Bank of America - Merrill Lynch Merger

[Commoner]

...Secondly, the WSJ is dubbing Thain the likely successor to Lewis as CEO after he retires. That can't be good for Chalotte's desire to keep the HQ for the long term.

Agreed. McColl doesn't shy from commenting publicly about happenings at the bank. I'd be interested to hear if he has anything good to say about that. Unfortunately, I'll probably infer the same thing you did if he's silent on it.

[atlrvr]

Indeed. The failure to make prudent financial decisions is what led to the excesses of the 1920s and the end result was the collapse of the stock market and the failure of a lot of banks which wiped out almost everyone. This is why the government at the time decided that Adam Smith should not apply to the American finance system and slapped a bunch of controls and guarantees on banking that kept it out of trouble until the 1980s when the decision was made to begin dismantling these controls. It's no surprise that banks which have been at the leading edge of this movement are the ones in the most trouble.

BTW, I agree complete with Adam Smith theory, but I don't agree that it should be the basis for an economy as it leads to the excesses that result in many of the things we don't like about our cities. Probably the subject of a different topic.

Just to stir the pot, I was recently forwarded this article by an admitted conservative.

NY Times article from 2003

Quotes from the articles.

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

...

Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

[monsoon]

^Did Freddie and Fannie have problems in 2003? I don't know.

[rockhilljames]

Yes. Both Bush in 2003 and McCain in 2005 proposed new regulatory agencies and rules to oversee what was apparent to everyone that looked; the Community Reinvestment Act had enabled Fannie and Freddie to push people into loans they couldn't afford. They, in turn, were taking these worthless pieces of paper and selling them to anyone looking to get into the subprime boom.

A lot of people saw that this was a ticking time-bomb, not just Bush and McCain, but I have to give them credit for pushing for more oversight. Barney Frank and Chris Dodd, along with other prominent Democrats like Maxine Waters and NC's own Mel Watt, not only denied there was an issue, but praised Frank Raines (later convicted in a Civil case of cooking the books to trigger massive bonuses, he and other executives named in the suit had to pay back over $31 million in penalties and Raines individually was forced to give up over 15 million in stock options as part of the settlement) and also accused any criticism of the GSE's as subtle racism.

What hasn't really been reported that much is that Dodd got $165,400 in contributions and Obama himself got $126,349 from Fannie Mae. How about Raines? He now advises Obama on housing issues. Nice.

Although the Democrats were in control of the House and Senate while all this was going on, the Republicans are far from innocent in all this mess. Other than a few lone voices, most looked the other way while accepting contributions that came close to matching most of the Democrats.

Once the mainstream banking community jumped into the subprime pit to get their slice, it was only a matter of time.

[monsoon]

....

Although the Democrats were in control of the House and Senate while all this was going on,.....

What!???? The GOP controlled the House from 1994 - 2006. Except for a short time in 2001, the Senate also was controlled by the GOP from 2000-2006. They also had Bush and Cheney in office from 2001 until present. Bush of course can veto any law and Cheney has the constitutional power to break ties in the Senate. The GOP could have passed any law they wanted to reform banking during this time but they didn't despite the words. What they did do is remove the restrictions that allowed this stuff to take place.

If you are faulting politicians for taking political contribution from the banks, then fault them all. You mentioned Watt, but Myrick, McHenry, Hayes, Dole and Burr have all received very significant donations from the finance industry. However you might want to read this story for a really sickening example.

Obama for his part, stopped all contributions from lobbyists to any politician in the party when he was nominated. The GOP has not taken the same position.

[rockhilljames]

Ah yes, I suppose I should clarify. Democrats were in control in 1993 when the CRA was updated to allow for more loans to lower income families. Dodd was chairman of the Senate Banking Committee when the hearings about Fannie and Freddie were held and blocked any effort to extend regulation.

You are very correct in pointing out that Republicans shoulder much of the blame for our current mess as well. It has been increasingly difficult for either party to pass meaningful legislation, since they have both lacked clear majorities since around '95. However, had they possessed the mettle, the Republicans probably could have passed at least some form of oversight, and they did not.

Although I'm well aware of the fact that Democrats were not the only ones to receive campaign contributions (Bob Bennett ranking among the top 5, for example), the amount and timing of Fannie and Freddie's contribution to ranking Dems is what is really pertinent to this discussion.

While I applaud Obama for giving the perception of refusing lobbyist donations, in truth "bundlers" representing multiply lobbyists and special interests have given tens of millions to his campaign. The reality of the current politically climate wouldn't allow him to survive otherwise.

