Bank of America CEO Ken Lewis has been standing in front of Congress with his beggar's cup intermittently for a couple of years. Calls for receivership nationalization are beginning to reach a clamor from both the left and right (including many free market crusaders). In response, Lewis is sending memos to staff touting BofA's profitability, strong liquidity, and active lending, while reassuring stockholders that BofA can make it on its own--even as share prices fall to historic lows.
Despite the hoopla that's been in the news since the September crash, BofA's troubles are not all that new. Lewis and his cronies have been at this game for quite some time. Since 2007, Lewis has been telling the public and shareholders that BofA is fine while begging Congress to rescue the company.
In October 2007, the same month that BofA acquired La Salle Bank for $21 billion, BofA and the Treasury orchestrated a bailout M-LEC Superfund super-SIV to buy up SIVs. The super-SIV would have insured guaranteed, mostly distressed securities backed by questionable real estate loans.
For those who are unschooled in the jargon of the billionaires club, when a loan is securitized, it is basically taken off of the balance sheet and put into an off-balance-sheet "vehicle." The balance sheet is the accounting report that compares assets to liabilities, telling us the "net worth" of a company. You are considered "insolvent" when you have more debt than assets (when you have a negative net worth). Securitizing loans can be one way of hiding the insolvency of a banking institution, especially in a downward market.
In effect, the super-SIV would have kept questionable assets off the banks' balance sheets alleviated the credit crunch by increasing liquidity. The super-SIV was supposed to be up and running within 90 days, but by December 2007 the plan had been scaled back by the banks, and by January 2008 it was scrapped altogether. The banks, led by Lewis at BofA, had decided it wasn't necessary. According to Lewis, things would to be just fine (this won't be the last time we hear from Lewis that things are fine).
On January 11, 2008, around the same time that Lewis and his cohorts decided that the super SIV wouldn't be necessary, Lewis also announced plans to rescue buyout the largest mortgage lender in the nation, Countrywide Financial, despite the obvious financial mess Countrywide had gotten itself into through risky loans. Some analysts called Lewis a genius for buying up this bad company, saying that Countrywide could save hundreds of millions in taxes by deducting Countrywide's losses (thus making taxpayers subsidize the buyout). Other analysts called him a fool, saying that BofA had not conducted appropriate due diligence, pointing out that no one had any idea how many bad loans Countrywide might be holding.
On February 11 (just one month later and months before the merger would be finalized), BofA lobbyists began disseminating to members of Congress a discussion document entitled "Federal Homeownership Preservation Corporation," and on March 11, just another month later, BofA lobbyists began disseminating another discussion document, entitled "FHA Housing Stabilization and Homeownership Retention Act of 2008." BofA lobbyists were, while in the midst of buying the country's largest and most distressed mortgage lender, proposing that Congress bail out the mortgage industry.
The documents explicitly noted, "We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bail-out." In other words, BofA wanted to receive a bailout but didn't want the public or investors to realize it was receiving (or needed) a bailout.
At the same time, Lewis was reassuring investors who were worried about the financial health of Countrywide that BofA would be fine and making cryptic statements "that investors should not count on it assuming all of Countrywide's debt." Over the summer, BofA spokesperson Robert Stickler admitted that BofA knew Countrywide bad assets were "somewhat of a black hole," and that no one knew how big that black hole would turn out to be. Meanwhile, Countrywide was under investigation by the SEC, FBI, FTC, and several state regulatory agencies. But of course Lewis said things would be fine.
On September 15, 2008, BofA announced a rescue buyout of troubled brokerage firm Merrill Lynch for $50 billion in an all-stock deal (a price that many analysts said, much like in the Countrywide buyout, was much higher than it should have been) after only 48 hours of talks and little due diligence. Lewis told the press that it was no problem, BofA's balance sheet could handle it. Things would be just fine.
