries: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Romania, and United Kingdom.

Over the last couple of years, there has been a major financial crises starting in the United States and impacting almost every nation on earth.  As a result, the world total GDP as a whole has very little changes.  The global GDP was $61 trillion dollars in 2008 and remained $62 trillion dollars in 2010.  That is about $9000 dollars "GDP" for every person on earth.  The world economy has started to grow again this year, and in 2014, the global GDP is expected to reach $77 trillion dollars.  Obviously, the growth rates of these top economies are not all the same.  Whereas the European Union sees the biggest drop in the world GDP share from 30% to 24% between 2008 and 2014, China is growing its GDP and the corresponding share dramatically from 7% to 12% in the same period.  Nevertheless, these four major economies will contribute to more than 65% of world total GDP.

On average, governments around the world spend about 38% of the world GDP for their correspondent nations.  This ratio will remain steady in the foreseeable future, indicating the super-sized importance of the government role for the world overall economy.  Equally astonishing is the super-size of the government deficits.  It seems that most governments love to spend more than they can make.  This is especially true for the “advanced economies”.  In 2010, European Union as a whole is running a deficit of 4.5%, Japan is running a deficit of 7.5% and the USA is running at a remarkable more than 10% deficit of the national GDP, or $1.5 trillion dollars.  In comparison, the state deficit in China is around 3%.  The national deficit is a measure of government financial strength.  It directly affects nation's inflation rate, fiscal and taxation policies,  and other countries around the world.

Government deficits over the years will add into significant accumulation of national debts.  Whereas the US is having the most debts in 2010 around $13.5 trillion dollars, the total debts of the entire world is nevertheless an astonishing $47 trillion dollars.  That is more than ¾ of the entire world GDP in 2010, or close to $6800 dollars for every person on earth.  Although Europe has been hunted with the debt crisis, its total debt is actually lower than that of United States, i.e., 77% vs. 93%.  At the extreme and surprising side, Japan has the most national debts among the major economies, i.e., above 220%.  Fundamentally, significant debts are results of borrowing money heavily from future generations.  Ultimately,  it will bring down the future standard of living since the youngest have to repay the borrowed money eventually or the country goes bankruptcy.  To make things even worse, European Union, US and Japan will all see their national debts increase over the years to come.

How can future generations pay for all these reckless borrowing and spending?

Now you wish you actually live on the moon!

Mutual Fund, Hedge Fund and Sovereign Wealth Fund

Mutual Fund, Hedge Fund and Sovereign Wealth Fund are three major types of investment funds around the world.  Mutual Funds are open to millions of small or large individuals, institutions or any investors and organizations that have money to invest.  In a sharp contrast, the Sovereign Wealth Funds often have only one source of monetary funding, i.e., nation's foreign exchange reserve.  Hedge Funds are somewhere between these two categories, however, it generally does not deal with the small investors.

How big are these funds?

Total asset value for all the world Hedge Funds is about $2.5 trillions and Sovereign Wealth Funds are almost twice the amount, $4 trillions.  Mutual Funds still hold the lion share among all the funds, totalling around $20 trillions.  In fact, Sovereign Wealth Funds may invest in both Hedge and Mutual Funds, along with all the available common investment vehicles.  Hedge Funds may also invest in specific Mutual Funds.  However, Mutual Funds will not inversely invest in the other two types.

Where do the funds invest?

Almost anything and everything that can return a financial gain in short or long terms.  Look at the big pie of the world investments, an amazing total of $136 trillions, the common investments include bonds, stocks, CDs, FOREX, gold, etc.  Nevertheless, all three fund types may make money regardless whether these investment prices rise or fall.  The funds, especially the Hedge Funds, can heavily bet the price going down in order to hedge and profit from the fall.