[monsoon]

In regards to what Freddie and Fannie gave to Dodd and Obama.

The amount that cite that Freddie contributed to Dodd, 165K was the total amount he received over 19 years so we are talking about a campaign contribution worth $8,700/year. But since you mention the early 2000s. Lets look at the money they contributed during that period. I've included 2008, but I would think that year would not count towards the problems you mention.

Freddie Mac Campaign Contributions to Dodd

• 2000 - $1,000
  
• 2002 - $11,000
  
• 2004 - $1,000 +$5,000 from Fannie
  
• 2006 - $5,000
  
• 2008 - $28,000
  
• Total - $50,000
  

So during the period you mention, Dodd averaged $6,375/year. I am not sure that is a lot of influence.

Let look at Obama. He was sworn in as a senator on January 4, 2005 and was not put on any committees that could have introduced legislation that would have affected banking regulation at that time. None the less, here are his campaign contributions from them. I can't find any evidence that he received the amount specified above.

to Obama

• 2000 - $0
  
• 2002 - $0
  
• 2004 - $250
  
• 2006 - $0
  
• 2008 - $21,450
  
• Total - $21,700
  

This is about $5,500/year.

My source for this is opensecrets.org. Open secrets does also list a report that was produced that showed Obama receiving the $126K, but there is no documentation to back it up. Their own numbers show the above.

For this year, the NY Times published summary of FM donations

[rockhilljames]

I got my numbers from Open Secrets as well: http://www.opensecrets.org/news/2008/09/up...nd-freddie.html

The numbers listed are direct contributions from Freddie and Fannie, PAC contributions, and individual contributions from people within Freddie and Fannie.

It's worth noting that of the top six three were Dems and three were Republicans (although the top three were Dems).

[monsoon]

^That is the article that I was referring to when I said there was no evidence of it. You can check it directly by looking up what Freddie and Fannie gave. Furthermore, there is the NYTimes article that I posted.

[monsoon]

Wachovia's demise has caught all the headlines, but BofA stock has had some rather stunning losses over the last couple of days. It's down 30% since Monday and down close to 15% already this morning.

[nowensone]

^ How does that compare to the market in general and the other big banks?

[monsoon]

^ How does that compare to the market in general and the other big banks?

The Dow and for the matter the other indexes fell about 5.5% today. BofA nosedived 26.23% and since Friday is off a stunning 38%. In money terms, the bank has lost $72B in market cap. This number compares to the $44M they said they were going to pay to take over ML or the miniscule $4.1B that it paid to take over Countrywide. This drop would knock BofA out of the list of top 10 largest banks in the world basked on market capitalization where it was #2 at the first of the year.

[HopHead]

Apparently John Thain thinks he's worth a $10 million bonus: http://news.yahoo.com/s/nm/20081208/bs_nm/us_merrill_bonus. Is this guy for real??? Maybe Ken Lewis should've done a little more homework on retaining him with the merger.

[swh1972]

In a recent filing, Bank of America announced the first dividend to be paid back to the Government since it took advantage of TARP. The quarterly payment of $223 million will be paid to the Treasury Department in February.

[monsoon]

Sounds as if Ken Lewis did not do his due diligence (as was suggested earlier in this topic) on Merrill Lynch. It is turning into another disaster for the bank as it now finds itself in the position of having to ask for $10B more in bailout money from the federal government or it says it can't complete the merger. I think this also puts to rest the notion that BofA "really" didn't need the original bailout that it got despite what Lewis said about it last October and which was touted here by several of the bank's supporters. They needed it and were glad to get it.

Someone made the point yesterday, why should the government keep giving billions of dollars to CEOs such as Lewis whose bad decisions ran their firms down in the first place.

Meanwhile the bank stock is tanking. It closed just above $10 yesterday and in pre-trading today is already set to open below $10. This is an amazing loss of market cap. The last time BofA stock was at this level was at the end of 1991.

UPdate: the stock opened at $9.70 and has dropped into the $8+ range as I type this. It's going to be interesting to see where this ends up.

[swh1972]

It is turning into another disaster for the bank as it now finds itself in the position of having to ask for $10B more in bailout money from the federal government...

Agree. I don't think the details of what the deal entails are public yet. News sources are confusing the $10B that BofA received from TARP through the merger with ML as part of today's announcement that the Bank is in talks with the Government for them the provide ADDITIONAL support. In reality, the additional assistance may be much more than $10B.

