The market’s case of nerves this week seems a tad more justified, given that the details of the Bank of America rescue plan are apparently out, Previous press reports suggested the Charlotte bank might need $8 to $10 billion of additional equity to compensate for losses related to the Merrill acquistion. Yes, as Senator Everett Dirksen said, a billion here, a billion there, and pretty soon you are talking real money, but an infusion of $10 billion or less, particularly after the bank trying to back out of the Merrill purchase, would not have been a catastrophic number.
But the level of support set forth in the Wall Street Journal belies the idea that BofA was a strong bank, able to absorb the risks of garbage barges like Countrywide and Merrill (in fairness, Merrill at least has some good franchises along with the junk on its balance sheet. We’ve long inveighed against the Countrywide acquisition). They were both known problem children, suitable only for a highly capitalized and capable institution. The latest turn of events raises considerable questions about Ken Lewis’ judgement as well as the health of the bank ex these turkey deals (and that should be no surprise either, given that BofA is a retail giant and consumer balance sheets are badly impaired).
From the Wall Street Journal:
Reeling from previously undisclosed losses from its Merrill Lynch & Co. acquisition, Bank of America Corp. received an emergency capital injection of $20 billion from the Treasury, which will also backstop about $118 billion of assets at the bank…
The developments angered some Bank of America shareholders, who began to question why Chief Executive Kenneth Lewis didn’t discover the problems prior to the Sept. 15 deal announcement. Many also wanted to know why he didn’t disclose the losses prior to their vote on the Merrill deal on Dec. 5, or before closing the deal on Jan. 1.
The situation put Treasury Secretary Henry Paulson in the position of negotiating to spend money destined for the Obama administration, a further reason for the poor regard in which the bailout is held in Washington….
Bank of America said it learned of Merrill’s losses after the Dec. 5 shareholder vote.
Yves here. Huh? The deal was agreed in mid-September. I ought to track down the merger agreement, but pretty much every deal has representations and warranties by the seller (for instance, that there have been no material adverse changes since the last financial save as disclosed). This was supposed to be a coup of sorts for BofA, rescuing bruised but not broken Merrill, but the apparent safeguards for the buyer even in a hastily brokered deal is more akin to a shotgun wedding.
And in the days following, both Federal Reserve Chairman Ben Bernanke and Mr. Paulson impressed upon Mr. Lewis the importance of closing the transaction for the firm’s own sake and also warned of the consequences for the country’s overall financial system, say people familiar with the discussions.
Bank of America spokesman James Mahoney said: “Beginning in the second week of December, and progressively over the remainder of the month, market conditions deteriorated substantially relative to market conditions prior to the Dec. 5 shareholder meetings. So Merrill wound up making adjustments for the quarter that were far greater than anticipated at the beginning of the month. These losses were driven by mark-to-market adjustments which were necessitated by changes in the credit markets, and those conditions change on a daily basis.”
At one point in December, Mr. Lewis even sent lawyers to New York to find out whether Merrill’s situation amounted to a material-adverse situation that might allow the bank to cancel the deal, according to a person familiar with the situation…..Merrill Lynch Chief Executive John Thain and Tom Montag, the firm’s global head of sales and trading, positioned these losses as ….”market related” and not out of step with the rest of Wall Street, according to attendees at these meetings….
Yves here, Reader reality testing would be useful here. “Material adverse change” means big time decay. I don’t follow the blow by blow in credit markets, but aside from a marked deterioration in commercial real estate, I was under the impression that conditions in the credit markets were generally improving in December. Treasury bond prices fell a bit (but from super high levels, and that would be a sign of willingness to move into riskier assets), mortgage spreads tightened, even junk bond prices improved. Back to the article:
Messrs. Bernanke and Paulson also urged Mr. Lewis to finish the deal and not invoke a material-adverse change clause, saying it was in his interest to finish the deal. If they walked away, it would reflect poorly on the bank and suggest it hadn’t done its due diligence and wasn’t following through on its commitments.
Yves here. True but irrelevant. You don’t compound an error (lack of due diligence and risk-shifting back to the seller where due diligence could not be done adequately) by proceeding with a turkey deal if you have a way to get out. The pretexts are irrelevant. Lewis was not willing to cross the Treasury and Fed in an environment like this when he’d almost certainly need their support at some point. Back to the piece:
The policy makers told Mr. Lewis that if conditions were really as bad as he believed, then the government could step in with a rescue similar to that used for Citigroup Inc. in November. In such an arrangement, the government would provide cash and guarantee against part of the firm’s losses.
