Is Bank of America Headed Toward Collapse?

The nation's largest bank has only gotten bigger since the financial crisis and the government bailouts. But is big trouble ahead for the big bank?

Monday 15 August 2011

by: Sarah Jaffe, AlterNet | New Analysis 

 

Bank of America is no stranger to controversy. The largest bank in the United States has seen, in just the last six months, nationwide protests of its branches by groups like US Uncut, National People's Action and other progressive activists angered by the company's tax dodging, foreclosures, massive bonuses (paid after taxpayer bailouts) and other practices.

But could the too-big-to-fail behemoth actually be headed for failure?

On August 5, Yves Smith of the blog Naked Capitalism started a Bank of America Death Watch, writing:

“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.”

Back in 2008, Bank of America snapped up Countrywide, one of the subprime lenders that preyed on low-income home buyers, often with adjustable-rate mortgages that ballooned after a couple of years, leaving homeowners unable to make payments. Though it doesn't seem hard to figure out that many people would be driven into foreclosure by such loans, Countrywide was able to repackage these loans into mortgage-backed securities that were then resold as prime products to investors—investors that often were state pension funds, like CalPERS, the funds responsible for paying the benefits owed to public employees. These are the same public employees who are now being targeted around the country as greedy and unwilling to take cuts to their pensions. The unethical actions of big banks and mortgage lenders are at fault, yet working people are expected to take the hit.

"Countrywide exploited the American dream of homeownership," then-state attorney general, now California governor Jerry Brown said when he announced his state's lawsuit against the lender. "Countrywide was, in essence, a mass-production loan factory, producing ever increasing streams of debt without regard for borrowers," he said. "Californians...were ripped off by Countrywide's deceptive scheme."

As part of a massive settlement of Countrywide's practices, Bank of America was supposed to modify loans to help keep people in their homes, but it's all too often claimed the right to foreclose instead. Meanwhile, if borrowers happen to default again on a modified loan, B of A could profit from tacking added fees to the bill its investors are expected to foot.

But a wrench was thrown into B of A's plans this summer. In June, the bank announced an $8.5 billion settlement with investors, but New York's attorney general Eric Schneiderman, filed a motion to intervene. 

He called the settlement “unfair and inadequate,” and alleged “fraudulent and deceptive conduct” on the part of Bank of New York Mellon, which is the trustee in this case--supposedly acting on behalf of investors, but, Schneiderman alleges, possibly making a deal with Bank of America that gives the big bank the far better end of the bargain.

Schneiderman, unlike many government officials on the state and federal level, took the step of intervening because signing off on the settlement might affect his ability, later, to file charges against any of the companies involved.

As David Dayen at FireDogLake noted, the suit alleges that Countrywide sold what amounted to non-mortgage-backed securities to those investors. It reads:

“These provisions are central to any mortgage securitization, but they are now vitally important to trust investors in light of the housing market collapse. Any action to foreclose requires proof of ownership of the mortgage. This must be demonstrated by actual possession of the note and mortgage, together with proof of any chain of assignments leading to the alleged ownership. Moreover, complete mortgage files give borrowers assurance that their properties are properly foreclosed upon. The failure to properly transfer possession of complete mortgage files has hindered numerous foreclosure proceedings and resulted in fraudulent activities including, for example, 'robo-signing.' These fraudulent activities have burdened borrowers as well as the courts with flawed foreclosure proceedings.”

 Robert Scheer pointed out that Schneiderman stepped up when everyone from the White House on down was willing to sign off on a sweetheart deal that would “complete the job of saving the banks while ignoring their victims.” Schneiderman deserves credit for his fight, and also has some powerful tools on his side as the New York AG; the Martin Act, which, as Scheer quotes the Wall Street Journal, is “one of the most potent prosecutorial tools against financial fraud” because it doesn't require the AG to prove intent to defraud.

“There are so many people who got bad deals and are stuck with those bad deals that are just seething at the sense that the bankers who put them in the bad deals aren't stuck with the deal," Schneiderman said. “They’re not stuck with taking responsibility for this.”

Now Delaware attorney general Beau Biden (the son of Vice-President Joe Biden) has joined in the petition against Bank of America's settlement, noting the massive conflict of interest on the part of Bank of New York, and claiming his right to intervene and protect Delaware investors.

Yves Smith commented, “The fact that the rule of law is not completely dead in the US is looking increasingly likely to provide a very costly lesson to some very large banks and their asleep at the wheel regulators.”

