The Feds Look Upon the Bank of America As a Piggy Bank

The Federal Government Loots the Bank of America The government announced yesterday a $16.65 settlement with the Bank of America to settle mortgage securities claims. The Bank did the federal government a large favor in 2008 by acquiring Countrywide Financial and Merrill Lynch. It keeps paying and paying. Let us go back to the near collapse of the nation’s financial markets in 2008. The United states, indeed much of the world, was facing an economic collapse on the levels of the Great Depression. The real estate market collapsed, and with it over a trillion dollars in mortgage based securities, often referred to today as “toxic loans.” A run on the banks was threatening every major financial institution in the United States. The United States on January 1, 2008 had five large, independent investment banking companies: Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs. Only Morgan Stanley and Goldman Sachs were left on January 1, 2009. Bear Sterns failed in March 2008. It was acquired by J.P. Morgan Chase at a fire sale orchestrated by the Feds. It had heavily pushed securitization of mortgage backed securities. It had an unsustainable debt to capital ratio of 35.6 – 1. Lehman Brothers collapsed 6 months later with a leverage rate only slightly lower than Bear Stearns. It was sold off in pieces in bankruptcy. Barclays Bank paid $1.35 billion for most of the bankruptcy “stripped clean” United States assets. A run on the banks, as in 1932, ensued. WaMu went under Wachovia, then the nation’s fourth largest bank, lost $5 billion in deposits in one day, September 26, 2008. IndyMac was soon to follow. Merrill Lynch was hemorrhaging. Morgan Stanley and Goldman Sachs would follow. The situation was so perilous, so reminiscent of the Great Depression, that the Bush Administration pushed the $700 billion TARP (Troubled Assets Recovery Plan) stature through Congress. Kenneth Lewis, CEO of the Bank of America, arranged for BofA to acquire Countrywide Financial, the largest mortgage issuer in America and the largest mortgage supplier to Freddy Mac and Fannie Mae. Countrywide was sinking fast. Kenneth Lewis had visions of emulating A. P. Giannini, the founder of the Bank of America, who led the small, but highly solvent, Bank America in buying up failing banks throughout California during the Great Depression. Lewis then agreed on September 4, 2008 to acquire Merrill Lynch, which had lost $19.2 billion from July 2007 to July 2008. It soon became clear shortly that Merrill Lynch was in worse shape than thought. It lost $51.8 billion in the last quarter of 2008. Bank of America told the feds that it would not complete the merger, whereupon Secretary of the Treasury Henry Paulson told the Bank that he would fire BofA’s management and that the Bank would have regulatory problems. Kenneth Lewis also was barred from telling shareholders of Merrill Lynch’s declining financial s before they voted to approve the merger. Kenneth Lewis resigned on December 31, 2009. The Countrywide and Merrill Lynch mergers saved the feds at least tens of billions of dollars, if not hundreds of billions, that would be needed to clean up the bankruptcy mess and pay of depositors. Thus, the federal shotgun marriage between Bank of America and Merrill Lynch. The Bank of America has now paid out $74.58 billion to settle claims against mostly Countrywide and Merrill Lynch. BofA, Countrywide and Merrill Lynch issued $965 billion in mortgage securities between 2004 and 2008, of which ¾ were by Countrywide. $245 billion went into default or are seriously deficient. Only $9 billion of that originated with the Bank of America. WaMu was failing fast. It was placed in receivership by the FDIC and acquired from the FDIC by JP MorganChase on September 25, 2008. The shareholders, as in normal in a bank receivership, were wiped out. The Justice Department reached a $13 billion settlement with JP MorganChase on November 9, 2013 for the mortgage backed securities issued by WaMu. Wachovia was acquired by Wells Fargo at the end of 2008. Wachovia was choking on the mortgages held by Golden West Financial (World savings), which it acquired for $24 billion in 2006 at the peak of the real estate market. It failed within 2 years. President Obama cried out against the “Fat Cat bankers.” His Justice Department is now looking upon them as a piggy bank for the federal treasury. As of this morning, again according to the Wall Street Journal, BofA has paid out $75.48 billion so far, JP Morgan Chase $27.09 billion, CitiBank $12.4 billion, Wells Fargo $9.9 billion, Morgan Stanley $1.91 billion, and Goldman Sachs $.88 billion. I just saw that Goldman Sachs may have settled claims earlier today for $3.15 billion I understand the laws of successor liability. The mistakes of the banks were not to receive from the federal government a “hold harmless and indemnification clause” in the shotgun marriages. The large banks will not step up next time, and there will be a next time, unless they receive a guarantee against future liability. (By way of full disclosure, I have owned shares in the Bank of America, especially predecessors Nations Bank and Citizens & Southern Bank of Georgia for decades, and currently a few shares in Wells Fargo and CitiBank)