Cost to insure BofA debt at record high

Elizabeth Fournier
SHARES in Bank of America tumbled more than six per cent during trading yesterday, as the price of insuring its debt rocketed to an all-time high.

The spread on the bank’s five-year credit default swaps (CDS) climbed to 435 basis points in early trades, meaning it would cost £435,000 a year over five years to insure $10m of BofA debt. The highest the spread on the bank’s CDS has previously traded was in March 2009, when it hit 386bp.

Shares fell as low as $6.01 in morning trade, extending losses which have seen 34 per cent wiped off the price so far this month.

The bank has been hit by resurfacing fears that it will not have enough capital to cover the cost of mortgage disputes it is embroiled in.

At the end of last year, BofA chief executive Brian Moynihan referred to the disputes as “day-to-day, hand-to-hand combat,” that would continue to dog the bank well into 2011.

Analysts in the US seem to be split over BofA’s cash position, with debate fuelling volatility in the shares throughout yesterday afternoon.

“The market is forcing BAC into a capital raise and the lower stock price goes, the worse it gets,” said Layla Peruzzi at Jeffries, who estimated the bank would need around $40-$50bn (£24-30bn) to maintain minimum regulatory capital levels.

Ex-analyst Henry Blodget – who is permanently banned from the securities industry after a fraud settlement in 2003 – put the amount of cash needed at closer to $200bn.

Bank of America was quick to quash Blodget’s accusations yesterday, calling his claims “exaggerated and unwarranted”. “We have more than enough capital to run our business and run our strategy,” said a spokesman.

Shares in Bank of America closed 1.87 per cent down at 630 cents.