Is Bank of America about to go under?

Gabe Wisdom had a guest on who believes BofA is headed for a government takeover or bankruptcy.

A few hours ago, the news mentioned that in a few months, BofA is going to add a $5 per month fee for having a debit card to make purchases. This was a predicted side effect from “banking reform” to limit the “swipe fees” paid by the merchant.

About two weeks ago, BofA announced it was cutting 40,000 jobs. Another story says they are selling their ownership of around 1,100 Pizza Hut restaurants. It’s something they inherited from buying Merrill Lynch. (a good example why you don’t want FDIC insured banks taking equity interests in risky business ventures)

The extremely low interest rates that banks can earn means that “free checking” is coming under pressure. When doing taxes last year, I noticed that my money market account at my mutual fund family earned $0.00 for the year. The costs of running the fund exceed the puny interest they can earn on overnight money.

My advice is to be very careful to not exceed FDIC limits at Bank of America, even for a few days, like escrow or proceeds for a real estate closing. Have a second way you could pay your regular bills for a few months. I’m weird, but I prepay my utility bills a few months in advance.

BofA is a huge problem. It is too big for the FDIC to “rescue”. No other bank is big enough to absorb them, nor would they want to assume the liabilities for the mortgage mess they acquired from Countrywide Mortgage.

A total shutdown of BofA would be chaotic. Too many people now do their bill paying online. Business customers would have a major mess.

One technique used by the FDIC in a bank that is “too far gone” is to directly seize the bank, rather than arranging a marriage. In a seizure, the FDIC would close the branches, close all the checking and savings accounts and send out checks for the final balances once things stabilize. CDs would be terminated and refunded early (bad news if you have a long term CD paying rates you can no longer get). If you have a loan or credit cards from a failed bank, you would pay the FDIC as trustee until they sell the loans to another party. It’s likely that would end your access to more credit through them.

The above would be politically unacceptable. People would panic even if they don’t have a accounts at BOfA.

Congress gave Tim Geithner a blank check for $4 trillion to use if he needs to prevent a systemic failure. To do so, he would have to sell more bonds – which would further damage the US Credit rating. The head of the FDIC who was fending off Tim Geithner’s plan to effectively end the autonomy of the FDIC has left.

Hold on tight. The ride may get bumpy.

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8 Responses to Is Bank of America about to go under?

  1. Piquerist says:

    Hope and “change.” What a great legacy… .

  2. foyle says:

    I just keep thinking back to all the crap that happened in the last 45 years that has led to this mess.

    Just a couple of examples:
    –allowing Bank of America (and others) to merge and grow into ‘national banks’ that have become “too big too fail”. If banks were still local and state entities, the failure of any particular bank would not cascade down the whole system (and banks that made poor business decisions would fail, as they should)
    –the idiotic “Community Reinvestment Act” (CRA) in the 1990’s (that largely led to the housing bubble and ‘everybody gets a mortgage’ mess that followed). I can still remember hearing Clinton admin folks on NPR touting the CRA as the ‘final solution’ to poverty and inequity in America. By letting EVERYBODY (regardless of creditworthiness) get a mortgage they reasoned that this ‘rising tide’ of “wealth” will lift all boats and social engineer the America that they wanted.

    Despite all of their failed policies, these same morons still refuse to admit error or change their tune. I saw an article yesterday by Robert Reich (another Clinton era buffoon) touting that “Keynes was right, more government borrowing is the only way out of this mess”. If you listen to the Diane Rehm show on NPR ever, this theme has become their mantra the past 12 months or so. It seems that ever time I turn on her show the guests are hand wringing and fretting that the FedGov might stop borrowing trillions of new dollars in debt and thus “destroy the economy”.

    Tens of trillions of dollars later, they are doubling down.

    Hopeless, just hopeless.

    • Art Stone says:

      In the late 1970s, I worked for North Carolina National Bank in Charlotte, NC. The bank was run by a man named Hugh McColl. He deeply resented the power of the New York banks, and was one of the major forces working to end the rule that prevented banks from operating across state lines. His idea seemed to be that a large regional bank would have the clout to compete against the New York banks.

      At the time, some states (Illinois comes to mind) permitted a bank to only have a single branch…. (the rule was slightly relaxed to allow a second branch office with a drive thru). This type of regulation firewalled banks from each other, preventing cascading failures. Banks were not free to set the interest rates they could pay. Commercial Banks could not engage in investment banking, risky trading in the financial markets or insurance.

      I was assigned to work on NCNB’s international banking system. NCNB had an office in London, Hong Kong, and the Cayman islands. While much of what NCNB was doing was supporting the needs of local businesses engaged in export/import (a major shoe retailer used NCNB to do letters of credit to buy shoes from other countries), the bank did get involved in lending money to businesses in other countries, and the London office was involved in doing forex arbitrage. They were probably doing other things that was beyond my understanding at the time (I was in my 20s)

      NCNB started to break through the rules by acquiring a mortgage company in Florida, and found a loophole that allowed them to start opening banking branches in Florida because they had a business presence in Florida.

      So how did we go from that to the current massively “too big to fail” retail banks like Citigroup and NCNB? [Bank of America has many pieces, but NCNB was the core of what is today BofA – Hugh McColl ran the combined company until he retired in 2001 and Bank of America’s headquarters is still in Charlotte, North Carolina.

