10.21.2011 Original publish date
02.13.2016 update: stock chart broken, unable to repair. Archived report under Financial News Editorial
Bank of America Not Likely Preparing for a Chapter 11, But Risks Inhabit
original article written by Net Advisor™
EDITORIAL: Consumer Impact of Dodd-Frank Government Regulation
After reading the tweet and referenced Reuters blog regarding the question, “Is Bank of America preparing for a Chapter 11, I would have to argue that Bank of America is not planning to file Chapter 11.
Here is my take on what is happening:
Bank of America’s asset moves have more to do with Obama and Dodd-Frank regulation limiting or restricting banks and investment banks from proprietary trading and investing their own capital into certain funds. Further regulation on banks under Obama is making it more difficult for banks to make money, and the costs of compliance complicated this problem.
Coincidentally, both Chris Dodd (R) and Barney Frank (D) were instrumental to the Housing Crash and had long and big financial ties to Fannie Mae and Freddie Mac. In January 2011, analysis warned that banks would raise fees on consumers to offset Obama’s massive regulations, which again reduces the ability for banks to make money.
ABC News Video: 01-06-2011
As much as we all dislike bank fees, let alone higher banks fees, we can thank the Obama Administration for putting regulations in place that will cost consumers more money.
Warning Before Dodd-Frank Legislation
Before Dodd-Frank was enacted (2010) I talked about how the negative impact this would have on banks and investment banks. I also talked about how the volatility in the stock market would increase from reduced liquidity in the markets. We have seen this happen where the stock market has gone through huge price swings since, and no one dares to bother to look at what helped this to occur.
“Next if the government does ban proprietary (“prop”) trading, that will also reduce liquidity to the financial markets. And if memory is short lived, when liquidity is dramatically reduced in financial markets, we can see more extreme movements (volatility) like we had on the May 6th Flash Crash.”
— Net Advisor’s 05-20-2010 Report on risk of Dodd-Frank legislation & the impact on financial markets
[Further examples at the bottom of this article.]
Bank of America’s Troubles
Bank of America still has financial issues. As of the date of this article, Bank of American’s stock has fallen about -88% since about October 1, 2007. The bank’s problems were magnified by their purchase of CountryWide Mortage and further magnified the risk by buying Merrill Lynch. CountryWide and Merrill Lynch were on my top 5 companies in financial trouble posted in 2007 – long before most people became aware of what was really happening to the housing market or to the economy.
My other laundry list of problem financial companies can be found here – NetAdvisor’s 2007 Yahoo post).
A Trillion Dollar Nightmare
Currently, Bank of America is still sitting on over $1 Trillion in bad loans, and is being sued by pretty much ‘everyone.’ Bank of America still has the greatest risk of all the major banks in my analysis. This does not mean they are getting ready for Chapter 11 however.
Why Bank of America is Not Going to File Chapter 11
Any bankruptcy by Bank of America would have a catastrophic impact on global financial markets and would risk collapsing other major banks and investment banks, not to mention put the U.S. economy in a severe recession unlike what we have seen since the Great Depression. The financial impact would make the Lehman Brother’s bankruptcy look like an unnoticed blimp in the market.
In such event were to occur, the U.S. government (regardless of what anyone thought, or argued) would take over and nationalize the bank. The common stock would become worthless, the bonds could arguably lose 50%+ of their value overnight and we could see massive layoffs. The bank is already laying off 30,000 people over the next three years.
Government Says Banks ‘No Longer Too Big to Fail?’
Government Solution: Let’s Make Banks Bigger?
The Bush and Obama Administration complained about “too big to fail,” yet after the collapse of Bear Sterns, Lehman, AIG, Washington Mutual, Wachovia, and arguably Citigroup, surviving banks became even BIGGER.
These banks didn’t bigger on their own. I would argue that Government facilitated, encouraged and financed the bailouts and assisted the takeover to avoid further collapse of our banking system in 2008 and 2009.
In the major banking/ lending/ financial arena:
- Bank of America acquired Countrywide and Merrill Lynch;
- JP Morgan Chase acquired Bear Sterns and Washington Mutual;
- Wells Fargo acquired Wachovia;
- The Federal Government forced a takeover of AIG, Fannie Mae, Freddie Mac, and effectively acquired 34% of Citigroup;
- Lehman Brothers was left out to be the poster child of the financial collapse.
Many people probably have forgotten that CIT Group (which has nothing to do with Citigroup) filed for bankruptcy in 2009 – the 5th largest bankruptcy in U.S. history at that time. They have since restructured. So the banks we were told that were “too big to fail” just got even bigger and with no reservation of thought from government or anti-trust regulators.
The New FantasyLand: Washington DC
Result of Bush & Obama’s Too Big to Fail? Government allowed and made the banks bigger than they were before. Some in Washington DC seem to think they they can write a bunch of words on a piece of paper (call it “legislative reform”) and suddenly whatever they want comes true.
“Never again will the American taxpayer be held hostage by a bank that is too big to fail.”
— Barack Obama (speech 01-21-2010) (PDF)
Never-mind that despite Obama’s TV rhetoric the U.S. government – via the FDIC bailed-out and facilitated the takeover with taxpayer loan-loss guarantees to the acquirer of 157 banks just in 2010 alone.
The Washington thinking appears to be “too big to fail is bad” (but that is exactly what they created); and “too small to fail” is worse?”
Possible Scenario with Bank of America
What is a possible scenario is that Bank of America could send their biggest pain in their vault, CountryWide Mortgage to Chapter 11. This is not an immediate scenario, but a possible scenario. The financial impact would not likely be as severe as the whole bank going Chapter 11. The full impact on financial markets is not known however. But one thing is certain, any B of A bankruptcy or a major division thereof would likely have an impact on financial markets; especially if the bank did not warn the market of this possibility first, and had an approval stamp from the current Administration.
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Further Reading:
- Market Report: 08.08.2011 Dow Falls 634 in a Near Perfect Storm
- Market Report 08.14.2011 Dow Rebounds 423 after Yesterday’s 519 Point Drop
- Market Report 08.22.2011 (Featuring HP, Bank of America & Europe Risk)
- Report 08.25.2011 Analysis on Buffett’s Bank of America Billion-Dollar Bathtub Ball
Disclosure:
Net Advisor™ and or clients have been short Bank of America, and most all major financial stocks off and on since especially 2007. Net Advisor™ and or clients are NOT currently long or short any of the securities mentioned in this report as of post date. However, if the EU bailouts fail, will short the banks and everything else with it.
Net Advisor™ is a Finance & Risk Manager, is available an expert witness, and performs investigative work (limited) mostly in the financial arena. See bio for more.
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