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.