Bank of America Is in Deep Trouble, and There May Be Financial
Disaster on the Horizon
Its stock value has dropped 40 percent since April, and the bank is
mum on what losses it's hiding on its $2.3 trillion balance sheet.
Alternet | November 11, 2010 | Joshua Holland
Will Bank of America be the first Wall Street giant to once again
point a gun to its own head, telling us it'll crash and burn and take
down the financial system if we don’t pony up for another massive
bailout?
When former Treasury Secretary Hank Paulson was handing out trillions
to Wall Street, BofA collected $45 billion from the Troubled Asset
Relief Program (TARP) to stabilize its balance sheet. It was spun as a
success story -- a rebuke of those who urged the banks be put into
receivership -- when the behemoth “paid back” the cash last December.
But the bank’s stock price has fallen by more than 40 percent since
mid-April, and the value of its outstanding stock is currently at
around half of what it should be based on its “book value” -- what the
company says its holdings are worth.
“The problem for anyone trying to analyze Bank of America’s $2.3
trillion balance sheet,” wrote Bloomberg columnist Jonathan Weil, “is
that it’s largely impenetrable.” Nobody really knows the true values
of the assets these companies are holding, which has been the case
ever since the collapse. But according to Weil, some of BofA’s
financial statements “are so delusional that they invite laughter.”
Weil points to the firm’s accounting of its purchase of Countrywide
Financial -- the criminal enterprise at the center of the sub-prime
securitization market. Bank of America, Weil notes, hasn’t written off
Countrywide’s entire value. “In its latest quarterly report with the
SEC,” he wrote, “Bank of America said it had determined the asset
wasn’t impaired. It might as well be telling the public not to believe
any of the numbers on its financial statements.”
With investors valuing BofA at half the worth that the bank claims,
it’s one titan of Wall Street that may be on the brink of collapse.
But it’s not alone. “Everybody was doing this, this is not just
something that Countrywide and Bank of America were doing," legendary
investor Jim Rogers told CNBC. As a result, the banks’ balance sheets
are "full of rotten stuff" that “is going to be a huge mess for a long
time to come.”
And that “rotten stuff” will continue to be a drag on the
brick-and-mortar economy until the mess gets cleaned up. Which, in
turn, is a powerful argument for a second dip into the public trough.
When the financial crisis hit, those of us who view the free market as
more than a hollow slogan urged the government to take over the ailing
giants of Wall Street, wipe out their investors, send their parasitic
management teams to the unemployment line and gradually unwind the
huge pile of “toxic” assets that they’d amassed before selling them
back, leaner and meaner, to the private sector.
It worked in the past -- it was Ronald Reagan’s [sic!! -- it was Bush
#1's] response to the Savings and Loan crisis of the 1980s. But that
was then, and today Reaganite [sic] policies are deemed to be
“creeping socialism” -- thoroughly unacceptable. We were told the
banks were too big to fail, and Bush saw eye-to-eye with Republicans
and Blue Dogs in Congress and bailed the banks out without exacting a
penalty in exchange for the taxpayers' largesse. They socialized the
risk, but the financial industry went right back to its old tricks,
paying its execs fat bonuses and playing fast and loose with its
accounting.
Much of that toxic paper remains on their books -- somewhere. The
assets are still impossible to price and now several Wall Street
titans appear to be approaching a tipping point, poised to once again
to extort a mountain of cash from our Treasury by claiming to be too
big -- and interconnected -- to crash and burn as the principles of
the free market would otherwise dictate.
But there’s a difference between then and now. At the time, most of
us saw the crash as a result of hubris and greed run amok in an
under-regulated financial sector. Now, we know the financial crisis
was the result of unchecked criminality -- that fraud was perpetrated,
in the words of University of Missouri scholar (and veteran regulator)
William Black, “at every step in the home finance food chain.” As
Black and economist L. Randall Wray wrote recently:
The appraisers were paid to overvalue real estate; mortgage
brokers were paid to induce borrowers to accept loan terms they could
not possibly afford; loan applications overstated the borrowers'
incomes; speculators lied when they claimed that six different homes
were their principal dwelling; mortgage securitizers made false
[representations] and warranties about the quality of the packaged
loans; credit ratings agencies were overpaid to overrate the
securities sold on to investors; and investment banks stuffed
collateralized debt obligations with toxic securities that were
handpicked by hedge fund managers to ensure they would self destruct.
That homeowners would default on the nonprime mortgages was a
foregone conclusion throughout the industry -- indeed, it was the
desired outcome. This was something the lending side knew, but which
few on the borrowing side could have realized.
