Bank of America should just admit that they screwed up with the Countrywide purchase, and opt for re-organization. GM did it, and many others. Could the federal government be far behind?
Hat tip to DB for sending this along, from businessinsider.com:
Bank of America has over $100 billion in mortgage liabilities, says Chris Whalen Co-founder of Institutional Risk Analytics. On a web broadcast published on KingWorldNews, he advocates “the classical American way of dealing with this problem”– complete and total restructuring through Chapter 11. Before its too late.He says, “The only sane way of fixing this and I mean fix it so that Bank of America comes out of the process restructured, ready to support growth, support leverage, is a classic chapter 11…”
His point: Countrywide’s bond trusts are worthless, were never properly constructed, and don’t protect investors at all. Bank of America is on the hook for all of that, and while its subsidiaries are well capitalized, the parent company is bust. The only thing to do to fix this problem is to unmake $100s of billions worth of bond contracts.
Bank of America can’t take that strain as is because it can’t touch any subsidiary money to settle its legal claims, so equity holders are going to get wiped out, and bond holders are going to have to take serious haircut.
At least, says Whalen, if the bank files for bankruptcy, it can be saved.
“…we’re not going to take the bank down. Bank of America is not going to close. I have all my money in Bank of America, my company, my personal accounts are all at Bank of America, and I have no concern because I know the folks at the FDIC will take care of it if they have to. But I don’t think we have to go there.”
Because of Countrywide, the biggest mortgage lender in the U.S. and thus the originator of most of the bad loans, Bank of America has the worst fate of the U.S. banks. But other major banks face some degree of pain depending on what comes out of FHFA’s lawsuits.
Aside from the “moribund larger banks”, Whalen specifically mentioned Allied Bank and Wells Fargo as companies in the danger zone. The rest of the banking sector is free of these massive legacy issues, though, and can continue as is.
So how do we fix the problems at big banks?
Repeal the Bank Holding Company Act so that the Federal Reserve isn’t on the hook for their debt.
Then we should…
“…allow commercial companies to control depositories. They would be separated (depositories and companies) but I think having new capital, better management, more innovative management, would help the U.S. tremendously. You know, banks aren’t special. They aren’t supposed to be special…I want to let the private sector take on risk and not put these artificial limits up so that the Fed protects big banks.”
You see, to Whalen, the entire point of quantitative easing was to buy time so that banks could restructure. But the big boys haven’t been doing it. Instead they, and Washington, have been “treading water” until they’re forced to do something (or, in Washington’s case, until after election season).
It’s a game called “extend and pretend.” But increasingly, its looking like the game is now over.
Regulated banks with customer deposits are not allowed to file traditional Chapter 11 bankruptcy, and can’t be saved through bankruptcy. Their holding companies can, but that does nothing to reorganize the bank.
The only legal way to reorganize them is through their regulators such as the FDIC.
I’m sure BofA has enough assets that can be liquidated to pay off the depositors. It would be the bond holders and stock holders that would take a major haircut. The 401K/Pension retirement scheme sold to the public is what gets in the way of this resolution. Effectively the wealth disparity in America would drop rapidly if you allowed investors to eat the losses, of course you’re retirement pension is going to take a hit also.
This is like after Katrina and the conventional thought in Washington was you couldn’t send a bunch of mobile homes to the area because it was against Federal law. Change the law! And they did. They make it up as they go along anyway.
Like I said in a previous post, when the transfer payments stop is when the real hurt begins.
http://www.realclearpolitics.com/video/2011/09/06/wasserman_schultz_republicans_who_think_the_recovery_act_didnt_work_are_wrong.html
50% went to prop up state and local governments! What will we do now?
Looks like the Bamster is going to propose another $300 billion “stimulus” package on Thursday.
Where are the legitamate prosecutions?
What do you think Orange Man is doing today?
“What do you think Orange Man is doing today?” – 3rd Generation
Getting a tan! What else…
I’m not sure I’m understanding his proposal. When you say things like “repeal the Bank Holding Act” and “allow commercial companies to control depositories,” I cringe. Sounds like wanting even MORE deregulation in financing, and we all saw how well the banks have been regulating themselves since we repealed Glass–Steagall Act in 1999. Imagine win-at-all-costs CEOs like the Orange Man and the Enron Boys running the now-regulated banks. I wouldn’t want my money there….Yikes!
Um, this article is clearly written by someone who doesn’t know the first thing about banks and their bankruptcy. It’s shocking actually how much he wrote for someone who doesn’t actually know anything.
Agreed, though these days it is hard to tell if it is a reporter running wild with one or two off the cuff comments, or whether he is making a major push to get out a proposal that has no possible basis for support under the law and demonstrates his lack of knowledge of how banks are regulated.