Thursday, January 15, 2009

The Bank of America (Literally)

The big news yesterday was the government's first capital injection into Bank of America. The bank said it needed the help because of the early troubles it is having with its acquisition of Merrill Lynch.

As I mentioned the day after it happened, Merrill Lynch was not acquired because Bank of America felt it would strengthen the company, in fact they were acquired for the exact opposite reason. The acquisition now made them too big to fail, granting them the elite right for an endless supply of government support.

While this first round of capital is projected to be around $10 billion, I anticipate the total money needed to keep the bank solvent this year to be well over $100 billion. (Remember, they have already received $25 billion from TARP funds)

Citigroup is currently dealing with some major issues as well. News was announced this week that the bank would be splitting up its operations to help it run more efficiently.

The real nature of these decisions is once again exactly the opposite. The bank is splitting up because its pieces will soon be merged with other large banks in takeovers. My early favorites for this would be Goldman Sacs and J.P. Morgan.

Of course, Citigroup is another mountain of toxic debt, and it will take a least another $100 billion in government support to help this transition.

This would then leave three large banks: Goldman, Morgan, and Bank of America, that essentially would be the "Banks of America" as they would continue to make acquisitions and reckless business decisions with the full support of the Treasury and Federal Reserve.

The entire banking system would currently be insolvent without our government backstop. Every hour that passes the underlying debt on their balance sheets loses value as homeowners stop making payments on mortgages, credit cards, and auto loans.

All the anchors have now been tied on tight to our large ship; the American economy. Now we can just sit back and watch the debt pull the entire ship underwater, drowning everyone on board.

No comments:

Post a Comment