Archive for August, 2011

h1

Bank of America, The New Lehman?

August 12, 2011

This is my last negative post, from now on I’m going to be focused on solutions to reinvigorate capitalism; presenting ways of unleashing the full potential of the most talented, connected and creative generation in the history of the human race. That we’re reduced to trembling in fear, talking about a double dip recession or another Great Depression is a disgrace.

Having said that the problems we face in the aftermath of the Financial Crisis are not going away. Apart from the unsustainable debts of almost everyone, municipalities, individuals, sovereign governments etc., there are unresolved liabilities emanating from the 2008 mortgage mess that are about to break through our defensive perimeters. Think Titanic; the banking system essentially hit the iceberg at full speed in 2008. We’ve kept her afloat ever since, but at the moment the economic engine room is flooded and water is rising fast on the lower decks. It’s a mathematical certainty that we’ll sink; it’s simply a matter of time.

Why single out the Bank of America? Well there are a couple of reasons. First of all their behavior was and continuous to be deplorable.  To say banking standards were compromised in the past decade is like saying Bonny and Clyde were good kids out to have some fun; the reality is bankers were overwhelmed by greed, recklessness and incompetency. How many banks foreclose upon a home that the owners paid cash for, and don’t have a mortgage? Bank of America did. But that level of incompetency is only the tip of the iceberg; there is a growing army of Attorney Generals lining up to sue Bank of America for illegal foreclosures in their States. Wisconsin is only the latest. Attempts by the bank to settle this matter are unraveling fast.

Even that paragon of virtue, AIG is suing BofA (for $10 billion) over a variety of abuses. But they’re only one of a long (and growing) line of litigants seeking to recover losses on hundreds of billions of dollars of mortgage-backed securities, claiming that Bank of America, its Merrill Lynch and Countryside Financial divisions knowingly misrepresented the quality of mortgages placed in securities and sold to investors.

Bank of America is not alone in having these problems, many banks share them, but unfortunately for shareholders, BofA is the weakest in the herd. With a share price in the single digits there is a growing sense of unreality at the senior management level. Although it remains the largest bank in the United States by assets, the BofA has dangerously weak capital ratios. But as CEO Moynihan said recently: “We simply could not continue… diluting our shareholders to raise capital.”

The banking industry has been sleepwalking through the crisis ever since TARP program was announced.  And complacency reigns; when the banking industry has gotten in trouble in the past (i.e. after the Enron fiasco) they’ve received only a slap on the wrist and a bank friendly settlement acknowledging no wrongdoing or liability. How do the banks do it? The banks have important cards to play; they can rightly claim that they are central to the material well-being of the nation – not just too big to fail, but too important to be held accountable for wrongdoing.

The Justice Department, true to form, is concluding its inquiries into bank malfeasance without filing any serious charges. Banks are hoping and expecting that they’ll receive a politically brokered ‘free pass’ when the dust settles. Unfortunately, neither banks nor officialdom will be able to withstand the public backlash that’s coming when the economy takes another steep nosedive. The public, already plenty angry, will be out for blood and the politicians will simply throw the rotten bankers to the mob to save themselves.

Like Lehman the fall of Bank of America will be very much greater in perception than in reality. It will have a knock on effect that staggers the imagination. Batten down the hatches, and man the lifeboats.

Follow

Get every new post delivered to your Inbox.