What Do You Do With a Problem Like Bank of America?
[NOTE: This is a guest post by Dan Bischoff]
Be your very own markets reporter by filling in the blank lede below. Bonus points for the use of the words `swoon,' `pared,' `checked,' and 'rumours.'That's how FT Alphaville starts its "Bank of America Game" today (hat tip to Yves Smith at nakedcapitalism.com). The blog lists its reasons for setting up the game right away: An analyst speculates BofA will need an additional $40-50 billion in new capital; the bank has decided to maintain at least half its stake in the Chinese Construction Bank Corp., more than expected; continuing snags in its mortgage settlement deal with major financial firms; and BofA's current status as the most frequent victim of high frequency traders.
The glee with which the markets and commentators have taken to snarking at BofA really is striking -- it's a schadenfreude that can find no bottom, rather like the banking giant's stock, down 7.89% yesterday and even further today, as much as another 5% at one point. If the tone stems from BofA's noted arrogance during the collapse of capitalism three years ago, the current urgency comes from the spiraling public nature of its problems, and a coalescing conviction that keeping the current bank going is only making its problems worse.
And that is shaking long-run confidence in every other financial company.
If BofA is all but dead, what about other banks?
"There's a reason this country's founders forced bankers to be subject to bankruptcy courts way back in the 18th century -- for finality's sake," says banking analyst Chris Whalen, who has urged the FDIC to admit the inevitable and step in. "Because they knew if you let an insolvent bank continue trading it would be bad, it would make the problem much worse over time. In the UK, they don't let insolvent banks trade for a single day... they come in, wipe the bondholders, remove management, and lecture the bankers on morality."
In the case of the Charlotte-based BofA, its stock is trading at roughly a quarter its book value of $215 billion, the worst stock price of any of the Too Big To Fail Four. Whatever the idea was behind the government forcing BofA to buy Merrill during the 2008 crash, its management has been sacrosanct ever since.
Current CEO Brian Moynihan is BofA builder Ken Lewis' hand-picked successor, and most of the board is still made up of the same folks who supported the abrasive Lewis as he commandeered more and more of the tainted mortgage sector during the boom. They've had all the profits of the upswing and paid very little so far on the down. There are so many lawsuits surrounding their $8.5 billion deal with mortgage creditors -- including AIG's outstanding $10 billion suit -- that no one thinks it's settled yet.
Whistling past the graveyard
Whatever magic the government thought BofA could work in the last three years, forestalling the FDIC now looks like whistling past the graveyard. Waiting for the bank to become a penny stock is only going to make the clean-up hideously more expensive -- and allow the board to hand out more inflated compensation packages, like the $64 million in retirement swag Lewis walked away with last year.
Then again, that may have been the only sort of magic the government cared about when it bailed out the banks in the first place....
Dan Bischoff writes about art for The Star-Ledger in New Jersey; He was European editor for WorldBusiness and National Affairs Editor for The Village Voice.