In addition to a capital injection from the Treasury, the Fed, Treasury and FDIC are working on an asset-guarantee plan modeled after the Citi rescue. The government may backstop a figure of $115 billion to $120 billion in Bank of America assets, with BofA agreeing to take a portion of first losses, the Treasury and FDIC taking second losses, and the Fed backstopping a large chunk of the rest.
Some conspiracy-minded readers have suggested Merrill was not in as bad shape as portrayed, but served as a convenient pretext to give a lot of support to BofA in one fell swoop, which (in the long run) would go over better with the markets than the drip-drip-drip of quarterly writedowns and compensatory cash injections.
Update 1:40 AM: Some useful detail on how the dough for the deal was cobbled together from the WSJ Economics Blog. As we have noted, Treasury with the auto rescue plan relied on the notion that even though the TARP funds were very close to fully committed, quite a few of the payments had not yet been made.
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“Lewis was not willing to cross the Treasury and Fed in an environment like this when he’d almost certainly need their support at some point.”
That is the big point Yves. The banking system is nationalized, And Lewis’ gravy train is tied to his new masters. You keep pointing back to the stockholders, but they are beholden to the federal government as much as Lewis is. These banks were empty a year ago, and the charade was intended to do no less than keep the world wide economy afloat.
Yves: “Lewis was not willing to cross the Treasury and Fed in an environment like this when he’d almost certainly need their support at some point.” That, to me also, is the key point, more or less. It seems to me that in the ‘September Crisis’ Paulson more or less told Lewis that he, i.e. We the Sheeple, would take the losses so lone as he, Lewis, kept the assets operating. It strains credulity that MER sustained $20B+ in losses after 5 Dec which could not be identified prior to that date. The reality is that no one had any remote idea how much MER was going to china syndrome throught the bottom of the vault, nor do I think anyone now has any idea. BAC will be back for $20B per quarter just like all the other rotting zombie overlords dragging this country to the bottom of the swamp.
Really, its the land of the Nazdrul, now. Our Rubberstampretives in the Congress just voted for another six months of giveaway insanity rather than holding onto $350B and doing a redesign on Paulson’s Robbery. If anyone wants a list of what Democrats are worth a pinch of salt, just look at those who voted against this Takeout Redux, or at least abstained: ten in total. That is the entire liberal caucaus in the US Senate; the rest work for the banksters. That being the case, I expect that we will have NO substantive new thinking until late in 09 after the Takeout Redux and the Faux Stimulus both flop out. The real economy will be dire; the zombie banks will be pyromaniacal by then; the next election cycle will be imminent. Only in late 09, or early 10 when these rounds of payouts are disbursed will we see any new ideas.
How many more acts to this ugly play are there?
I was thinking that there would be a national shock that would bring an end to this stupidity but am now thinking that it will take one or more foreign countries to tell us no before the giant sucking sound stops.
Treasury gets preferred shares with an 8% dividend for the $20 billion injection.
What do they get in exchange for the $118 billion backstop? I don’t see anything mentioned in the official press release or any of the news stories.
Also, did anyone see this in the release:
“Separately, the FDIC board announced that it will soon propose rule changes to its Temporary Liquidity Guarantee Program to extend the maturity of the guarantee from three to up to 10 years where the debt is supported by collateral and the issuance supports new consumer lending.”
Ten years, eh? I thought the crisis is supposed to end in the second half of ’09, LOL.
Citigroup, BoA…
The only BIG domino left is JPM. Its story is going to be written in 2009 making the bailouts of Citi and BoA pale in comparison. Unfortunately JPM is being felled under the hammer blows of:
A) Absorbing BS and WaMu
b) >$60tn of derivatives
c) Commercial real estate downturn
Its seems to have the closest relationship with the Fed – which makes the level of existing support – opaque.
Zombie banks
Vampire banks
Terminator banks: I’ll be back
Ones gotta love our corrupt and incompetent government, their next on the road to insolvency.
Yves, love your blog, but dont confuse “improving credit conditions” like fake mortgage spreads and government guaranteed commerical paper with an improvement in the toxic junk Merrill has-or BofA for that matter. New mortgages are one thing-paper written in 2005 with a no doc zero down loan are completely different-its not about spreads-its about repayment.
The banking system is not nationalized. If it were, we’d have a transfer of ownership to the state, with concomitant haircut for current owners and future appreciation potential for the taxpayers. Instead we have the reverse: protection for current shareholders and future downside potential for the taxpayers. That’s not nationalization of the banks, it’s privatization of the Treasury.
