Bank of America is big in Southern California, but is it still too big to fail? Back in 2009, it took $45 billion in TARP bailout money from the Treasury, which it paid back a year later as it returned to profitability – but it did so by issuing new stock and diluting the value of existing holdings.
Of late, it managed to settle $424 billion in lawsuits related to mortgage-backed securities picked up during its 2008 acquisition of Countrywide – for a paltry $8.5 billion. Now AIG, the quintessential too-big-to-fail insurance giant whose...um, failure in 2008 got the bailout ball rolling and nearly brought down the entire global economy –is suing B of A for $10 billion, for “misrepresenting” mortgages that were bundled into securities that AIG insured. (Let's not even get into the Dadaist suspension of ethical reality that you would need to endorse a lawsuit like that.)
It gets worse. Since the beginning of the year, B of A's stock price has been on a slow downward slide that culminated in a fall off the cliff in August, for a loss of around 50 percent. This led econoblogger Yves Smith at Naked Capitalism to start a “Bank of America” death watch on August 5:
It is clear that the Charlotte bank has too much in the way of legal liability that it will not be able to shed and yet-to-be-taken writedowns on balance sheet items (for instance, roughly $125 billion of home equity loans and junior liens on residential real estate as of end of last year) for it not to be at risk of a death spiral. Its stock was down 7.44% yesterday, which puts its market cap at $89.5 billion, which is a mere 41.6% of common equity (total equity less book value of preferred) of $215 billion.
You can ignore all the balance-sheet inside baseball: The point is that B of A is in a world of hurt. There’s chatter that it may put Countrywide into bankruptcy. Smith says that to raise capital, it could try to sell Merrill Lynch, the investment bank that it took over in the depths of the financial crisis. But who would be interested in buying? (The answer you're looking for is "no one.") Hedge funds are running for the exits. And ominously, the FDIC is evidently unsure of whether it has the capability to “take down” a bank as big as B of A, the nation’s largest.
This would not be small potatoes for the Southland, where B of A is, well...ginormous, as Mark Lacter explained earlier this month in L.A. Magazine:
From its earliest days as a San Francisco-based institution, Bank of America has been a huge player in the L.A. area. There are 350 banking centers, 1,500 ATMs, $200 billion in retail deposits, and 16,000 employees in Southern California. The Countrywide deal places BofA among the region’s largest employers (along with Northrop Grumman, Ralphs, and Boeing).
Yes, that’s $200 billion in deposits. The FDIC would have its hands full. The regulators who aren’t ducking and covering under their desks, that is.
The B of A mess has even led Christopher Whalen at Institutional Risk Analytics [via Reuters] – who called this nightmare last year in a presentation Business Insider called “terrifying” – to nominate the bank as the first victim of Dodd-Frank:
BAC is a too big to fail zombie created by the Obama Administration and the Fed to protect US financial markets, but is now so vast and unstable that it threatens the global economy. But more corrosive and dangerous than the torrents of red ink inside BAC is the steady erosion of public confidence. Uncertainty is the enemy now, both with respect to BAC and to its large bank peers.
The only way to end the uncertainty and also accelerate the economic recovery is to put BAC through a restructuring using the powers under the Dodd-Frank legislation. While a restructuring by the FDIC may seem to be a horrible prospect, in fact it offers the first real hope of definiteness in the housing crisis, the multi-trillion dollar millstone around our collective necks. Indeed, the BAC situation illustrates why the Founders of the US embedded bankruptcy in the Constitution, namely the need for finality.
We'll see if it comes to that. It would be shocking – but also, perhaps, necessary.
Photo: Wikimedia Commons