Thursday, April 23, 2009

The Real Bank of America Deal Emerges

There are some interesting headlines in the news today as I scroll through Bloomberg online:

- Jobless claims hit 640,000
- Fannie, Freddie defaults rise significantly
- GM will close factories for nine months and cancel debt payments

But there was one that jumped out at me before I even made it to my computer. On the front page of the Wall Street Journal this morning we see a huge picture of Bank of America's CEO Ken Lewis, Henry Paulson, and Ben Bernanke.

Lewis' testimony to Attorney General Andrew Cuomo regarding the acquisition of Merrill Lynch a few months ago was leaked to the press.

If you can't remember, Bank of America bought Merrill in one of those chaotic weekends last fall as the financial system was collapsing. They bought the company without doing any due diligence on their balance sheet, and they paid about 60 times the share price they would have if they let the company get closer to bankruptcy.

Bank of America has stated all along that the purchase was intended to help the company build for the future. They have continued to persist that they got a great deal for the brand and it was the best option for their shareholders.

Until today.

This from the front page of the Wall Street Journal:

Question: Were you instructed not to tell your shareholders what the transaction was going to be?

Ken Lewis (BofA CEO): I was instructed that "we do not want a public disclosure."

Question: "Who said that to you?"

Ken Lewis: Paulson....... (Henry Paulson the Treasury Secretary at the time)

Question: Had it been up to you would you (have) made the disclosure?

Ken Lewis: It wasn't up to me.

Question: Had it been up to you?

Ken Lewis: It wasn't.

Another part of the article:

"During the testimony, Mr. Lewis described a conversation with Mr. Paulson in which the Treasury secretary made it clear Mr. Lewis' own job was at stake.

When the news of the Merrill Lynch acquisition broke last fall, I said the day after it happened that Bank of America did it to become one of the banks that was too big to fail. They wanted to be part of the inner circle. They chose Merrill because their losses were going to be so great, and they now had a government promise to bail the company out no matter what.

This has caused Bank of America shares to plummet to close to nothing, wiping out the life savings of many people I know that live here in Charlotte and work for the company. These shareholders bought the stock believing their CEO would do what is best for the company.

The CEO did what was best for himself, as the acquisition allowed him to keep his job and receive unlimited government protection.

Tuesday, April 21, 2009

The IMF tops Roubini

I remember way back to a time that seems like so long ago, February 2007, when Ben Bernanke our Federal Reserve Chairman, told the world that he felt the subprime crisis was contained. He felt that it would not effect the overall economy, and he thought that the total losses from subprime loans would be less than $100 billion to the banking sector.

Just over two years later we have found out that those estimates were off by just a tad.

The IMF released its most recent Global Financial Stability Report this morning. In the report they now estimate that total worldwide banking losses will be over $4 trillion.

$2.7 trillion will come from United States banks.

About $1.3 of the $4 trillion in losses have been taken thus far. That means based on the IMF's estimates we are entering inning 4 of the credit crisis and the true pain has yet to have begun.

Yet, just last week all we heard on the news was how our major banks had finally hit the bottom. The markets had gone into euphoria based on their profit announcements in the first quarter.

What a ridiculous notion. If the IMF is correct (they have been under estimating the losses the entire way) then the banks still have close to $2 trillion in losses that they need to come clean on. Please don't pay attention to profit announcements based on accounting gimmicks.

Another news anouncement that shook the markets yesterday was Bank of America warning that major credit card losses were approaching fast.

Shocking! Who could have ever imagined this was an oncoming problem?

With Americans no longer able to borrow from their homes, they have recently moved onto the credit cards as their last option to cover their bills every month. Just as subprime loans looked harmless at first, this has led to increased business for the credit card companies that initially looks attractive to Wall Street.

The obvious problem is that the people borrowing the money have no way of paying it back. Loan defaults are surging across the board right now. Capital One announced earnings this evening and surprised the markets with major losses.

This massive increase in defaults will cause credit card companies to cut credit lines across the board (and increase fees). With this option taken away, Americans will finally have to stop borrowing every month to buy things they do not need.

In anticipation of this "problem," the Fed has already announced a program to purchase credit card debt. As they purchase the bad debt, it clears the way for new cards to be sent in the mail to be used and not paid for.

The free market is trying so hard to correct this process and force Americans to save. The Fed wants none of that and is focused on keeping our train running full speed toward the edge of a cliff.