And since the crash, they’ve committed widespread foreclosure fraud,
dutifully whitewashed by the corporate media as nothing more than some
“paperwork” problems resulting from a handful of “errors.”
It is anything but. As Yves Smith, author of Econned: How
Unenlightened Self-Interest Undermined Democracy and Corrupted
Capitalism, wrote in the New York Times, “The major banks and their
agents have for years taken shortcuts with their mortgage
securitization documents — and not due to a momentary lack of
attention, but as part of a systematic approach to save money and
increase profits.”
Increasingly, homeowners being foreclosed on are correctly
demanding that servicers prove that the trust that is trying to
foreclose actually has the right to do so. Problems with the
mishandling of the loans have been compounded by the Mortgage
Electronic Registration System, an electronic lien-registry service
that was set up by the banks. While a standardized, centralized
database was a good idea in theory, MERS has been widely accused of
sloppy practices and is increasingly facing legal challenges.
Judges are beginning to demand that the banks show their work -- prove
they have the right to foreclose -- and in many instances they can’t,
having sliced and diced those mortgages up into a thousand securities
without bothering to verify the paperwork as most states require by
law. This leaves what Smith calls a “cloud of uncertainty” hanging
over trillions in mortgage-backed securities -- the largest class of
assets in the world -- and preventing a real recovery of the housing
market. In turn, that is holding back the economy at large; according
to the International Monetary Fund, it’s the drag of the housing mess
that’s causing the high and sustained levels of unemployment we see
today.
Big financial firms have also been cooking their books in order to
obscure how shaky their balance sheets really are because honest
accounting would likely bring an end to those big bonuses that drive
“the Street.” Yet a day of reckoning may be fast approaching.
If the worst-case scenario should come to pass, with the banks hit by
thousands of lawsuits, unable to foreclose on properties in default
and with investors running for the hills, expect to hear calls for
TARP II. It’d be a very heavy political lift, but given Congress’s
fealty to Wall Street it could plausibly be passed.
There are alternatives. As in 2008, the federal government could put
failing financial institutions into receivership. But some experts are
saying that if we want to get off the roller coaster of an economy
moving from one financial bubble to the next, a bolder approach is
necessary: permanent nationalization of banks that can’t survive
without public dollars.
“Inevitably, American taxpayers are going to pick up much of the tab
for the banks' failures,” wrote Nobel prize-winning economist Joseph
Stiglitz last year. “The question facing us is, to what extent do we
participate in the upside return?” Stiglitz argued that the government
should take “over those banks that cannot assemble enough capital
through private sources to survive without government assistance.”
To be sure, shareholders and bondholders will lose out, but their
gains under the current regime come at the expense of taxpayers. In
the good years, they were rewarded for their risk-taking. Ownership
cannot be a one-sided bet.
Of course, most of the employees will remain, and even much of the
management. What then is the difference? The difference is that now,
the incentives of the banks can be aligned better with those of the
country. And it is in the national interest that prudent lending be
restarted.
Leo Panitch, a professor of comparative political economy at Canada’s
York University, wrote that "the prospect of turning banking into a
public utility might be seen as laying the groundwork for the
democratization of the economy.”
Ellen Brown, author of Web of Debt, points to the success of the
nation’s only government-owned bank, the Bank of North Dakota. “Last
year,” she wrote, “North Dakota had the largest budget surplus it had
ever had…and it was the only state that was actually adding jobs when
others were losing them.”
North Dakota has an abundance of natural resources, including oil, but
as Brown notes, other states that enjoy similar riches were deep in
the red. “The sole truly distinguishing feature of North Dakota seems
to be that it has managed to avoid the Wall Street credit freeze by
owning and operating its own bank.” She adds that the bank serves the
community, making “low-interest loans to students, farmers and
businesses; underwrit[ing] municipal bonds; and serv[ing] as the
state’s 'Mini Fed,' providing liquidity and clearing checks for more
than 100 banks around the state.”
Several states have considered proposals to emulate North Dakota, but
such a bold move would obviously be all but impossible in Washington.
But it shouldn’t be off the table. Banks provide an “intermediary
good” to the economy, creating no real value. But Big Finance’s
speculation economy has caused great and real pain for the rest of us.
As Joe Stiglitz put it, there’s no reason in the world the incentives
of the banks shouldn’t be better aligned with the interests of the
country and its citizens.
Joshua Holland is an editor and senior writer at AlterNet. He is the
author of The 15 Biggest Lies About the Economy (and Everything else
the Right Doesn't Want You to Know About Taxes, Jobs and Corporate
America). Drop him an email or follow him on Twitter.
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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