While the intervention in this settlement by a couple of determined attorneys general certainly isn't enough to sink B of A, that's hardly the only problem facing the bank that many progressive groups call “Bad for America."

Also this week, AIG (yes, the same AIG that helped kick off the financial crisis with its own toxic financial business) filed suit against B of A for $10 billion in losses, making it “possibly the largest mortgage-security-related action filed by a single investor,” according to Gretchen Morgensen and Louise Story at the New York Times. The suit claims that B of A and its subsidiaries Countrywide and Merrill Lynch misrepresented the quality of the mortgages sold as securities to investors—the same subprime mortgages that created and then popped the housing bubble.

Morgensen and Story note that while the Justice Department has brought only three cases against employees at large banks and none against executives, private suits are still a possibility. AIG might have been part of the cause of the economic crisis, but at the moment it is still mostly owned by taxpayers (you and me) thanks to the bailout back in 2008. Kathleen C. Engel, a professor at Suffolk University Law School in Boston, told Morgensen and Story, “To the extent there are places where shareholders and borrowers can pursue claims, they are really serving the function of the government. They are our private attorneys general.”

These suits, and the possibility of others down the line, are creating bigger headaches for Bank of America that it seems to have foreseen when it bought one of the biggest purveyors of toxic mortgages. “Obviously, there aren't many days when I get up and think positively about the Countrywide transaction in 2008," Brian Moynihan, Bank of America's CEO, said in a conference call last week.

There are indications that investors and customers are also betting against Bank of America. Credit default swaps—mechanisms by which investors protect against default on a loan by purchasing insurance against its default, thereby hedging their bets—against B of A surged recently to their highest since April of 2009. The difference between a credit default swap and traditional insurance is that you don't have to have any financial interest in the loan in question—so they effectively become a form of gambling on default. Smith noted that B of A had a near-death experience back in 2009 as well, but wasn't forced to make any significant changes to its operations. Until Schneiderman intervened in the foreclosure settlement, B of A was allowed to keep functioning in essentially the same way it had before the financial crisis, when taxpayer bailouts had to keep it from falling apart.

And of course, with all those public protests against B of A's practices, Smith pointed out that the bank has been steadily losing depositors, as customers move their money to different banks that have less of a reputation for shady dealings.  

So when, on Thursday, a mainframe computer malfunction in the Los Angeles area left customers unable to access their accounts, Demos fellow and former Wall Streeter Nomi Prins tweeted “Yesterday, BofA says it doesn't need to raise more capital, today its CA systems fail, thereby clamping down on capital. probably unrelated.”

Whether or not the Los Angeles computer glitch had anything to do with B of A's financial troubles, the bank is likely to see its problems magnify. The entire financial market took a hit over the past couple of weeks, and the bank's current legal troubles may be only the beginning. Jack Barnes at Money Morning called Bank of America “A house of cards on the verge of collapse.” With a double-dip recession looking increasingly likely, a giant, undercapitalized beast like Bank of America looming over the economy like a bomb waiting to go off should scare everyone.

Christopher Whalen at Reuters wrote “[Bank of America] 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,” and argued that the best way to deal with it is to put it through a restructuring under the Dodd-Frank legislation.

In other words, for the FDIC to take control of the bank, proceeding like a regular bankruptcy but protecting depositors before creditors of the bank.

As we learned with the first round of financial crises, the government was unwilling to let the big banks go under, preferring to save giant institutions and hope that their largesse would trickle down to depositors and borrowers. They also proved unwilling to break up those giant institutions—in many cases, like that of Bank of America and Countrywide, putting multiple too-big-to-fail entities together to create an even bigger, more dangerous monster that could have serious impact on everyone if it goes down.

If Bank of America does wind up in the death spiral Smith and others predict, are taxpayers going to find themselves on the hook for another bailout? Is there hope in the interventions of AGs Schneiderman and Biden, that perhaps some government officials will put people before massive corporate profits, and hold the people at the root of the economic crisis responsible for their dealings? Only time will tell.

More Foreclosures, More Bank Failures, Big Trouble for the FDIC

Published on 08-11-2010
Source: Yahoo Finance

The U.S. housing market continues to send mix signals. More homes continue to enter foreclosure but the number of homeowners carrying so-called “under water mortgages,” declined in the second quarter, Zillow.com reported Monday.

21.5% of homeowners owed more on their mortgage than their home was worth in the second quarter, that’s down from 23.3% in the first quarter and 23% a year ago.

