The United States of Wall Street just added another major holding to its portfolio of financial garbage: Bank of America.

Like Citi, BA has now received more MORE IN BAILOUT MONEY than its actually worth. (BAC = $53B; C = $21B) How this can ever be a profitable investment, as some mathematically challenged Congress-critters have suggested, is all but impossible to imagine.

Blaming “previously undisclosed losses from its Merrill Lynch,” B of A threatened to kill their purchase of Mother Merrill.  Treasury made an emergency capital injection of $20 billion, on top of the $15B and $10B already received by BA and MER respectively. The taxpayers will also backstop $118 billion of assets, setting up what is likely to be a jumbo money losing trade.

What should have happened in both instances was an orderly liquidation, selling off the pieces to competent managers who understand risk, and can manage smaller portions of the firm. Instead, the same idiots who helped destroy all of companies involved are still running the show.

Federal Reserve:

“The U.S. government entered into an agreement today with Bank of America to provide a package of guarantees, liquidity access, and capital as part of its commitment to support financial market stability.

Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans, securities backed by residential and commercial real estate loans, and other such assets, all of which have been marked to current market value. The large majority of these assets were assumed by Bank of America as a result of its acquisition of Merrill Lynch. The assets will remain on Bank of America’s balance sheet. As a fee for this arrangement, Bank of America will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Bank of America from the Troubled Asset Relief Program in exchange for preferred stock with an 8 percent dividend to the Treasury. Bank of America will comply with enhanced executive compensation restrictions and implement a mortgage loan modification program.”

The amazingly bad deal Bank of America plan mirrors an even worse bad deal made by the Feds with Citigroup in November. There, the taxpayers explicitly insured the bank against losses on 90% of $306 billion of toxic assets — Citigroup’s real-estate loans and securities.

Like Citi, the B of A monies are a terrible deal for the taxpayer — not a lot of bang for the buck, and leaving the same people who created the mess in charge.

Organ transplant medicine understands certain truths: You do not give a healthy liver to a raging alcoholic, as they will only destroy the organ via their disease/bad judgment/lifestyle.

Why do we give billions of taxpayer dollars to incompetent managers who failed to protect their assets, who destroyed shareholder value? These people have demonstrated a marked INABILITY to run these firms. Why reward them with 10s of billions of dollars?

Its nothing short of madness . . .

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Sources:
Treasury, Federal Reserve, and the FDIC Provide Assistance to Bank of America
Federal Reserve, January 16, 2009

http://www.federalreserve.gov/newsevents/press/bcreg/20090116a.htm

Bank of America Posts Quarterly Loss After Bailout
David Mildenberg and Linda Shen
Bloomberg, Jan. 16 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJx0WNKsL9Fk&

BofA’s Latest Hit
Treasury Injects $20 Billion More; Stock at 1991 Level
WSJ, JANUARY 17, 2009

http://online.wsj.com/article/SB123208718376389675.html

Category: Bailouts, Corporate Management, M&A, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

45 Responses to “The $45 Billion Dollar Club”

  1. flipspiceland says:

    You ask why? Surely you know by now that there is only one “why”, and it’s not insanity.

    ALL political economy is nothing more or less than legalized BRIBERY.

    Follow the money.

  2. Bruce in Tn says:

    Barry,

    Where is John Galt?

    ~~~

    BR: He had a moment of enlightenment, and realized Humans cannot be allowed to operate with out rules, or they destroy themselves.

    He’s figured out that his entire worldview was based on nonsense . . .

  3. John Borchers says:

    If you are disappointed in this you are going to be very disappointed this year.

  4. rob says:

    Because the American Taxpayer is an ignorant fool, that would rather have someone else to deal with the “nasty stuff” than to deal with it themselves. Even if that someone borders on insane, illegal, or simply wrong. Long as it doesn’t interrupt their routine or lifestyle, “Please take care of it for me Mr. Politician.” We talk about no oversight for taxpayer funds. Hell, we have no oversight of our elected officials!

  5. austincompany says:

    I agree with Rob. Most Americans are idiots who would be hard pressed to find Iraq on a map – much less understand what a CDO or TARP is. It’s the Roman Empire all over again. Just give the mob their games (“American Idol”) and bread (McDonalds) and the Senate (Congress) can do whatever they please.

  6. John Borchers says:

    Now which would you rather own? Intel making 4 cents EPS or gov’t back financials where the gov’t is insuring any amount which would make the bank insolvent.

    Doesn’t take a rocket scientist to figure out this is exactly what they are doing.

  7. jsgarber says:

    Congress is ignoring one of the most important principles of trading…Never add to a losing trade!