I share the fear about no new ideas until further disasters unfold in ’09. In truth, though, plenty of people have better ideas; they’re just not the ones Obama is listening to. It remains an open question whether these ideas can be forcibly injected into the debate. A union, SEIU, is contacted 500,000 people across the country to protest the B of A bailout. That’s a surprising development with some potential to have an impact.
Why does Cowboy Ken Lewis still have a job? This is absurd. He holds complete responsibility for this mess. It is not like he had been dealt a lousy hand and is trying to make the best of it.
This may be the most upsetting development yet for several reasons.
-The bank holds more retail deposits than any other U.S. institution.
-It is completely self inflicted. While you may blame risk managers obfuscation for the other banks, the risks were becoming clear even at the top with these mergers.
-This jerk said he would not need funds in the first round of bailout money
Markel – “Privatization of the Treasury” – I love it. Great phrase.
The term sheet gives details on the backstop. BoA pays $4 bill for $10bill second loss coverage from Treasury and BoA, and 20bp for tail coverage from the Fed. 10% copay applies to both.
So now we have two data points–the Citi deal (306 bill) and the BoA deal (118). Someone at Treasury has a model they are using to come up with these premiums. What is it?
‘Privatization of the Treasury” is not just a phrase.
It is an exact, accurate description of what is happening today.
Does anyone blogging here think that either Bernanke or Paulson is representing the interests of the taxpayers in all of these new TRILLIONS in direct and contingent taxpayer liabilities that are being laid at the altar of preserving capitalism as we know it?
Please say how that is.
An honest assessment of the losses coming down the pike shows that the entire banking system, save a few community banks, is insolvent.
These banks and these bankers have used THEIR fractional-reserve debt-money system to leverage the American people and the American economy into an unprecedented, unsustainable death-spiral of debt.
A few people are honestly acknowledging that it will take a decade to rid the system of these toxic (an overused term that has lost all meaning) liabilities, while maintaining a semblance of social order.
Why?
We are a sovereign people, and that means that we own our money system.
We need to take it back from the private bankers that have had control over it for almost a hundred years, resulting in THIS.
Debt-free money.
Government-issue.
ALL bankers lend real money through a sound and stable 100 percent reserve banking system.
Create a supra-risk leverage-based free-market for the financial swashbucklers out there, but leave the debt-and-risk-free money system for the rest of us.
Public money.
Greenbacks.
Plain and simple.
Looks like it’s a race between JMP and Wells Fargo to see who gets next dibs a the trough.
On his 60 Minutes interview in the fall, BofA's Lewis freely admitted to–even boasted of–overpaying for ML in order to acquire an untainted brand name. The ML stock price was in a complete free fall with Lehman II speculation rampant, so that a wait-and-see a
The positiveness for the brand name was associated, however, with ML's retail brokerage services, not with its trading activities that had accumulated the net asset toxicity. This was and is a pure M&A deal of the most egregious and all-too-typical Wall Street ilk: grossly overpaying the acquiree's stockholders–for the hedge-fund toxicities–in order to have the "synergies" in the merged entity–from the brokerage. The "due diligence" was conducted over a weekend of then-celebrated wheeling and dealing. Lewis's attempt to backout of the deal now is pure bad faith, subject to the same kind of–but much larger–judicial punishment that Texaco received in 1985 from a famously non-bamboozled Texas jury. ML's but-the-credit-markets-changed fig leaf–mendacity?–is simple positive ex post spin.
BofA overpaid for ML and bragged of it. The perfunctoriness of BofA's "due diligence" does not excuse its subsequent attempted bad faith dealing from buyer's remorse. ML is merely providing spin to keep the deal from going to its board's only next step: the courts–where redress could be punitive to BofA but is both problematic for ML and too long in the makintg to prevent de jure BK. Both companies, not just ML, are now de facto bankrupt thanks to Lewis. Geithner/Obama, using Paulson/Bush as an agent, is now forcing the taxpayer to pay for the BofA overpayment. Not only have losses (ML) have been socialized and stripped of management accountability but starry-eyed, pie-in-the-sky M&A deal-making have been as well.
beyond the TARP II, have a look at the credit metric deterioration. be scared.
Meanhwhile, Goldmasn sucks is all quiet — except for th tipbit that they will be bidding for a piece of Merkal’s german empire (FT). What is the liklihood that GS ends up wityh some of Citi businesses, deposits?
