Rich On Money

Short sellers can kill a stock’s QUICKLY – Bank of America is a great example

I have been involved with Bank of America on and off, for the better part of 30 years as an investment. Since 2008 and the financial crisis I have watched the largest bank in our country self-destruct. The cause was greed and stupidity but probably not in that order. You have heard the expression, when in Rome, do what the Romans do, and it is probably appropriate here also. Bankers went crazy when it came to risk. They were doing no documentation loans or loans without looking at the documentation which is just as bad. As a result, everybody was able to get a mortgage, and then even a home equity loan after that. Hundreds of thousands of homeowners did not deserve the loans they received, but once receiving them, said to themselves, “I must be okay; the bank approved it after all”. 

So Bank of America went out and bought Countrywide, and paid billions upon billions of dollars for a mortgage company that was worthless. To top it off, they bought Merrill Lynch for $29 per share. Had they waited 24 to 48 hours, they could have owned it for $2 per share, the way JP Morgan Chase took Bear Stearns for $2 initially. 

Here we are a couple of years later, and there has been a massive amount of shorting in Bank of America’s common stock (symbol BAC). There is no longer an uptick rule in effect. The SEC enforced uptick rule ensured that short players had to wait until there was an uptick in the price of a stock before you could come in and short again. No more, now you can short, and short, and short – no waiting. 

This means you can legally organize a short sale battle against a stock. What you cannot do is issue verbal negative statements about a company unless they are true statements. In my opinion, Bank of America got down to the $6 and change level recently, where I bought it because of a barrage of negative short sale players. Warren Buffett’s investment of 5 billion dollars in the stock should serve as a buffer against further shorting. The upside should be interesting from here.