  8. Michael Cerulean says:

    Bye-bye American Pie,

    Greenspan blew a bubble,

    Paulson told Congress a lie.

    Banksters stole your money,

    Left your family high and dry.

    Now you can’t find a job,

    No matter how hard you try.

    Say good-bye to your dreams in the sky,

    Say good-bye to your piece of the pie.

    –- by SliderOnTheBlack

    http://www.sliderontheblack.com/politics-money-and-markets/bye-bye-american-pie/

  9. Bruce N Tennessee says:

    Yes, I agree with that, Barry.

    However, he also figured out that people in power will continue to act against the majority’s wishes until they are called on it….

    No matter whether this works or not, we are screwed either way. Depression now, or staggering debt for years to come.

    The result of overspending and policies that encouraged overspending for much of my adult life.

    Thanks for the work you put into your blog.

  10. rktbrkr says:

    well Paulson certainly guaranteed that the US is in too deep to quit, $90B of equity and $400B of guarantees in these 2 big swashbuckling banks and Jan hatzius said we’re about 1/2 way thru the RE declines so…

  11. Patrick Neid says:

    I don’t know which is more painful. The “Plans” themselves or the folks who thought they would work.

  12. jmf says:

    Moin from Germany,

    This from FT Alphaville sums it up….

    Selected excepts from Ken Lewis (Banker of the Year) on the Bank of America/Merrill Lynch conference call, September 15th, 2008.

    Enjoy!

    …we could have rolled the dice and possibly could have got it at a cheaper price. We thought the long-term benefits were so overwhelming, it was such a strategic opportunity that we elected not to roll the dice and to go ahead and do it at this time.

    Question: can you provide a little more colour on some of the due diligence that was done?

    Well, Joe, you want to go over it again in terms of- and the JC Flowers piece is key because they were renewing something- an effort that had already gone on and been very, very extensive.
    Errr…

    Clearly we had a tremendous amount of historical knowledge both as a competitor with Merrill Lynch and reviewed and analyze the company over the years.

    Mr Lewis, have you ever visited the planet earth?

    …it’s not as if we don’t have a very significant knowledge of the markets around the asset classes that are most problematic. In addition, as you would expect, we deployed the team that we would ordinarily deploy in these types of situations, which had well over 45 people from our team on site as well as others offsite outside counsel and the like.

    Well over45 people!

    PRICELESS!!!!!!!!!

  13. ben22 says:

    ok, was just announced on CNBC by Lewis that they bought Merrill b/c the Fed and Treasury basically told him to, I mean that’s how I interpreted anyway.

    So now the question becomes, if the FEd and Treas tell you what to do, what is your role exactly as CEO?

  14. ben22 says:

    and JMF,

    those 45 people apparently didn’t forecast the decline in the assets, in other words, they had 45 people, none of which really knew what they were doing.

    this guy is a complete joke

  15. dead hobo says:

    *** One of the attributes of successful people

    “Never Admit Your Mistakes”

    *** One of the definitions of success

    “Being able to get people off your back when they start to bug you”

    *** Another attribute of successful people

    “Ignore people when it suits your purpose”

    *** What successful people do when the facts don’t support them

    “Ignore the facts, repeat your mistakes, hope the results differ this time”

  16. ben22 says:

    o.k., now he also just gave the millionth call for second half recovery.

    JB, how bought you load up on some BAC on top of your XLF today.

    Don’t we buy stocks for the long term cash flows the companies generate? Your thesis of govt backup and you should buy as a result seems a bit silly to me.

    But hey, like I said the other day, I’m rooting for you but I’ll happily keep my own money out of any bank.

  17. jmf says:

    Moin Ben22,

    the “Banker Of The Year 2008 Award” rivals Satyam Award for ” Golden Peacock Global Award for Excellence in Corporate Governance for 2008″……

    You really cannot make this up………

  18. It is now painfully clear that it is the elite (top 10) banks that are getting bailed… and the majority of TARP funds are being used to clear their junk portfolios. (Citi and BoA included)

    So let’s take a step down-market: Glacier Bank (GBCI) for instance… from their Dec 30 press release:

    “We greatly appreciate the federal government’s recognition of our financial strength in approving Glacier’s participation in the TARP Capital Purchase Program. However, with the $94 million in net proceeds from our successful common stock offering, we are already one of the most strongly capitalized banking companies in the country, with total risk-based capital of approximately 16%. Consequently, we do not believe that participation in TARP is in our shareholders’ best interests.”

    Now isn’t that a breath of fresh air?

    So, they closed a $94M additional placement in Nov, declared a dividend several weeks later, and acquired another profitable bank in Colorado a few days after that. All in the midst of this crisis!