      This document highlights when these changes started to happen – a lot of the motivation had to do with the Carter administration’s loss of control over interest rates, although Reagan’s desire to deregulate business was also a factor:

      • foyle says:

        I worked for NCNB’s competitor Wachovia back in the 1980’s. At the time they were playing second fiddle to NCNB — every time NCNB would “merge with” (i.e. buy out) another bank, Wachovia would follow suit shortly thereafter. From being North Carolina-only banks they each grew to southeast regional and then nationwide banks.

        • Art Stone says:

          At some point, I interviewed with First Union also. I sized it up pretty quickly that their idea of how to staff this computer department was they looked for really smart tellers who had no education in computers and would work really cheap. It had a definite “chick feel” to the whole department, and I figured I might have some problems working for women who had their jobs because they were female and would work for minimum wage.

          I always found it amusing that everyone who works for a bank for than a year or two is a “vice president”.

          For what it’s worth, one of the reasons I left NCNB was the United Way. A new guy came in and took over running the department. At a department meeting, someone asked him a direct question – did the bank track who gave to the United Way and was it a factor in promotions and pay increases? He said absolutely not.

          The woman in the cube next to me was writing a system to track United Way contribution rates, and aggregate by manager to keep track of which managers were most effective at coercing their employees to give to causes that they probably don’t agree with.

          I find the entire United Way concept distasteful, but that the head of the department would lie about it when asked a direct question told me volumes about the organization and its integrity (or lack thereof). The woman in the cube next to me was a blabbermouth. Pretty much the entire department already knew about her “secret” project.

          • foyle says:

            Ha ha! We share many common experiences in our working pasts!

            1) Wachovia was infamous for low ball salaries. I worked my way up from the literal bottom of the barrel to being the #2 person in a 20 employee department. While in that position I finished my undergraduate degree and then my boss moved on to a better job. Naturally, I applied for his position — to my surprise I was not even granted an interview because I was told I was ‘overqualified’ with my degree. So instead the bank hired a (you guessed it) recent graduate to be my boss. Problem was the guy had never worked a day in his life and this was his first job (mommy & daddy had paid his bills throughout college). I then had to train this moron from square one (while he was making two times the salary that I was receiving). I left the bank within a few months after that…

            2) Wachovia loved handing out titles also. When I worked there we had approximately 10,000 employees — of which 3800 were ‘Vice President’ or higher.

            3) We also had similar pressures regarding the United Way — I hated it every single year and they amped up the pressure every year. My final year there they put everyone in my building (over 100 employees) in the break room. After the tear jerking presentation they handed out the ‘pre-filled’ donation envelopes with “your share” already filled in (you only needed to sign on the dotted line). There was no “opt out” option on the form they gave us. Instead for the handful of us (myself included) who opted out, we had to raise our hands, walk up to the speaker’s desk, turn in our packets and fill out another form to exclude ourselves (all of this was done in full view of the other 100 people in the room for maximum pressure). (I also assume this way it made it simple for everyone to know those who would never get a raise or promotion).

  3. Art Stone says:

    unindenting my trip down memory lane with Foyle… just assorted anecdotes from my time at NCNB…

    Part of new employee orientation was spending an hour or so down in the item processing department – those amazing machines that could capture an image and spray a tracking code on a piece of paper whizzing by at 60 mph….

    The woman running the department, of course has seen everything – her motto was “only stupid people try to rob a bank by using a gun”. Another part of that tour had us walking by the rooms where they teach branch managers how to lie – doing role playing of different scenarios they might encounter.

    Re: United Way – other than the coercion, my problem with the United Way is the programs it runs encourage the problems they purport to be fixing – and that a lot of funding was just going to hire people who didn’t really do anything other than write proposals for why United Way should fund them.

    Creating a home for pregnant girls to live just makes it easier for girls to choosed to have sex – or even get pregnant of purpose -knowing that they’ll have a safe place to live and people taking care of them. Running programs to give meals to derelict homeless people just acts as a magnet to draw more people into the lifestyle. Some of the people objected to some of the things they were doing on religious grounds – like supporting planned parenthood. The United Way “dodge” was to allow people to designate that they didn’t want their money going for “x”, which was a meaningless gesture just to placate people The budgets for the various organizations where already set, and your choices had no real say in funding – just meant a little extra paperwork. If it were a bit more democratic – say they had a list of 25 organizations they might fund, and you would choose 10 and the top 10 would get funded, then I would have less objections to the entire process – but it was a top down “we’ve decided what you want” organization

    The people at the VP level also got hit with the PAC “contributions if you know what’s good for you”. Banks could not directly fund lobbying, so the employees “agreed” to fund the PAC with their “contributions”, with a tacit understanding that you would more than earn back your PAC contribution by your future earnings.

    • TheChairman says:

      Same thing at IBM…

      Back in the late 80’s I did a stint with IBM in Tucson, at their media and storage development facility. They had over 5,000 employees at the site, with about 3,000 being ‘management’ (so it seemed).

      Anyway, the routine was to herd everybody into the main cafeteria, bring out the dog and pony show (regional exec types), and do the annual United Way presentation. As I recall, it was performed twice, for 2,500 of us at a time.

      Then, department managers would come around and ask what percentage you wanted them to automatically deduct from your paycheck every pay period… wrong question to ask a new engineer.

      You wanna see ‘shock and awe’ in action? It’s when you tell them “zero”.

      After that initial encounter, they pressured me for a few weeks. Which led me to believe there was a bonus for managers, based dept participation rates.

      Well, I wasn’t considered a “team player”; no raise or promotion. I left IBM after 6 months… oddly, 4000 employees got ‘downsized’ a few months later.

      Years ago, when the United Way scandal hit the news, I finally felt vindicated.

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