October 2011, Week 3


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Wed, 19 Oct 2011 22:13:07 -0400
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Not with a Bang, but a Whimper: Bank of America's Death

by William K. Black
Published on Wednesday, October 19, 2011 
by New Economic Perspectives

Bob Ivry, Hugh Son and Christine Harper have written an
article that needs to be read by everyone interested in
the financial crisis.  The article (available here) is
entitled: BofA Said to Split Regulators Over Moving
Merrill Derivatives to Bank Unit. The thrust of their
story is that Bank of America's holding company, BAC, has
directed the transfer of a large number of troubled
financial derivatives from its Merrill Lynch subsidiary to
the federally insured bank Bank of America (BofA).  The
story reports that the Federal Reserve supported the
transfer and the Federal Deposit Insurance Corporation
(FDIC) opposed it.  Yves Smith of Naked Capitalism has
written an appropriately blistering attack on this
outrageous action, which puts the public at substantially
increased risk of loss. 

BAC continues to deteriorate and the credit rating
agencies have been downgrading it because of its bad
assets, particularly its derivatives. BAC's answer is to
"transfer" the bad derivatives to the insured bank -
transforming (ala Ireland) a private debt into a public
debt. (photo: Wonderlane)

I write to add some context, point out additional areas of
inappropriate actions, and add a regulatory perspective
gained from dealing with analogous efforts by holding
companies to foist dangerous affiliate transactions on
insured depositories.  I'll begin by adding some
historical context to explain how B of A got into this
maze of affiliate conflicts.

Ken Lewis' "Scorched Earth" Campaign against B of A's

Acquiring Countrywide: the High Cost of CEO Adolescence

During this crisis, Ken Lewis went on a buying spree
designed to allow him to brag that his was not simply
bigger, but the biggest.  Bank of America's holding
company - BAC - became the acquirer of last resort.  Lewis
began his war on BAC's shareholders by ordering an
artillery salvo on BAC's own position.  What better way
was there to destroy shareholder value than purchasing the
most notorious lender in the world - Countrywide.
Countrywide was in the midst of a death spiral.  The FDIC
would soon have been forced to pay an acquirer tens of
billions of dollars to induce it to take on Countrywide's
nearly limitless contingent liabilities and toxic assets.
Even an FDIC-assisted acquisition would have been a grave
mistake.  Acquiring thousands of Countrywide employees
whose primary mission was to make fraudulent and toxic
loans was an inelegant form of financial suicide.  It also
revealed the negligible value Lewis placed on ethics and

But Lewis did not wait to acquire Countrywide with FDIC
assistance.  He feared that a rival would acquire it first
and win the CEO bragging contest about who had the
biggest, baddest bank.  His acquisition of Countrywide
destroyed hundreds of billions of dollars of shareholder
value and led to massive foreclosure fraud by what were
now B of A employees. 

But there are two truly scary parts of the story of B of
A's acquisition of Countrywide that have received far too
little attention.  B of A claims that it conducted
extensive due diligence before acquiring Countrywide and
discovered only minor problems.  If that claim is true,
then B of A has been doomed for years regardless of
whether it acquired Countrywide.  The proposed acquisition
of Countrywide was huge and exceptionally controversial
even within B of A.  Countrywide was notorious for its
fraudulent loans.  There were numerous lawsuits and former
employees explaining how these frauds worked. 

for the rest of this article, go to 


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