At Bank of America, the situation is dire. We’ve been expecting a possible crackup of the big bank, which made some of the worst purchases in business history in acquiring Countrywide and Merrill Lynch. Now, Yves Smith notes that BofA may have to pull out of key areas of the country in order to survive

One of the ways in which the big banks were bailed out was through an artificially high credit rating based on the assumption that they would always get bailed out if they got into trouble. This was a major advantage for them over their competitors. Now S&P Rating Services is downgrading major banks.

I tweeted last night, “When bad news from Europe tomorrow makes stocks tank, and the idiots in DC blame it on Super Committee fail, could someone correct them?” Apparently, no one told the AP or Washington Post, who insist the Super Committee Fail is driving down the stock markets.

Jon Corzine’s investment company, MF Global, filed for bankruptcy after it was reported the firm was missing hundreds of millions in investor funds. It’s not clear where the money went, but the fund had invested heavily in European debt.

Every quarterly earnings statement and public comment from banks in the post-bubble period contains some discussion of a reserve fund for mortgage losses and liabilities. They always attach a dollar amount to it. If BofA knew about an AIG lawsuit seven months ago that would reshape the extent of their mortgage liabilities, and chose not to reveal that information, that’s a serious error. Is it criminal? Hard to say. The SEC has requested more disclosure on these matters. But if I were a BofA shareholder, I’d be mighty unhappy today.

The warning signs for Bank of America are all there. The liabilities are rising. The lawsuits keep coming in. The Knights of Columbus actually expanded their challenge to the large settlement on mortgage backed securities, another signal that the get-out-of-jail free card that BofA sought is not forthcoming. They’ve desperately tried to cut operating costs without resorting to raise capital, which would be given away cheaply because of the stock price. They started selling various units, a Canadian credit card company, some commercial real estate properties, everything non-core that wasn’t nailed down. And now, they plan to cut labor costs.

When state Attorneys General and the banks have a settlement to announce, call me. Otherwise, I’m not going to chase every rumor about the latest in negotiations that have literally been stalled for at least 5 months. I certainly think that Bank of America desperately needs a settlement, or at least desperately needs the markets to THINK they are close to a settlement, but that doesn’t mean that anything has fundamentally changed.

The banks want a steal of a deal, and an increasing number of AGs 1) don’t want to sell out cheap before undertaking an investigation and 2) don’t want to give up liability completely. And that has been the impasse for months.

You could probably talk to 100 people and get 100 different interpretations of the stock market volatility we’re seeing in real time. The market opened up 1% and then immediately fell to about even. The stock market is not the economy and really shouldn’t be seen as a barometer for the economy.

The amusing, though confounding, by-product here is that even zero growth would have the effect of increasing the deficit in the near-term, perhaps enough so that the debt limit deal does not actually get the country through the 2012 elections, forcing a need to increase in… September 2012? October?

I won’t discount the probability that Republicans are working hard to sink the economy. But this is bigger than that. All signs point to a weak economy globally for the foreseeable future. Austerity in the midst of this fragility is just damn stupid.