This BAC deal is simply beyond the pale. The left was fond of saying after 9-11 that patirotism turned jingoism was the last refuge of the scoundrel. Today we get a CEO of a publcily traded company whose sole resposnibility lies with a fiduciary responsibility to its sharholders resorting to the lthe last refuge of the scoundrel: “i did it for my country.” Bernanke, Paulson, Lewis, Rubin,etc…let the trials begin.
In the meantime the MSM should hunt Bernanke down in Switzerkland and demand an answer to how exactly he can reverse the easing so quickly by letting the portfolio run off? Disclose the collateral.
meanwhile, Obama in the background saying that we need to get back on track to preserve that competiotive adbvanatge. Perhaps he should instruct his treasury Sec. to begin thinking about doing the right thing for the odollar. That is afterall our advanatge isn’t it?
WaPo’s Appelbaum and Schneider say, “Bank of America and Citigroup together have now received $90 billion in taxpayer investments, plus federal guarantees limiting their losses on assets of $424 billion.” What are the terms received by the taxpayers on the government’s bailout largess, I assume, like before, poor. The financial ruling class and the slimy-on-the-take politicians stick it to the people, yet again. A government controlled liquidation of Bank of America and Citigroup is the only fair, long term viable option.
WHY WHY WHY do the incompetent greedy execs of all the banks & mortgage companies still have their jobs?! The credit crunch is far from improving but the government just keeps throwing more money their way. Their definition of tightened lending guidelines serve the same purpose as putting a band-aid on a severed limb.
“Market conditions” did indeed “deteriorate” in December in the sense that even fewer houses were willing to bid in the distressed sectors of Structured Finance.
I have been saying since August 2007 that PRICE CONTROLS on these wounded s-f bonds are needed to stop the madness of banks reporting losses in accord with accounting regulations when the instruments in question are performing poorly but not nearly as bad as their (non existent) “market values” imply.
The finance world, in NY and Washington, is peopled by people who were raised on Age of Reagan television. Market Fundamentalists. To preserve Laissez Faire hey are willing to destroy the economy and, in passing, what’s left of the comfortable working class.
There has been no market worthy of the name for these instruments for more than a year.
Bernanke, during the first day of TARP salesmanship in October, spoke of a “hold-to-maturity price” at which the Treasury would buy the Troubled Assets.
This notion — of setting value based on current and best-guess future PERFORMANCE of the assets rather than on their (non) market price — would be the basis of a price control regime.
It’s astounding how stubbornly the market ideology persists among the children of Reagan. Perhaps this BofA debacle may open some minds.
Over the past couple of months I missed a couple of payments on my Bank of America card. I was out of town for some of the time and just forgot to make a payment. They put my interest rate at 10 times what it had been before. I pointed out that I had sent them 600.00 all of my fees and penalties but informed them that i would not be able to pay the higher interest rate which is now 30%. They refused and closed my credit card hurting my credit but keeping the new 30% interest fee intact. Bank of America has little mercy or patience for their customers and they are burying people like me and at the same time getting massive government welfare. Obviously Bank of America is a dark enterprise whose ambition for money and power has created a significant negative influence on the lives hundreds of thousands of people. I do not know what can be done about them But I do wish that something is done change this company into something much worthy of its name.
http://SunflowerPipes.com
This is just appalling. More bailouts and the incompetents remain at the helm of the empire while the tax payer will have nix to show for it.
I say it’s time for a little revolution. A little guillotine time for these CEOs.
Vinny Goldberg (while feverishly searching his barn for a pitchfork… but finding nothing but hammers and sickles everywhere)
BofA mgt are a bunch of hicks. They never took risk when it would be profitable, never understood risk when it would be destructive. They manage for yesterday’s market activity. Deep down they consider their main stakeholder to be the media. And they practice willful blindness in everything from their acquisitions to, well… in five years 2002-2007, they only cleaned NY’s equity trading floor once: they day before Ken Lewis took a walking tour of it. That emperor has no clothes. (And no, I wasn’t fired.)
Brazen bloodsuckers Ken Lewis, John Thain, and Hank Pulson need to be investigated and, if warranted, arrested for fraud and blackmail.
There is no honor among theives, and it’s hard to say who is worse. Lewis is irritating because of his prissy, arrogant, know-it-all attitude. For more info on the BofA blackmailing the govt, see this Reuters news:
http://uk.reuters.com/article/marketsNewsUS/idUKN1554425220090115
But Hank “the Wall Street mole” Paulson is the boss of bosses, and has been leader of the continuing blackmailing of the Executive branch and the Congress.
http://uk.reuters.com/article/marketsNewsUS/idUKN1554425220090115