    Other examples of strong second tier banks abound…
    http://mast-economy.blogspot.com/2009/01/banks-with-muscle.html

    How about we bring some of these management teams over to lead some of these “top” banks?

  19. dead hobo says:

    Losers, on the other hand, are professional, whining doormats. Many losers make it into leadership positions, which then degenerates into LoserLand. Losers are timid, but loud, complainers who refuse to stand up and challenge those who are successful, but marginally competent.

    C and BoA are welfare queens who have had a taste of some primo crack in the form of bailout money. Uncle Stupid will huff and puff, then open up the wallet and beg the queens to take more when they complain about withdrawal pains.

    Personally, I think Uncle Stupid needs to hire someone with brains and an understanding of finance, but has the personality of a pissing mad junkyard dog. This person will use their influence to make sure the queens get off their asses. Maybe Elliot Spitzer would be mean enough to take this job on?

  20. wally says:

    There is no reason to believe that quarterly losses will not continue for the next several quarters – or longer- at the same rate. No profitability for banks can be expected for any reason other than uninformed hope.
    This is just taking future money and pouring it into the past.

  21. call me ahab says:

    I don’t get it. The federal government gave Citi billions of dollars and Citi then subsequently sold Smith Barney and is now breaking up into smaller companies and BofA is getting billions from the feds to help it digest the Countrywide and Merrill assets that made it a larger more unmanageable company? I just don’t understand why the market thinks this is good news- that these companies are allowed to limp along with government support. Would it not be better as Barry suggests and put them down quickly and to channel remaining assets to the strongest banks? As a side note- Jim Cramer thinks the government should protect the shareholders of theses banks so market confidence is not shaken- but aren’t shareholders investing and do they not have to accept the risk of their actions? Am I not a fool to invest in a bankrupt company and do I not deserve to go down with the ship?

  22. Scott F says:

    As the banks go, so goes the market and with the Citi and BoA earnings, breakup and US taxpayer savior news on the tape relieving some of the worst fears this week we are of course higher. There is also talk that the US gov’t will set up a ‘bad bank’ entity which would buy and hold troubled assets from banks to clean up their balance sheets. Today is also expiration which will pile on volume to the action. The risk trade is back on at least for the morning, as the euro is higher vs the $, the yen is lower and treasuries are down sharply. The IEA cut its global oil demand estimate by a full 1mm barrels per day to 85.3mm. They said OPEC cut its production in Dec by 330k barrels per day for a total of 30.9mm and they cut their non OPEC supply estimate by 30k barrels to 50mm. While we’ve seen huge demand destruction, supply destruction is also in the process of occurring. CPI y/o/y is expected to go negative for the 1st time since 1955.

  23. Stuart says:

    I don’t think this should surprise anybody to realize this really was a forced marriage, the parents being the Fed and the Treasury. They shuddered at the consequences of Merrill Lynch going the way of Bear Stearns without a suitor. The lack of personal accountability is criminally outrageous. If Obama wants to instill confidence in the markets, he needs to ensure those who profited through deceit, fraud and other avenues of corruption are prosecuted to the fullest extent of the law…… unlike Bush who seeks to persecute… lol

  24. Paul Jones says:

    Friends are buying BAC because it’s getting a bailout…

    We are the Soviet Union.

  25. CPJ13 says:

    If I hear ‘financial market stability’ or ‘systemic risk’ one more time I think I will go clinically insane.

  26. “We did think we were doing the right thing for the country,” Lewis said.

    Funny, I thought the job of the CEO of a corporation is to protect the interests of SHAREHOLDERS. What part of knowingly going forward with a terrible acquisition represents the best interests of BOA shareholders? Is Ken Lewis the CEO of America, Inc.? I guess so, since that is apparently whose interests he is looking out for, at the expense of BOA shareholders. Anyone still holding BOA shares has a pretty obvious lawsuit on their hands.

    The line between big business and government went from blurred to invisible in the last six months. Anyone disagree?

  27. rktbrkr says:

    If BOA realized that ML had deteriorated prior to closing the deal why didn’t they renegotiate the price? Not a lot of bidders for ML! Easier just to overpay with gifts from Paulson.
    Lewis blackmailed Paulson pretty effectively with that call. Surprised Wells is missing out on this!

  28. wally says:

    “We did think we were doing the right thing for the country,” Lewis said.

    My conscience is clear. It told me to lie, cheat and steal, so I did. I followed my conscience.

  29. Bruce N Tennessee:

    John Gault is, collectively, the American taxpayer. He’s about to shrug.