News of the rescue buyout of Merrill Lynch, coupled with the collapse of Lehman Brothers, sent the Dow Jones Industrial tumbling more than 500 points, the worst one day drop since 9/11. Three days later, an electronic run on the banks was allegedly so severe that Treasury Secretary Henry Paulson told members of Congress that the U.S. was within 3 hours of catastrophic financial collapse:
According to Rep. Paul Kanjorski (D-PA):
We don't even talk about these things. On Thursday, at about eleven o'clock in the morning, the Federal Reserve noticed a tremendous draw down on money markets accounts in the United States to the tune of $550 billion dollars... was being drawn out in a matter of about an hour or two. The Treasury opened up its window to help and pumped about $105 billion into the system and quickly realized they could not stem the tide. we were having an electronic run on the banks.
....
If they had not done that their estimation was that by two o'clock that afternoon, $5.5 trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 3 hours the world economy would have collapsed....It would have been the end of our economic system and our political system as we know it.
Paulson, the former robber baron CEO of investment house Goldman Sachs, told Senator James Inhofe (R-OK) and Rep. Brad Sherman (D-CA) that not only would the economic system completely collapse, but President Bush would likely be forced to declare martial law unless Congress approved an immediate bailout plan to be administered by Paulson with no oversight from any other government branch or agency.
But hey, Lewis and his friends had assured us from January 11 through September 15 that everything would be fine.
On October 3, Congress passed Paulson's bailout plan. Lewis was imploring Paulson to provide an infusion of cash. Without it, BofA could go under, and BofA is too big to fail. On October 14, Paulson handed BofA $25 billion -- $15 billion under the Capital Purchase Program (CPP), part of the Troubled Asset Relief Program (TARP) and $10 billion to help complete the merger with Merrill Lynch.
Merrill Lynch posted a $15 billion loss in the fourth quarter of 2008 (losses that Lewis later admitted he never saw coming). Yet, even after incurring such losses, Lynch executives saw fit to pay themselves $4 billion in bonuses in December, just three days before the merger would become final on January 1 -- bonuses that are ordinarily not paid until sometime in the first quarter of the new year. Once again, Lewis was back in Paulson's office begging for another government bailout. (but everything was going to be fine, right?)
On January 1, 2009, BofA officially absorbed Merrill Lynch (along with its bad assets, minus the $4 billion that had just been handed out to executives). On January 16, the Treasury announced yet another bailout for BofA to the tune of $20 billion to help complete the merger with Merrill Lynch. The government is also guaranteeing $118 billion of BofA's "distressed" assets (mostly securities backed by real estate loans). Critics say the guarantee does not cover another $500 billion in toxic assets (bad loans), but of course Lewis says BofA will be fine.
Although the goal of the TARP bailouts was to increase liquidity and lending, by February, it had become clear that the biggest recipients of TARP funds were lending less, not more:
Bank of America and Citigroup, led the retreat. Mortgage loan originations by the two companies in December fell $3.6 billion, or 15 percent, compared with October. New lending commitments to commercial and industrial customers dropped by $2.4 billion, or 11 percent. And the companies reduced the collective spending limit of their credit card holders by $45 billion, about 2 percent.
Banking officials also argue that lending increased from November to December. However, December lending was still lower than October lending.
BofA and their Treasury Department cronies have told the public, however, not to worry about the reduction in lending, even though the architects and supporters of TARP had been telling the public for months that the means by which it would "save the country's financial system" would be by increasing liquidity and lending. When information about the decrease in lending surfaced, TARP proponents defended the program by saying that an increase in lending would be impossible to measure because "lending levels would likely have been lower had the Treasury not taken actions to stabilize the financial system." In other words, they want their success to be measured by an unmeasurable metric.
February 4, Lewis told CNBC that in December, as Merrill Lynch losses accelerated, Paulson and Federal Reserve Chair Ben Bernanke "forcefully urged" BofA not to stop the merger, warning of "systemic risk" to the country's financial system if the deal fell through.
In the same CNBC interview, Lewis said that he thinks the acquisition of Merrill Lynch will "turn out to be a good investment over time." Unfortunately, he seems to have forgotten that the American taxpayers are the ones who invested in that acquisition -- CNBC should have asked him what kind of return the American people can expect to see on that investment.
