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2 Main Reasons Bank of America’s Capital Cushion Exploded

Amanda Alix
November 13, 2012

It was definitely a "hurrah" moment when Bank of America's (NYSE: BAC  ) third-quarter earnings report revealed a pumped-up Tier 1 capital ratio of 8.97%, trumping that of Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  ) . Considering the bank's troubles since the advent of the financial crisis, this achievement is certainly a feather in the cap of CEO Brian Moynihan, who has made much headway with his Project New BAC in just a couple of years' time.

As I mulled over the reasons for this success, it occurred to me that the gains that B of A has made may not be based on a sustainable, long term business plan. As far as I can tell, Project New BAC is mostly about subtracting unneeded assets to bring in cash -- which makes me wonder: Once the balance sheet is all shored up, what's the plan to bring in new business?

Nipping and tucking only goes so far
In order to reach that illustrious capital ratio, Bank of America has been doing a lot of trimming over the past year or so, in two major areas: real estate holdings and mortgage servicing rights.

The bank has been selling off much of its real estate assets, claiming that it is not part of its core business. A few weeks ago, B of A and Fortress Investment Group (NYSE: FIG  ) signed off on the sale of 12 office buildings in New Jersey for somewhere between $375 million and $400 million, according to Bloomberg. The bank had been trying to sell the lot since May, noting that it was an asset it obtained when it bought Merrill Lynch.

Other big property sales include the Hearst Tower this past May to Parkway Properties (NYSE: PKY