Bank of America is America’s biggest bank, but you wouldn’t have thought so after its stunning slide on Wall Street overnight.
It is now starting to move into the sights of worried regulators. The shares fell more than 20% after AIG, the US government-controlled insurer, revealed plans to sue it for $US10.5 billion over alleged mortgage securities fraud.
And the irony here, on the day of the sixth biggest fall in the Dow average in history, that the two biggest beneficiaries of US government aid during the GFC in late 2008 (between them they received more than $US220 billion in emergency capital injections), are now engaging in legal action over an amount that is a fraction of that, at a time when financial stresses are enormous.
So you have to wonder at the stupidity of AIG and its US government controllers at the timing of the legal action. It came on a very fraught day for financial markets of all types in the US and Europe.
Despite their claims to the contrary, the Americans have a death wish and you have to ask if the Obama Administration is as culpable as the two Bush administrations were in regulating the markets and trying to maintain some semblance of confidence?
Couldn’t they see the markets were shaping up for a replay of the GFC, Mark 1 after the Standard & Poor’s downgrade (To be probed by very upset US Senators) and the fears for the stability of the eurozone?
And for AIG and its US owners to pick on the weakest of the big financial groups in the US, at a time such as yesterday, shows a form of hubris that only the Americans can understand.
The action has singled out one of the financial groups that has become not only too big to fail, but too big to manage, just as Citigroup was three years ago (and possibly remains so in parts of its business today).
Bank of America inherited much of the dodgy mortgage dealing liabilities when it bought the very dodgy Countrywide, a subprime mortgage giant (there have been numerous legal actions, civil and criminal launched against Bank of America over Countrywide, from the US government, state governments, investors large and small and now AIG, which wrote a form of insurance against the derivatives based on these weak mortgages).
It also picked up liabilities and other rubbish when it bailed out Merrill Lynch (at the US government’s urging) in late 2008: Merrills had been brought down by selling too many dodgy collateralised debt obligations, dodgy mortgages and other unfortunate deals.
“AIG’s lawsuit is specifically tied to hundreds of mortgage-backed securities that the insurer claims Bank of America — and its Merrill Lynch and Countrywide Financial units — knew were not top quality,” according to published reports.
“The insurer is seeking to recover more than $10 billion in losses from Bank of America on $28 billion of investments, in what could be the largest mortgage security-related action filed by a single investor,” the reports said.
These dealings helped cripple AIG and forced the US government to rescue it in late 2008, as it was bailing out Wall Street, General Motors, Chrysler and a host of small banks and finance companies and insurers.
Back of America received billions of dollars in bailout funds through the US government’s Troubled Asset Relief Program (TARP) during the crisis of late 2008 and finally repaid the last of the $US45 billion in aid at the end of 2009.
The government also gave AIG a $US182 billion lifeline to keep the insurance company out of bankruptcy at the height of the financial crisis. That bought it an 80% stake, which has been slightly cut through share sales earlier this year.
Bank of America shares has already lost nearly 49% of its value this year, and closed at $US6.51 overnight where it’s trading under its book value.
AIG has tumbled more than 59%, but seeing the latter is still a ward of the state, that weakness doesn’t matter, except that it delays any chance of US taxpayers getting out of the company and recouping some of the tens of billions of dollars still tied up in AIG.
Bank of America was the worst performing of an average lot of US financial giants overnight. Citigroup shares fell 15.7%, JP Morgan Chase dropped more than 8%, Wells Fargo fell 9% while shares of Regions Financial lost 13%. Shares in the Vampire Squid (AKA Goldman Sachs) fell 6% to $US117.
Credit default swaps (CDS) tied to Bank of America debt jumped to their highest level since May 2009, a sign of rising nervousness among investors.
But with Merrill Lynch owned since the bailout in late 2008, plus Countrywide and various other small banks and other financial services, Bank of America is now more exposed than it was following the Lehman Brothers failure in September, 2008.
Bank of America said overnight that it doesn’t need to raise new capital. That’s the sign to watch for if you are worried, it will tell us that regulators are worried about the bank’s health. After all, it was the only major bank not allowed to increase its dividends after stress tests conducted by regulators in March of this year.
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