"We had a pretty good January," he said. (Of course he did, we gave him $20 billion to play with.)
Asked about the possibility of the nationalization of BofA, Lewis reiterated that BofA "categorically" will not need more bailout money. He sputtered, saying the idea of nationalization is "absurd" and claimed that he knows of "no government official" who has talked about nationalization. (Of course Lewis might be a little biased, who wouldn't love to nationalize their losses and privatize their profits.)
On February 11th, thanks to public outcry about taxpayer dollars going to bailout banks that are "too big to fail" and those banks not holding up their end of the bargaining by increasing lending, the House Financial Services Committee called a hearing and subpoenaed TARP-recipient CEOs. A red-faced, indignant Lewis told members of the House committee:
We know that the public will not always agree with our decisions. But Bank of America has for years been the most financially efficient bank with our business mix in the country. We have a hard-earned reputation for frugality, not extravagance. When we compensate associates, engage in marketing and advertising campaigns, or invest in green building technologies, we do so to grow our business, enhance profitability and generate returns for investors.
(Lewis also knew the public would not agree with his decisions when he circulated a discussion document that said not to call these programs "bailouts.")
Meanwhile, BofA shareholders are suing over what they perceive was willful negligence in BofA's lack of due diligence of the Merrill Lynch merger. New York State Attorney General Andrew Cuomo is investigating whether investors were misled about the severity of Lynch's losses during 2008. Friday, Lewis was subpoenaed in the investigation.
Now, it's looking more and more like BofA is more insolvent than anyone realized, and everyone from the far left to the far right (and in between) is wondering if nationalization might be on the horizon. The list of public leaders who are suggesting nationalization in some form might be the only solution left is growing, seemingly hour by hour, and now includes (to name a few):
former Federal Reserve Chair Alan Greenspan
former Federal Reserve Vice Chair Alan Blinder
Senator Lindsey Graham (R-SC)
Senator Chris Dodd (D-CT), Chair of the Senate Banking Committee
Senator John McCain (R-AZ)
Senator Chuck Schumer (D-NY)
Famed economist Nouriel "Doctor Doom" Roubini
Nobel Prize-winning economist Joseph Stiglitz
Nobel Prize-winning economist Paul Krugman
Conservative columnist George Will
Friday (the same day Cuomo issued a subpoena for Lewis) and Saturday, BofA tried to quell rumors of nationalization. Allegedly at the behest of Lewis, the Obama administration issued a statement Friday through White House Press Secretary Robert Gibbs that "This administration continues to strongly believe that a privately held banking system is the correct way to go." But when pressed, Gibbs refused to rule out nationalization.
On Saturday, an "insider" leaked administration plans to "stress test" the nation's largest banks to determine whether they need "an extra cushion of support" to survive a deepening recession. Many analysts and industry insiders saw this "leak" as another maneuver to reassure a shaky market.
Lewis also issued a memo Friday saying that BofA doesn't want anymore of our tax dollars, even as their stock was hitting a historic low of $3.17 a share:
Public debate on the subject of potentially nationalizing some banks continues to put great pressure on our stock. And yet, our company continues to be profitable.
....
Speculation about nationalization is based on a lack of understanding of our bank's financial position as well as a lack of appreciation for the adverse ramifications for our customers and the economy.
....
Bank of America does not need any further assistance today, and I am confident we will not need any further assistance in the future. I believe our company has more than enough capital, liquidity and earnings power to make it through this downturn on our own from here on out.
So, don't worry, Lewis says, your tax dollars investment is safe in BofA's pockets. Everything will be fine. (You believe him this time, right?)
A minor note: TARP was renamed the Financial Stability Plan (probably because the acronym TARP envokes imagery of covering something up or maybe to shift public opinion because the TARP plan is so very unpopular). When the banks start to market this new name to the public, don't be fooled. It's the same old gyp TARP.