STOCK MARKET WATCH - Wednesday, 1 February 2012

[Demeter]

2. Too Failed to Be Big? Public Citizen Petitions Federal Regulators to Break Up B of A

http://news.firedoglake.com/2012/01/25/public-citizen-petitions-federal-regulators-to-break-up-bank-of-america/

If financial regulators want to prove that they’re willing to take the necessary steps to protect the public and not the banks, they will soon have a great opportunity...Public Citizen will send a formal petition to the Federal Reserve Board of Governors and the Financial Stability Oversight Council, asking them to “recognize that the Bank of America Corporation (“Bank of America” or “the bank”) poses a ‘grave threat’ to the stability of the United States financial system and to mitigate that threat, as provided by section 121 of the Dodd-Frank Wall Street Reform and Consumer Protection Act...Under the systemic risk provisions of section 121, federal regulators can order a systemtically important institution that posts a “grave threat” to divest assets, restrict activities and basically shrink in size. While nobody seriously believes that the regulators will act in this manner, it offers a test case on how to apply Dodd-Frank in the crucial area of systemic risk.

“We’re asking them in the simplest of terms to get ahead of any possible crisis in the event of BofA’s instability,” said David Arkush, the director of Public Citizen’s Congress Watch division, in an interview. “They have the authority to break up Bank of America into discrete institutions, some of which may be solvent, some which may need to be liquidated. The current policy of letting behemoth banks limp along in the hopes that things will get better is dangerous and risks a financial crisis.”

No question this has been the modus operandi of the Administration. But in BofA’s case, it hasn’t worked. The company’s stock crashed in 2011 (it’s in a marginally better position now), despite asset sales on their own, and angel investments from the likes of Warren Buffett. BofA’s tremendous liability from the acquisition of Countrywide has significantly damaged the bank. Their takeover of Merrill Lynch has caused legal problems as well; CEO Brian Moynihan will give depositions in three civil suits in the coming days. BofA is already operating under a “Memorandum of Understanding” with the Federal Reserve, and while we don’t know the details, we know that it demands that the company get stronger than it is today. Despite these struggles, BofA remains the second-largest bank holding company in the United States, with holdings that make it “too large and complex to manage or regulate properly,” according to the petition. And “It would be hard to argue that the bank doesn’t pose a grave threat,” as Arkush says.

“Based on publicly available info, Bank of America is in the most serious trouble right now” out of the major banks, Arkush said. So it was the natural place to start in petitioning the government to restrict its size. Simply put, now is the time to make these calls. From the petition:

If Bank of America in its present form were to experience a run, then financial regulators’ options would be severely limited, putting at risk the Dodd-Frank Act’s policies of minimizing federal assistance to failed or failing financial institutions while safeguarding financial stability. First, there would be tremendous pressure to bail out Bank of America rather than put it through an untested orderly liquidation process. In addition, orderly liquidation would be complicated and difficult for an institution as large, complex, interconnected, and systemically dangerous as Bank of America, and it might not succeed. Even a successful orderly liquidation would require up-front funding by the Treasury. If the proceeds from the sale of assets are not sufficient to pay back that line of credit, assessments will be made against other financial companies. Depending upon those companies’ exposures to Bank of America, they might not be in a position to pay such assessments without threat to their stability and thus an orderly liquidation could result in a back-door bailout. It might involve the overpayment of creditors to avoid financial contagion, excessively putting U.S. taxpayer money at risk and perpetuating moral hazard that incentivizes financial institutions to take inappropriate risks. In the absence of aggressive action by financial regulators, this scenario appears increasingly likely.

Fortunately, Dodd-Frank created a systemic risk council with broad powers to break up banks before a Catch-22 like the one described above comes into play....

WELL, THAT WOULD BE GOOD, FOR A START...