“There are a lot homes caught up in mortgage modifications,” explains Richard Suttmeier of ValuEngine.com, which he says results in a temporary stability in home prices. The key word: temporary.

“There’s waves of more foreclosures coming in the housing market because very few of the HAMP modifications are becoming permanent,” he says.

Meanwhile, the backdoor bailout of the housing market continues. Freddie Mac reported a $4.7 billion second quarter loss Monday and asked the government for another $1.8 billion in aid. Last week, Fannie Mae - Freddie Mac’s larger counterpart - asked the government for $1.5 billion. That brings the total tab for the government-sponsored entities to $148 billion. Suttmeier estimates, Fannie and Freddie, will wind up costing taxpayers at least $400 billion.

All of this housing trouble creates a vicious cycle for the economy, jobs and the fragile banking system, Suttmeier tells Aaron in this clip, predicing another 30% drop in home prices by 2014, as measured by the Case-Shiller Index.

“If you’re not building homes, you’re not creating jobs. Construction is the biggest component of job creation on Main Street USA,” he says. “Community banks can’t lend because they’re stuffed with loans they wrote 2003-2007. They are going bad.”

The 'negative feedback loop’ is going to lead to more bank failures and that leads to another problem – a lack of money in the FDIC Insurance Fund.

"The FDIC Deposit Insurance fund has now been drained by just $1.33 billion so far this quarter bringing the year to date total to $18.93 billion well above the $15.33 billion prepaid assessments for all of 2010,” Suttmeier recently wrote clients. Ironically, filling that gap will fall on the shoulders of the ‘Too Big To Fail Banks’ he says. “Because they can afford it.”

The big banks can afford it thanks to TARP and other taxpayer subsidies but the rising cost of replenishing the FDIC fund means lower profits for the big banks, which means they'll be even less inclined to lend money to the rest of us, further curtailing economic activity.

Did somebody say "negative feedback loop"?

103 U.S. Banks Have Collapsed So Far In 2010

By Michael Snyder - BLN Contributing Writer - 07-26-2010

Have you ever noticed how almost all U.S. bank closings are now announced over the weekend?  It is almost as if someone wants to keep the increasing number of bank closures out of the news cycle as much as possible.  The Obama administration continues to use phrases like “green shoots” and “economic recovery”, but the truth is that the U.S. banking system is in the middle of a meltdown.  On Friday, federal regulators shut down 7 more banks.  That means that the total number of U.S. bank failures has reached 103 for 2010 so far.  Last year (which was a really bad year for bank closings), we did not break 100 until October.  Of course federal officials promise that “the worst is almost over”, but can we really trust anything that they tell us at this point?

When it comes to the health of the U.S. banking system, the statistical trends certainly do not look promising.

At the end of 2008, there were 252 U.S. banks on the FDIC’s problem list.

At the end of 2009, there were 702 U.S. banks on the FDIC’s problem list.

About halfway through 2010, FDIC Chairman Sheila Bair said that 775 banks (approximately 10% of all U.S. banks) were on the problem list.

Does anyone else notice a trend developing?

It is time for everyone in the financial world to admit that the U.S. banking system is dying.

Do you know if your bank if on the problem list?

You might want to go check.

Not that your money is going to suddenly disappear.

Even if your local bank fails, the FDIC will guarantee your bank account, right?

Yes, it will.

But the FDIC is far from healthy at this point.

The FDIC is backing approximately 8,000 U.S. banks that have a total of about $13 trillion in assets with a deposit insurance fund that is pretty close to empty.

Well, actually “empty” is not quite the right word.

It was recently reported that the FDIC’s deposit insurance fund is sitting at negative 20.7 billion dollars.

And the FDIC estimates that the seven bank failures on Friday will reduce the fund by another $431 million.

Ouch.

The truth is that the FDIC is rapidly turning into a gigantic financial black hole.

The red ink just seems to be endless.

The FDIC now estimates that their funds will experience a $60 billion reduction due to additional bank closings between now and 2014.

And to be honest, that figure is way too optimistic.

So who is going to bail the FDIC out?

The same source that bails everyone out.

The U.S. taxpayers.

But isn’t that bad?

Yes, all of these bailouts are going to cause the U.S. national debt to continue to explode, but what else can we do?

Are we just going to shut down the FDIC?

That wouldn’t go over too well with anyone.

No, the truth is that this is the system that we have built.

All the crap flows downhill and ultimately ends up in the laps of U.S. taxpayers.

The bad news is that it looks like large numbers of banks are going to continue to fail.

You see, right now the American people are simply not doing a very good job of paying their bills.

