By: Matthew Arndt, CFA, CPA, CFP | May 21, 2009 | Bad Financial Advice, Investment Performance, Wall Street Ethics, Who Can I Trust?

It is amazing that a bank can fail a stress test, be undercapitalized, and yet still impress shareholders. At least that is how it appears with the recent Bank of America (BAC) stock price rally. The share price of BAC has been on an upward tear following the announcement it will raise almost $13.5 billion through a stock sale to meet part of its U.S. government capital requirement.  This gets the bank only about half-way to meeting this obligation, and in the future, it must raise a similar amount. This will all amount to a massive dilution of shareholders interest.

I hear analysts at leading investment shops weave a creative narrative through these daunting facts and come up with various reasons why this recent rally in the banking sector all makes sense. I listen to the same commoditized Wall Street security analysts appearing on supposedly hard-hitting financial news outlets spew their phony metrics about how this is all good for the troubled banks (the same banks that still employ the slow-thinking, inept bankers that got us into this mess) and how it will inevitably lead to “earnings” (or maybe another round of illusory profits). These are the very same analysts that were telling everyone to buy Bear Stearns right up to the very weekend it blew up.

It all seems like a “Sucker’s Bet” for shareholders and would be investors. The latest round of this government sanctioned shell-game has done nothing but cosmetically changed the face of this mess. Bank of America, along with other banks, still appears to be a highly dubious business at risk to potential blow-ups.  Then again, the stock market and its participants have acted irrationally in the past (e.g. The Tech Bubble, etc.) and likely will in the future without rhyme or reason.  

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