On January 16, 2009, Treasury announced a further bailout of Bank of America. Bank of America expressed “surprise” that the investment bank Merrill Lynch which it took over in September lost $15.3 billion in the last quarter of 2008. In a deal structured similarly to the recent one with Citigroup, BoA will receive another $20 billion in TARP funds (in exchange for $4 billion in BoA stock) and it will receive a “backstop” for some $98.2 billion of its crap assets. BoA will cover the first $10 billion, the FDIC picks up the next $10 billion and the Fed and BoA split any other losses on the remaining $78.2 billion, 90% by the Fed, 10% by BoA.
So just to recap, BoA is at most out $4 billion in stock plus $10 billion in initial losses plus 10% of $78.2 billion in subsequent losses or $21.8 billion. But it just received $20 billion from Paulson so for a net pay out of $1.8 billion, it has gotten a government guarantee on $98.2 billion of its crap assets.
This is just obscene. What is happening here is about recapitalization of the banking industry by the backdoor without the government or the taxpayer getting anything but debt in return. It is yet another case among so many of “Privatizing gains and socializing losses”. BoA is under no obligation after this either to help distressed homeowners or resume normal lending to ease the credit crunch. It is also an example of how taxpayers are paying for the consolidation now occurring in the financial industry. BoA takes over Merrill, keeps the good stuff, and dumps the crap on the government, and ultimately the American taxpayer. And it shows once again how the paper economy is favored over the real one. The BoA bailout is not just a sweetheart deal. It is a giveaway. It was agreed late at night with no one watching or asking questions and none of the very public and long drawn out groveling that was required of the auto industry and its executives for a deal that was much smaller and had much harder conditions.
As long as Paulson and his successors in the incoming Obama Administration continue to favor BoA and other institutions like it over the wider economy and the interests of ordinary Americans and as long as they refuse to address the fundamental problems underlying the meltdown, we are not going to get out of the current crisis but we will pay for it anyway. Their priorities and approach remain completely out of whack. BoA comes out of this stronger, but the economy and the country have been made weaker.
And if even after all this BoA still has problems, it can follow the model of Citigroup one step further. Citi is currently in the process of splitting itself in two. In one part will be its profitable operations and in the other will be its remaining crap and unprofitable divisions. One will go on conducting business as usual and the other will be allowed to fail, be bailed out again and again by the government, or be sold if anyone can be found crazy enough to buy it. There is no way that the government should let Citi do this, but there is not a chance that it won’t. But that is the thing, the people who perpetrated the meltdown on us are also the people who are running the response to it, and neither those in government or in the industry have changed how they do business, the business that got us in this mess, at all.