During the first quarter of 2010, the total number of loans at U.S. banks that were at least three months past due increased for the 16th consecutive quarter.

Just think about that for a moment.

Would you consider 16 in a row to be a trend?

In an economic system built on credit, it is absolutely imperative that most people pay their debts or the whole thing will come crashing down very quickly.

And right now it is undeniable that things are unraveling at a staggering pace.

So who is benefiting from all this?

Well, there is one segment of the banking industry that is actually performing quite nicely in the midst of all of this chaos.

Many of the largest banks in the U.S. have been reporting very large profits as they gobble up larger and larger shares of the U.S. banking market.

In a previous article entitled “Are We About To Witness The Greatest Banking Consolidation In U.S. History?”, we noted the rapidly growing power of America’s megabanks….

Back in 2000, the “Big Four” U.S. banks - Citigroup, JPMorgan Chase, Bank of America and Wells Fargo - held approximately 22 percent of all deposits in FDIC-insured institutions.  As of June 30th of last year that figure was up to 39 percent.

The Founding Fathers of this country warned us of the danger of big banks getting too much power, but we have not listened to their warnings.

Now we have monolithic global banks that are so immense in size that we seem almost powerless to control them.

In fact, the six biggest banks in the United States (Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo) now possess assetsequivalent to 60 percent of America’s gross national product.

The truth is that these sharks aren’t shedding any tears when your local banks die off.

Why?

Because they know that many of the customers from the banks that have died will soon come their way.

The reality is that all of the legislation and regulations implemented during the past 30 or 40 years have rigged the game massively in favor of the big global banks.

So dozens upon dozens of smaller banks are going to continue to die and the megabanks are going to continue to eat up increasingly larger portions of market share.

So if you still have money in a small local bank, enjoy it while you can.

From now on, the small bank in America is an endangered species.

Bank failure is 83rd in '10; pace more than double last year's

The Associated Press

WASHINGTON (AP) — Regulators on Friday shut down a Nevada bank, raising to 83 the number of U.S. bank failures this year.

The 83 closures so far this year is more than double the pace set in all of 2009, which was itself a brisk year for shutdowns. By this time last year, regulators had closed 40 banks. The pace has accelerated as banks' losses mount on loans made for commercial property and development.

The Federal Deposit Insurance Corp. took over Nevada Security Bank, based in Reno, with $480.3 million in assets and $479.8 million in deposits. Umpqua Bank, based in Roseburg, Ore., agreed to assume the assets and deposits of the failed bank.

The failure of Nevada Security Bank is expected to cost the deposit insurance fund $80.9 million.

In addition, the FDIC and Umpqua Bank agreed to share losses on $368.2 million of Nevada Security Bank's loans and other assets.

The number of bank failures is expected to peak this year and be slightly higher than the 140 that fell in 2009. That was the highest annual tally since 1992, at the height of the savings and loan crisis. The 2009 failures cost the insurance fund more than $30 billion. Twenty-five banks failed in 2008, the year the financial crisis struck with force, and only three succumbed in 2007.

As losses have mounted on loans made for commercial property and development, the growing bank failures have sapped billions of dollars out of the deposit insurance fund. It fell into the red last year, and its deficit stood at $20.7 billion as of March 31.

The number of banks on the FDIC's confidential "problem" list jumped to 775 in the first quarter from 702 three months earlier, even as the industry as a whole had its best quarter in two years.

A majority of institutions posted profit gains in the January-March quarter. But many small and midsized banks are likely to continue to suffer distress in the coming months and years, especially from soured loans for office buildings and development projects.

The FDIC expects the cost of resolving failed banks to grow to about $100 billion over the next four years.

The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.

Depositors' money — insured up to $250,000 per account — is not at risk, with the FDIC backed by the government.

Your Retirement Funds to Bail Out Failed Banks?

Pension Funds as Corporate Safety Nets
By JAYNE LYN STAHL

With the recent spotlight on a runaway Prius, few are paying any attention to the latest government plan to bail out failing banks with retirement money.

The Federal Deposit Insurance Corp., according to Bloomberg, now thinks it's a good idea for public retirement funds over about $2 trillion to "buy out all or part of failed lenders."

Last year alone, the FDIC reportedly shut down close to 150 banks, and it expects even more banks to fail this year. But, a quick look at how the largest companies, like General Motors, are currently investing their employees' pension funds is guaranteed to make a shiver up and down the spine of every working American. And, two things become clear: 1) your pension funds are at risk, and 2) any bank that depends upon your pension fund is also at risk.