    Bank of America’s imminent demise is something akin to the failure of the United States Bank in the Great Depression, if for no other reason than each of that their names conjured an image of the entire financial system of the country– The Bank of AMERICA goes down: Since it effectively has, imagine how that will play across the globe.

    So far as its other acquisition, CFC, I can tell you anectdotally that BOA has done next to nothing to integrate the company. They (CFC) still do things exactly as always. Their local branch with whom I do business is even hiring new people. Until they have to fire everyone, I suppose.

  30. OnlineBrokerReview Says:

    January 16th, 2009 at 9:24 am
    “We did think we were doing the right thing for the country,” Lewis said.

    I know folks think Milton Friedman has been effectively discredited for his anti-Keynesianism, but he famously observed that the primary objective of the managers of a public corporation has to be maximizing shareholder wealth. Not the environment, not the social or cultural status of the company, not the broader economy…nothing but maximizing shareholder wealth.

    A man can only serve one master. For the CEO of a company, it has to be the shareholders. Which also explains alot about why Fannie and Freddie are now in conservatorship.

  31. rmasand says:

    >You do not give a healthy liver to a raging alcoholic

    Livers are hard to come by. Money however, given Guttenberg’s progeny, is essentially free.

  32. awilensky says:

    Do you know that the city gov municipal econ dev program is making me go through for a 15k loan? Do you?

  33. GB says:

    What we need is grass roots campaign to get people to use local banks that don’t sell mortgages. Kind of a Bailey Savings and loan vs. Potter but that would be to expensive since the rates would be higher.

  34. Mannwich says:

    It’s nothing short of theft. Let’s call this what it really is – theft on a grand scale. Plain and simple.

  35. Mannwich says:

    Here’s the thing – 99.99% of my friends and family have NO IDEA what is going on (they just know things aren’t good) nor do they seem inclined/motivated to do any homework to discover what is going on. We will not see a true outcry until enough of those folks lose their jobs/way of life. This will be a slow, painful process, unfortunately, and even more painful for those who are late to the game.

  36. Mannwich says:

    Looks like the market coming to their senses on BAC and the other financials. These ongoing bailouts’ ability to goose stock prices is starting to wane. Beware JB, beware……

  37. Bruce N Tennessee says:

    Curmudgeon:

    I usually stop on my way to the salt mine on Friday and buy donuts for everyone.

    Out of business, yesterday. Just a sign in the window.

    …just more of the same, I guess.

  38. DL says:

    Bruce @ 8:03

    “…we are screwed either way. Depression now, or staggering debt for years to come”.

    True.

    Most people will choose the latter, even though the ultimate cost will be far greater.

  39. 10 cc says:

    Mannwich,

    Have you noticed that the BKX has broken its’ November low?

  40. Bruce N Tennessee says:

    DL:

    I am puzzled here at the ALL IN nature of our government, as Barry opined in the last day or so about Mr. Bernanke. I can see the thought that Ben must be having, that he’s studied the problem, and that if the first large skirmishes look as though we aren’t getting anywhere, just keep on shooting. But I am a more conservative person that apparently our Fed chair, and I can’t help but wonder what this leaves the next generation, even if we’re “successful”..

    There is a story today about the differential in interest rates in Europe…on one hand there is Germany, who debt is funded at a much better rate than the countries who’ve run up huge deficits recently and appear to have lost their fiscal resolve…you know them, Ireland, Greece, Spain…

    I keep seeing this future debt piling up, and the entities we are bailing out…it just seems like there comes a time when the cure is worse than the disease…

  41. Mannwich says:

    Sorry for OT but Pfizer laying off 2,400, a third of its salesforce. There goes the myth that biotech/pharma/health care “recession-proof”. Well, maybe they’re ARE RECESSION-proof but not DEPRESSION-proof.

  42. going broke says:

    OT: What company makes the Treasury printing presses and ink?… I wanna buy their stock.

  43. Bruce N Tennessee says:

    Gotta go…finished at the mine…here is the story about what debt can do to your country…and we are at the early stages..

    http://www.bloomberg.com/apps/news?pid=20601085&sid=azQAixzrw_y4&refer=europe

    Trichet Vision Unravels as Italy, Spain Debt Shunned

  44. willid3 says:

    so why didn’t the FED and Treasury just buy the banks outright instead of trying to prop them up ? It would have been cheaper in the long run as they could then turn around and break them up and spin them off later when they had gotten them fixed? I know it would be hard on the financial companies and executives as they would loose all those bonuses and perks. maybe that why. they have to much pull with the politicians. and our current leader!

  45. sherm says:

    What i would like to know is when does bad policy become criminal? A friend and i discussed this the other day and his take is that criminalizing bad policy decisions would set a precedent that would inhibit future policy makers from making tough decisions.