The antagonists were Hugh McColl Jr. and Ed Crutchfield, the respective leaders of North Carolina National Bank (which would take over Bank of America) and First Union (which turned into Wachovia), both based in Charlotte, North Carolina. Obsessed with each other, these two men transformed their personal competition into one of the most ridiculous and elaborate penis-measuring contests in the history of American business – even engaging in the garish Freudian spectacle of vying to see who would have the tallest skyscraper in Charlotte. First Union kicked things off in 1971 by erecting the 32-story Jefferson First Union Tower, then the biggest building in town – until McColl's bank built the 40-story NCNB Plaza in 1974. Then, in the late Eighties, Crutchfield topped McColl with the city's first postmodern high-rise, One First Union Center, at 42 stories. That held the prize until 1992, when McColl went haywire and put up the hideous 60-story Bank of America Corporate Center, a giant slab of gray metal affectionately known around Charlotte as the "Taj McColl." When asked by reporters if he was pleased that his 60-story monster overwhelmed his rival's 42-story weenie, McColl didn't hesitate. "Do I prefer having the tall one?" he said. "Yes."
For a time, this ridiculous rivalry between two strutting Southern peacocks was restrained by the law – specifically, the McFadden-Pepper Act of 1927 and the Douglas Amendment to the Bank Holding Company Act of 1956. These two federal statutes, which made it illegal for a bank holding company to own and operate banks in more than one state, were effectively designed to prevent exactly the Too Big to Fail problem we now find ourselves faced with. The goal, as Sen. Paul Douglas explained at the time, was "to prevent an undue concentration of banking and financial power, and instead keep the private control of credit diffused as much as possible."
But these laws didn't sit well with Hugh McColl. To him, size was everything. "We realized that if we didn't leave North Carolina," he explained later in his career, "we would never amount to anything – that we would not be important." Note that he didn't say the ban on expansion prevented him from turning a profit or earning good returns for his shareholders – only that it put a limit on his sense of self-importance. So McColl and his banking minions set out to break down the interstate banking laws. First, in 1981, they used a legal loophole in Florida law to buy a bank branch there – evading the federal ban on out-of-state owners. Then, following a Supreme Court decision in 1985 that allowed banks to cross state lines within a designated region, he and Crutchfield went on a conquering spree worthy of a Mongol horde, buying up a host of banks in other Southern states. McColl, a silver-haired ex-Marine who would eventually be celebrated for bringing a "military approach" to his business, went to ridiculous lengths to play up the manly conquest aspect of his bank's merger frenzy, rewarding key employees with crystal hand grenades. By 1995, McColl had acquired more than 200 banks and thrifts across the South, while Crutchfield had snapped up 50.
A few years later, after Congress repealed most of the barriers to interstate banking, McColl took over Bank of America, realizing his dream of creating what one trade publication called "the first ocean-to-ocean bank in the nation's history." Later, after McColl retired, his successors kept up his acquisitive legacy, buying notorious mortgage lender Countrywide Financial in 2008, and using some of the $25 billion in federal bailout funds they received to acquire dying investment bank Merrill Lynch. Both firms were infamous for their exotic gambles and their systematic cutting of regulatory corners – meaning that the shopping spree had burdened Bank of America with a huge portfolio of doomed trades and criminal conspiracies.
But to McColl, it was all worth it – because he would never have been important if he hadn't also been big. "I have no regrets about building it large," he said in 2010, when asked if he considered all the monster consolidations a mistake in light of the crash of 2008. "I may have some regrets about not building it larger."
This deeply American terror of not always having the absolutely hugest dick in the room is what put us in the inescapable box called Too Big to Fail. When the bailouts were dreamed up to save Bank of America, the government was essentially committing public resources to preserve this lunatic spending spree – which means two successive presidential administrations have now spent nearly half a decade and hundreds of billions of tax dollars defending the premise that Hugh McColl should always be allowed to have the "taller one."
And why? The rationale for allowing that merger spree in the first place was based on a phony assumption: that big banks would somehow be more efficient and more profitable than small ones. "The whole premise of a Citibank or a Chase or a Bank of America is wrongheaded," says Susan Webber, an analyst who writes one of the most popular and respected financial blogs under the pseudonym Yves Smith. "Studies consistently show that after a certain size threshold, bank efficiency taps out. In fact, it turns out that all those cost savings the banks were supposed to enjoy from being bigger were actually based on cutting corners and fraud."
And man, what a lot of fraud!
In the end, it all comes back to mortgages. Though Bank of America would ultimately be charged with committing a dizzyingly diverse variety of corporate misdeeds, the bulk of the trouble the bank is in today arises from the Great Mortgage Scam of the mid-2000s, which caused the biggest financial bubble in history.
