Bank of America Stock in Danger

Despite crazy takeover rumor, Bank of America not in danger of failing.A crazy rumor swept through Wall Street this week: JP Morgan would imminently take over Bank of America in a deal that would be "supported" by the federal government with a $100 billion investment in preferred shares in the combined entity or via a souped-up guarantee of deposits.

No one believes this, but the fact that it has cropped up speaks volumes about the mess that Bank of America has helped create for itself. It is surely a sign that the PR folks are struggling when the public discussion lapses into the absurd. There's no way that Bank of America is in any sort of danger of failing, as the rumors imply.

There's not much that would prompt a massive intervention right now. One of course would be a run on the bank. This could take two forms. Consumers could lose confidence and rush to the get their money back, something we rate as a low-probability likelihood. On the other hand, institutions and corporate clients could lose confidence stupendously and rush to get their money back.

Thanks to Bloomberg, we know that what pushed Morgan Stanley to the very brink of solvency in 2008 was a run by hedge funds on the bank's prime brokerage unit. Bank of America is not in any sort of similar danger. In fact, it would appear to be in decent shape from a balance sheet perspective. Certainly, it is on track to stay in compliance with Basel III's phased-in milestone requirement, given the many assets it could sell. That said, there's also reason to think that there's little room for growth in this environment. And a reverse split is more likely than dividends.

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