It's not breaking news that the money we depend upon to be there in our retirement is invested by those corporations who hold it in trust for us just as it's common knowledge that money deposited into bank accounts doesn't sit there looking pretty until it's withdrawn.

But, what has changed is that corporations are now effectively "going to Las Vegas," as a Dallas investor recently told the New York Times, with our pensions. It's no longer about buying stocks, but investing has now expanded into junk bonds, commodity futures, and foreign stocks, too.

More importantly, companies may soon use public pension fund revenue that they're exposing to increasing risk to rescue failing banks and with FDIC blessing.

Okay, it breaks down quite simply like this: XYZ Corporation has a public pension fund in which John Jones' retirement savings are being kept. XYZ Corporation decides to take a bite of Jones' pension account and invest it in commodities with an eye to using the revenue from that investment to bail out Granny's Bank. XYZ can sleep easy knowing that whatever money it invests in Granny's Bank is federally insured, so if there is a loss, it will ultimately be the FDIC who will pick up the tab.

What a monstrous idea that the FDIC should be looking at retirement money as a safety net for failed lenders!

If the idea is to stabilize the lending industry by allowing corporations to gamble with their employees' savings and then, in effect, turn the pension funds over to a failing bank, who wins? It's simply risk multiplied exponentially. And, ultimately, it's not the banks, or the corporations, who are taking the risk, but John Jones because when the FDIC runs out of money, or decides to lower the amount it insures as is all but inevitable, it is the worker who will lose.

While the banks, and pension administrators, are traditionally reticent about their plans, some regulators are said to be debating whether or not letting private corporations take over failing banks is a good thing because they may not only be jeopardizing federally protected deposits, but may use the bank as collateral, or sell it for profit.

When the regulators get in bed with the risk takers, the only ones who win are the ones who hold the mortgage, and more and more it looks like, by 2050, the only question you may expect when applying for U.S. citizenship will be "Will that be Mandarin or Szechuan?"

What this plan is really about is having the FDIC bail out not banks but corporations who incur losses by making risky investments with your retirement money. Once again, it's "score one for the corporations!" Public pension funds becomes an extra layer of padding for fortune 500s in a financially cold climate, and essentially it's the individual, not the corporation, who is taking the risk.

Somebody seems to have gotten it backwards. The banks are supposed to bail us out in an emergency and not the other way around. Thomas Jefferson said it best two hundred years ago: "if the American people ever allow private banks to control the issue of currency... the banks and corporations that will grow up around them will deprive the people of their prosperity until their children wake up homeless on the continent their Fathers conquered."

Massive Bank Failures Due, Says Oversight Panel

Massive Bank Failures Due, Says Oversight Panel
02-27-2010
Source: Epoch Times

Close to 3,000 banks are currently classified as having a risky concentration of commercial real estate loans, according to a recent report by the Congressional Oversight Panel (COP). All of them are small to mid-sized banks, already weakened by the financial crisis.

The COP is “deeply concerned” that commercial real estate losses could jeopardize the stability of these banks and the damage will contribute to prolonged weakness throughout the economy, according to chair Elizabeth Warren.

About $1.4 trillion in commercial real estate loans are due for refinancing between now and 2014. “In today’s market, many applications will be turned down,” Ms. Warren said on a video posted on COP's Web site.

Property values have fallen 40 percent on average, and banks are unwilling to refinance; many wanting a lower loan-to-value ratio, which will trigger lot of foreclosures.

“Some loans were flat-out reckless when they were made and never should have been financed,” Warren said. Banks could suffer losses of up to $200 to $300 billion, the report said.

“A big enough wave of commercial mortgage defaults would trigger economic damage that would touch the lives of every American,” Warren said.

Empty offices, empty hotels, and empty stores could lead directly to job losses, and banks could fear lending. The largest loan losses are projected for 2011 and beyond. But the stress tests conducted on big Wall Street banks last year examined their stability only through 2010, the COP report states.

“Even more significantly, community banks tend to hold much greater concentrations of commercial real estate than big Wall St. banks. But community banks never underwent any stress tests at all,” Warren said.

Nearly 3,000 community banks (that’s nearly 40 percent of all banks in the United States), have a very high proportion of commercial real estate on their books and are at particular risk of being overwhelmed.

These are the same banks that provide loans to small businesses that create jobs and boost productivity.

“If hundreds of community banks go under, the effect could be to dump sand in the gears of our economic recovery,” Warren said.