BAC/MER Gets Life Support / $100Bln Writedown?
A: And the tentacles of the credit beast attack again! If you missed the chart I posted a few days ago, take another look at the estimated market size of the different classes of derivatives held on the books of the financials ranging from subprime to CMBS to Alt-A to Prime to Autos to HELOCs to Leveraged Loans to Agency MBS to Commercial & Industrial to CDOs to HY Corporate Bonds; well you get the idea! It was meant to be an eye opener as to the scope of the problem we face here in our banking system.
So, now BAC gets $138,000,000,000.00 from the US Gov't in what amounts to $118Bln in toxic asset guarantees (including Residential / Commercial / Credit Default Swaps assets), and $20Bln in direct capital injections via the purchase of preferred shares with an 8% dividend. Think about this for a moment. Steve Liesman on CNBC moments ago explained it perfectly:
Consider if MER was a standalone company right now, this would be the equivalent of BAC saying that we are WRITING DOWN OUR ASSETS BY $100BLN & WE ARE GETTING CAPITAL OF $20BLN! This would be an extraordinary move on the part of MER all by itself and raises all types of questions. Ken Lewis was saying that we didn't mis-value the assets, rather, the assets deteriorated further in the 4th quarter.Simply fascinating. If you did go back and look at the table chart from a few days ago, you start to get the picture of WHY these writedowns/guarantees or whatever you want to call it, continue to occur and at such alarming levels! The scope of the problem IS that big!
So, lets tackle another question that Jeff & I have been discussing, the accumulation of excess reserves. Here is the latest chart showing Excess Reserves at Depository Institutions via the St. Louis Fed:
Americans/Politicians/Economists and others are doing their ranting - LEND LEND LEND!!! Why should they? Seriously now. Considering that bank capital ratios are so messed up, toxic assets remain on & hidden off the balance sheets, consumer credit quality is deteriorating, consumption is slowing, savings rate is rising, businesses can't sell out inventories, and the economy in general is undergoing one of the most severe downturn's since TGD. Does this sound like a solid environment to be lending in? This is an environment where performing assets become toxic, and at a fast rate! Let's not forget what got us into this mess into the first place!
This is a solvency problem with our banking system and until the balance sheets are cleansed, get used to this type of news. Jeff wrote an excellent piece two weeks ago, explaining that excess reserves are rising dramatically because:
"...Among the alternatives, only the spreads from lending to real borrowers are attractive to banks today due to the headlong rush by financial players into treasuries, but banks are still afraid to lend to all but the very best borrowers (and many of the lesser quality potential borrowers don't want to borrow), hence the explosion of excess reserves on bank balance sheets despite all the efforts to resucitate lending. Some would assume that this mountain of reserves will get put to work in the credit markets at some point and cause economic activity to go wild. My guess is that these excess reserves will be melted away as banks absorb losses on delinquent loans and as marked down securities see their income streams actually collapse. "I'll leave this piece with a few rants from two of my favorite bloggers:
MISH's "Bank of America Threatens Fed, Demands More Cash From Taxpayers" -
A shotgun wedding at a purposely ridiculous price with an agreement from the Fed to pick up the pieces later if necessary sounds just like what the doctor ordered. Of course it could be pure incompetence by Lewis, or a pure gamble by Lewis that the Fed (taxpayers) would pick up the pieces if it all came crashing down.BR's "The $45 Billion Dollar Club" -Congress, the Fed, and the Treasury are proposing that insolvent and overburdened taxpayers should bailout insolvent banks. The idea of course cannot possibly work, but the bureaucrats would rather believe in the Keynesian Free Lunch theory, than common sense. Let me simplify matters a bit with this statement. "Bank of America is Insolvent".
The United States of Wall Street just added another major holding to its portfolio of financial garbage: Bank of America.Interesting times indeed. As I finish this piece, BAC stock is trading DOWN $0.25! I guess wall street realized buying stock in a very sickly patient that just received a new IV, may not be the best investment.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.
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.