Bank of America Falls, Bank of China Rises



Bank of America Center
in Charlotte

 Bank of America, BOA or BAC, is the largest US bank with a total asset in 2010 of $2.3 trillion.  The bank, started in California more than 100 years ago, has climbed steadily riding the strong tide of American Century.  BOA today is a global financial powerhouse with business in more than 150 countries.  The bank holds close to 15% of all deposits in US that is close to $1 trillion.  Its 2008 acquisition of Merrill Lynch made BOA the world largest wealth manager and a major player in the investment banking industry.  However, the acquisition of Countrywide Financial, the country’s largest home loan lender in 2008, has brought BOA misfortunes and troubles ever since.  American’s worst mortgage disaster pushed Countrywide Financial to the brink of bankruptcy even before the merger.  Bad loans and the corresponding huge investment derivatives during the peak of the financial crisis in US almost completely destroyed Bank of America, only saved by the government bailout.

The rise of USA in the American Century had grown BOA into the 2^nd largest bank in the world (Citibank was No. 1), a position it had held many years before 2008, with a peak market value of more than $220 billion.  The fall of US economy during the 2007-2008 worst financial crisis hits banks the hardest.  BOA’s market value plunged to around $50 billion at the bottom of the crisis.  That was with the addition of both Merrill Lynch and Countrywide Financial.  Not surprisingly, it has dropped to No. 9 from No. 2 in the top bank list. 

Change in Market Value and Bank Ranking for Bank of America and Bank of China

BOA had been rising along the America rising in the last century.  It also falls along with the decline of America today.

The top 10 largest shareholders of BOA include Corporations, Hedge Funds, Banks and Mutual Funds.  All top shareholders are holding a relatively small portion of the bank, however, the combined share of top 10 largest shareholders is less than 22%.

Top Shareholders of BOA

	Holder	Shares	%
1	STATE STREET CORPORATION	422,744,582	4.21
2	VANGUARD GROUP, INC. (THE)	354,099,395	3.53
3	BlackRock Institutional Trust Company, N.A.	273,292,183	2.72
4	FMR LLC	243,472,279	2.43
5	PAULSON & COMPANY, INC.	167,794,229	1.67
6	JP MORGAN CHASE & COMPANY	158,233,124	1.58
7	PRICE (T.ROWE) ASSOCIATES INC	156,747,924	1.56
8	Capital World Investors	140,766,540	1.4
9	AXA	135,781,108	1.35
10	Bank of New York Mellon Corporation	129,353,229	1.29

Bank of China Tower
in Hong Kong

Bank of China, BOC, is the smallest of the Big Four state-owned commercial banks in China, after Industry and Commercial Bank of China - ICBC, Construction Bank of China – CBC , and Agriculture Bank of China - ABC.  BOC is the 2^nd largest lender in China overall and has operations in 27 countries, the most international business among Chinese banks, with a revenue of $40.3 billion on asset of $1.5 billion.  After its IPO in both Hong Kong Stock Exchange, H Share, and Shanghai Stock Exchange, A Share, in July 2006, BOC climbed to the No. 6 largest bank in the world (ICBC – No. 1, CBC – No. 2, ABC – No.5), a ranking it holds until today.  Obviously, the rising of Chinese banks corresponds to the rapid rise of Chinese economy.  State is the largest shareholder for BOC – 67.5%, followed by other state enterprises.  Hong Kong tycoon Li Ka-shing and two Asia banks also hold a small portion of the bank, less than 2% combined.

Top Shareholders of BOC

	Holder	Shares	%
1	SAFE Investment - A Share	171,412,138,186	67.53
2	Hong Kong Central - H Share	71,041,739,156	27.99
3	Li Ka-shing - H Share	2,566,790,989	1.01
4	Asia Development Bank - H Share	506,679,102	0.2
5	Bank of Tokyo - Mitsubish UFJ - H Share	473,052,000	0.19
6	Li Ka-shing Foundation - H Share	350,000,000	0.14
7	China Life - A Share	421,727,885	0.17
8	China Aluminum - A Share	90,909,000	0.04
9	Shenhua Group Limited - A Share	90,909,000	0.04
10	China Southern Electric Grid - A Share	90,909,000	0.04

BOA’s current business is truly global.  The combined revenue of its global credit cards, global banking, and global investment is more than 73% of its total revenue.  Majority of BOC’s business, on the other hand, is primarily from home loans and banking deposits, totaling more than 82% of its total revenue.  Both of these have benefited heavily from China’s fast economic growth and booming real estate market.  Housing price in China’s major cities such as Beijing, Shanghai, etc., are more expansive than those in most US cities today.  While both banking asset and revenue of Bank of American are about double the size of those for Bank of China, the market value of BOA is nevertheless almost 30% less.

