Explaining Southern California's economy

Why Warren Buffett can't lose on Bank of America

Mercer 19058

Justin Sullivan/Getty Images

Bank of America customers use an ATM on January 21, 2011 in San Francisco, California. Bank of America reported today that it has reached an agreement for an $8.5 billion settlement with a group of investors who lost money buying mortgage-backed securities from Countrywide Financial.

Recall, if you will, this past summer when Warren Buffett put a floor under Bank of America's then-plummeting stock, serving up a $5 billion "Buffett bailout." Now, as one of the worst years for bank stock ever winds down, Bank of America has been headed South again. Yesterday, it dropped through the symbolically important $5 per share level (it's back up over $5 today). As the Wall Street Journal reports, Buffett is now like a lot of people who hold BofA mortgages: $1.5 billion underwater.

Is Buffett concerned? Probably not:

Don’t worry about Buffett, though. He is guaranteed a profit on his BofA investment. The banking giant must repay Buffett’s $5 billion, plus a 5% premium, at any time. Plus, the world’s third-richest man will rake in dividends of $300 million a year from BofA, and he won’t give up those payouts no matter what sub-basement BofA shares tumble into.

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Occupy LA gets more aggressive

Occupy Protesters March In Downtown L.A.

David McNew/Getty Images

LOS ANGELES, CA - NOVEMBER 5: Police officers stand guard as Occupy LA protesters stop to demonstrate at a Bank of America during the Move Your Money March on what is being called Bank Transfer Day on November 5, 2011 in Los Angeles, California. Occupy movement members are calling for people to move their money from banks to credit unions today in support of the 99% movement. (Photo by David McNew/Getty Images)

When compared with Occupy protest movements in New York, Oakland, and now Berkeley, Occupy LA has seemed like a blissed-out band of peaceniks. No police confrontations. No tear gas. No rubber bullets. No truncheons. 

Until now. Well, OK, there's been no real violence. But elements of Occupy LA did...actually occupy something other than the lawn of City Hall last night. They moved into a Bank of American branch lobby. KPCC's Corey Moore got the story:

About 50 protesters holding signs and chanting "Make banks pay" briefly took over the lobby of a Bank of America branch in downtown Los Angeles Wednesday night, calling for greater accountability. They were part of a march of about a thousand people demanding that financial corporations help resolve the state’s budget problems.

It's not clear yet whether the Occupy Movement is ramping up its provocations because it wants to...or needs to, given that the public and the media may be losing interest in the protests.

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Bullet Points: The utter pointlessness of banking fees

Wells Fargo is about do it. So is Bank of America. Huge financial institutions with billions in deposits are struggling with post-bailout legislation and passing costs on to their customers. People who've gotten used to swiping their debits cards for every imaginable transaction are about to see that service run them as much as $60 a month.

In the New York Times, Ron Lieber and Ann Carrns assess the pros and cons. But when you get right down to it, there basically are no pros. Here's why:

  • Credit unions offer branch deposits. Online banks get dinged for not having a physical place where you can hand over cash or checks to an actual human person. But they don't have a monopoly on old-school, bricks-and-mortar banking. Credit unions also have branch offices — and in many cases are members of networks, so you get a collection of branches that's comparable with the Big Banks.
  • Online banking is easy and technologically sophisticated. ING DIRECT, for example, offers a suite of checking accounts that actually earn interest. That's right, they pay you to hold your money. Setting up an account is a relatively simple process. And because money is pretty much just numbers flying around in the electronic ether, it really shouldn't be a problem to adapt yourself to this no-so-brave new world.
  • There's no risk to not using a Big Bank. Deposits at BofA are FDIC-insured. But so are deposits at online banks. Credit union deposits are also insured, by the National Credit Union Association (NCUA). 
  • Not using a Big Bank may actually be BETTER for the Big Bank. Back in late 2009, Arianna Huffington, along with a group of finance folks, got involved with a project called Move Your Money. The idea was to, in a manner of speaking, take from the rich and give to the poor. With in this case the poor being local banks. The upshot would be an surge in funding to "Main Street" banks, which might enable the kind of small-business lending that the country needs to recovery from the Great Recession. And the Big Banks would in turn be less likely to pose a massive risk to the entire system.

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Is Bank of America about to put Countrywide into bankruptcy?

Bank of America's stock price is drifiting down again today, edging precariously close to $7. There's really no convenient way to phrase it: the bank continues to suffer a hangover from its pre-financial crisis acqusition of Countrywide. So how do you solve a problem from Mozilo? Possibly...bankruptcy? This is from Bloomberg:

The option of seeking court protection exists because the Charlotte, North Carolina-based bank maintained a separate legal identity for the subprime lender after the 2008 acquisition, said the people, who declined to be identified because the plans are private. A filing isn’t imminent and executives recognize the danger that it could backfire by casting doubt on the financial strength of the largest U.S. bank, the people said.

The threat of a Countrywide bankruptcy is a “nuclear” option that Chief Executive Officer Brian T. Moynihan could use as leverage against plaintiffs seeking refunds on bad mortgages, said analyst Mike Mayo of Credit Agricole Securities USA. Moynihan has booked at least $30 billion of costs for faulty home loans, most sold by Countrywide during the housing boom, and analysts estimate the total could double in coming years.

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Our little corner of the Bank of America sell-off

Bank of America, the country's second-largest bank (or first, depending on if you go by assets rather than market cap), is in a heap of trouble. Its CEO, Brian Moynihan, is presiding over a restructuring that's supposed to refocus the mega-bank on its core consumer business. This means massive layoffs — 30,000, according to various published reports. There's also been speculation that BofA will try to sell Merrill Lynch, the investment back it acquired after the financial crisis. But there's also speculation that Merrill would be absorbed into BofA and become something far less than the top-level i-bank it was back in the day. That's speculation for you! Heads one day, tails the next!

Countrywide is also a major factor. The subprime mortgage lender was picked up by BofA just before the financial crisis and its portfolio of bad loans is often pointed to as the biggest drag on BofA's performance. There's a nightmare scenario in which BofA puts Countrywide into bankruptcy and then witnesses federal regulators take control of the bankruptcy proceeding — and BofA. 

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