[monsoon]

The pundits on CNBC are expressing a lot of frustration at BofA. They are suggesting that it might have been a better idea to let all the ones in trouble just fail, then transfer the assets to banks that have acted responsibly.

[atlrvr]

In a related note, the Wall Street Journal today has an editorial piece parallelling Ayn Rand's Atlas Shrugged with what is going on in today's economy. The general point is that Rand predicted this would happen with so much government intervention and that continued infusions of money and policy will only prolong the problem.

Link to the editorial.

Of course Rand would say let all the banks fail.

[monsoon]

^The basic logic failure that author makes is that any governmental intervention in business is bad because the Bush administration's bailout of failed financial institutions as been a disaster. And somehow, they completely miss that it was caused by his political hacks doing exactly what they suggest, letting the banks run unregulated. It's a simplistic argument that doesn't even get close to what is really wrong. Ending it with platitudes such as "economic dictator" and calls for Obama to be brave by abolishing the Income tax are a nice touch. I don't know how it can be taken seriously.

[Commoner]

^The basic logic failure that author makes is that any governmental intervention in business is bad because the Bush administration's bailout of failed financial institutions as been a disaster. And somehow, they completely miss that it was caused by his political hacks doing exactly what they suggest, letting the banks run unregulated. It's a simplistic argument that doesn't even get close to what is really wrong. Ending it with platitudes such as "economic dictator" and calls for Obama to be brave by abolishing the Income tax are a nice touch. I don't know how it can be taken seriously.

An equally simplistic argument is that the credit, liquidity and capitalization crises among major financial institutions stem entirely from Bush Administration (and Bush "hack") policies. For one's analysis to begin in 1/2001 and to be limited to the executive branch, a lot of significant precursors are missed.

Also, for what it's worth, I don't think the editorial writer was suggesting the abolition of the federal income tax. We can debate whether John Galt would be in favor of abolishing the federal income tax, sometime.

[Neo]

^The basic logic failure that author makes is that any governmental intervention in business is bad because the Bush administration's bailout of failed financial institutions as been a disaster.

How quickly it is forgotten that the incoming president was for the same bailout. It wasn't as if Bush just had to write a sticky note to send the money to the banks, there were a large number of individuals that had to pass it, including Obama. I'm not saying we should have bailed out the banks, but you can't put Bush in the center of everything that is a failure in the US government.

[sharkdawg]

How quickly it is forgotten that the incoming president was for the same bailout. It wasn't as if Bush just had to write a sticky note to send the money to the banks, there were a large number of individuals that had to pass it, including Obama. I'm not saying we should have bailed out the banks, but you can't put Bush in the center of everything that is a failure in the US government.

The Bush administration promised to provide more oversight how the TARP money was used, but instead decided to let the Banks use the money however they wanted. From the start it should have been built similar to the British bailout.

It is interesting seeing the breakup of Citigroup and how that leaves BofA sitting alone at the top. It seems like the Bush administration puts a lot of trust in Ken Lewis.

[Commoner]

...

It is interesting seeing the breakup of Citigroup and how that leaves BofA sitting alone at the top. It seems like the Bush administration puts a lot of trust in Ken Lewis.

It's not trust as much as it is gratitude*, though I don't think either sentiment is necessarily that much of Congress or the administration's driving force behind policy decisions affecting BAC.

*Countrywide and Merrill Lynch

[DanRNC]

^It is more of the fact that BofA is in severe trouble and the Fed knows it-they are going to report massive 4th quarter losses and continue to take write downs from the CountryWide debacle.

[Commoner]

^It is more of the fact that BofA is in severe trouble and the Fed knows it-they are going to report massive 4th quarter losses and continue to take write downs from the CountryWide debacle.

Well obviously - that, and the systemic risk presented.

It's just that sharkdawg was comparing the case of Citi to BAC. Citi presents similar systemic risk (although at a greater probability at this point). Rather than endorsing a good bank/bad bank scenario, Treasury appears willing to make a secondary preferred investment in BAC. (Citi has already issued a second round of preferred shares to Treasury - it didn't really change the entity's viability.) I think this distinction results from a combination of (a) BAC's relatively short history of losses compared to C and (b) BAC's willingness (arguably moreso than JPM) to stave off crises to the monetary system that would have been created by bankruptcies of Countrywide and MER.

As for BAC's 4Q loss, it will be significant, but pales in comparison to the losses reported by Wachovia for the second and third quarters last year.