The shorthand version of the scam is by now familiar: Banks and mortgage lenders conspired to create a gigantic volume of very risky home loans, delivering outsize mortgages to dubious borrowers like immigrants without identification, the unemployed and people with poor credit histories. Then the banks took those dicey home loans and sprinkled them with bogus math, using inscrutable financial gizmos like collateralized mortgage obligations to rechristen the risky home loans as high-grade, AAA-rated securities that could be sold off to unions, pensioners, foreign banks, retirement funds and any other suckers the banks could find. In essence, America's financial institutions grew vast fields of cheap oregano, and then went around the world marketing their product as high-grade weed.
The holy trinity of Bank of America, Countrywide and Merrill Lynch represented the worst conceivable team of financial powers to get hold of this scam. It was a little like the Wall Street version of Michael Bay's nonclassic Con Air, in which the world's creepiest serial killer, most demented terrorist and most depraved redneck are all thrown together on the same plane. In this case, it was the most careless mortgage lender (the spray-tanned huckster Angelo Mozilo from Countrywide, who was named the second-worst CEO of all time by Portfolio magazine), the most dangerous mortgage gambler (Merrill, whose CEO was the self-worshipping jerkwad John Thain, the ex-Goldman banker who bought himself an $87,000 area rug as his company was cratering in 2008) and the most relentless packager of mortgage pools (Bank of America), all put together under one roof and let loose on the world. These guys were so corrupt, they even shocked one another: According to a federal lawsuit, top executives at Countrywide complained privately that Bank of America's "appetite for risky products was greater than that of Countrywide."
The three lenders also pioneered ways to sell their toxic pools of mortgages to suckers. Bank of America's typical marketing pitch to a union or a state pension fund involved a double or even triple guarantee. First, it promised, in writing, that all its loans had passed due diligence tests and met its high internal standards. Next, it promised that if any of the loans in the mortgage pool turned out to be defective or in default, it would buy them back. And finally, it assured customers that if all else failed, the pools of mortgages were all insured, or "wrapped," by bond insurers like AMBAC and MBIA.
It sounded like a can't-lose deal. Not only did the bank offer a written guarantee of the high quality of the loans it was selling, it also promised to buy back any bad loans, which were often insured to boot. What could go wrong?
As it turned out, everything. From tits to toes, the mortgage pools created, packaged and sold by Countrywide, Merrill Lynch and Bank of America were a complete sham: worthless and often falling apart virtually from the day they were delivered.
First of all, despite the fact that the banks had promised that all the loans in their pools met their internal lending standards, that turned out to be completely untrue. An SEC investigation later found out, for instance, that Countrywide essentially had no standards for whom to lend to. As a federal judge put it, "Countrywide routinely ignored its official underwriting guidelines to such an extent that Countrywide would underwrite any loan it could sell." Translation: Countrywide gave home loans to anything with a pulse, provided they had a sucker lined up to buy the loan.
How did they make these loans in the first place? By committing every kind of lending fraud imaginable – particularly by entering fake data on home loan applications, magically turning minimum-wage janitors into creditworthy wage earners. In 2006, according to a report by Credit Suisse, a whopping 49 percent of the nation's subprime loans were "liar's loans," meaning that lenders could state the incomes of borrowers without requiring any proof of employment. And no one lied more than Countrywide and Bank of America. In an internal e-mail distributed in June 2006, Countrywide's executives worried that 40 percent of the firm's "reduced documentation loans" potentially had "income overstated by more than 10 percent... and a significant percent of those loans would have income overstated by 50 percent or more."
"What large numbers of Countrywide employees did every day was commit fraud by knowingly making and approving loans they knew borrowers couldn't repay," says William Black, a former federal banking regulator. "To do so, it was essential that the loans be made to appear to be relatively less risky. This required pervasive documentation fraud."
So what happened when institutional investors realized that the loans they had bought from Countrywide were nothing but shams? Instead of buying back the bad loans as promised, and as required by its own contracts, the bank simply refused to answer its phone. A typical transaction involved U.S. Bancorp, which in 2005 served as a trustee for a group of investors that bought 4,484 Countrywide mortgages for $1.75 billion – only to discover their shiny new investment vehicle started throwing rods before they could even drive it off the lot. "Soon after being sold to the Trust," U.S. Bancorp later observed in a lawsuit, "Countrywide's loans began to become delinquent and default at a startling rate." The trustees hired a consultant to examine 786 loans in the pool, and found that an astonishing two-thirds of them were defective in some way. Yet, confronted with the fraud, Countrywide failed to repurchase a single loan, offering "no basis for its refusal."
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