In the 3^rd quarter of 2010, Bank of China made a net profit of $4.3 billion with a remarkable annual growth rate of 30.8%.  Bank of America, on the contrary, had a net loss of $7.5 billion.  This was almost solely due to a huge goodwill impairment charge of $10.4 billion, in order to comply with US’s new financial bill and regulations.

In the past six months, stock price of BOA has plunged again from $19.8 to around $11, a drop of more than 40%, wiping out a market value of $71 billion for the bank.  In comparison, Wells Fargo Bank and JP Morgan Bank both declined only about 15% for the same period.

What are the depressing pressures and factors behind this significant plunge in stock price of Bank of America? 

First of all, “do not fight against the FED”, the most depressing pressure obviously comes from Obama government.  Obama won the 08 Election by redirecting voter’s attention from Iraqi War to the poor US economy.  It was the financial crisis that helped Obama and Democrats to win the White House and both Houses.  Once in power, Obama constantly condemned banks in order to maintain his popularity among anger-growing voters.  The Democrats in House and Senate pressed vigorously to pass the notorious financial bill that will severally limit the banking business and weaken their overall financial strength through big government regulations.  If that is not enough, Obama dictated Elizabeth Warren, who hates banks in all her life, to lead the new consumer protection agency created from the financial bill.  Moreover, the US Treasure has kept a significant holding in Citibank’s common shares and has been selling these shares in the open market very slowly for a long period of time.  By doing this, the Obama administration can firmly control the depression of banks and
 financials, making the bank
hatred into real bleeding.

Secondly, in spite of its huge size, Bank of America has always been outside the “elite” banking circle around the Manhattan’s Wall Streets.  From its early start in California to the current location in North Carolina, Bank of America is always out of the US’s financial center.  However, its grass root and steady expansion are more representative of Americans than many others inside the financial center.  BOA has been constantly facing the fierce competitions from the joint allies of the “central” financial firms, all waiting to take BOA’s top spot.

In addition, Brian Moynihan, the new CEO who replaced Ken Lewis early this year, needs a cool feet treatment, no matter how experience he had been with the banking industry.  He must catch and mast the pace of the business, implementing his new growth strategies.  Ken Lewis has been a legendary CEO for Bank of America.  He has orchestrated numerous large acquisitions during his tenure, growing BOA to a world top bank.  Can and will Brian Moynihan do the same for BOA?  

Only time will tell.

These depressive actions from politicians, regulators and competitions have attracted big hedge funds to short the BOA stock repeatedly.  In many cases, one has to suspect that the Democrats and Obama government officials must have worked together with the hedge funds to collaborate the shorting sales.  Whenever there was encouraging development from the banking industry, the Obama government and Democrat congresses would find or create something bad for them, bonus “scandal”, Goldman Saks subpoena, financial regulation legislation, and the most recent foreclosure paperwork flaws, just name a few.  Almost every bad exposure has been perfectly timed to bring down the bank. 

For Bank of China, the government, as its largest shareholder, has strict regulations on the banking industry, in order to avoid bank’s own bad loan disaster and a repeat of mortgage crisis that has sunken US and world economy two years ago.  Fundamentally, however, the state, business and the Chinese people all push the banks to thrive and success.  When banks, including Bank of China, thrive, so does the Chinese economy.

How to jump start the Bank of America? 

One quick way is to sell a major portion of the company to Bank of China.  The sale will provide badly needed cashes to enhance BOA’s fund reserve and bring China’s booming economy into the staggering US market.  In fact, BOA and other US major banks such as Citibank, Morgan Stanley and Goldman Sachs, all hold major share of Chinese major banks.  However, it is very doubtful that the government, politicians and regular Americans have the real guts to swallow a Chinese banking takeover.  Although everyone will benefit from the sale, it does not sound good in America at this moment.  Maybe Americans need a major change in their altitudes. 

When Bank of America thrives, so does the American economy!