Bank of America should have gone out of business back in 2008. Just as the mortgage market was crashing, it made an inconceivably stupid investment in subprime mortgages, acquiring Countrywide and the billions in potential lawsuits that came with it. "They tried to catch a falling knife and lost their hand and foot in the process," says Joshua Rosner, a noted financial analyst. It then spent $50 billion buying a firm, Merrill Lynch, that was rife with billions in debts. With those two anchors on its balance sheet, Hugh McColl's bicoastal dream bank should have gone the way of the dinosaur.
But it didn't. Instead, in the midst of the crash, the government forked over $45 billion in aid to Bank of America – $20 billion as an incentive to bring its cross-eyed bride Merrill Lynch to the altar, and another $25 billion as part of the overall TARP bailout. In addition, the government agreed to guarantee $118 billion in Bank of America debt.
So what did the bank do with that money? First, it sat by while lame-duck executives at Merrill paid themselves $3.6 billion in bonuses – even though Merrill lost more than $27 billion that year. In all, 696 executives received more than $1 million each for helping to crash the storied firm. (The bank wound up hit with a $150 million fine for its failure to inform shareholders about the Merrill losses and bonuses.) Bank of America, meanwhile, paid out more than $3.3 billion in bonuses to itself, including more than $1 million each to 172 executives.
In fact, the real bailouts of Bank of America didn't even begin until well after TARP. In the years since the crash, the bank has issued more than $44 billion in FDIC-insured debt through a little-known Federal Reserve plan called the Temporary Liquidity Guarantee Program. The plan essentially allows companies whose credit ratings are fucked to borrow against the government's good name – and if the loans aren't paid back, the government is on the hook for all of it. Bank of America has also stayed afloat by constantly borrowing billions in low-interest emergency loans from the Fed – part of $7.7 trillion in "secret" loans that were not disclosed by the central bank until last year. When the data was finally released, we found out that, on just one day in 2008, Bank of America owed the Fed a staggering $86 billion.
That means that when you take out a credit card or a mortgage or a refinancing from Bank of America, you're essentially borrowing from the state; the "private" bank is simply taking a cut as a middleman. "For banks, the cost of capital is the key to success," says former New York governor Eliot Spitzer. "So by lowering their cost of capital to almost zero, the Fed has almost guaranteed that the banks will make big profits."
Another public lifeline is Fannie Mae and Freddie Mac, the giant, nationalized mortgage lenders. Need to make some cash? Toss a bunch of home loan applications onto a city street, then sell the resulting mortgages to Fannie and Freddie, which are basically a gigantic pile of public money guarded by second-rate managers. Just like the state pensions in Iowa and Maine and Mississippi, Fannie and Freddie were targeted for sales of toxic mortgages, and just like those entities, they have sued Bank of America, claiming they were suckered into buying more than $30 billion in shitty securities. But unlike those other suckers, Fannie and Freddie continued to buy crap loans from Bank of America even after it was clear they'd been hoodwinked. Last year, the bank created more than $156 billion in mortgages – nearly $38 billion of which were bought by Fannie. Having the government as an ever-ready customer, standing by to buy mortgages at full retail prices, has always been an ongoing hidden bailout to the banks.
But even the government has its limits. In February, Fannie announced it would no longer keep blindly buying mortgages from Bank of America. Why? Because the bank, already slow to buy back its defective mortgages, had gotten even slower. By the end of last year, the government reported, more than half of all the crappy loans that Fannie wanted to return came from a single bad bank – Bank of America.
But if you think that Fannie cutting off the bank is good news, think again. If it can't get the money it's owed from Bank of America, it'll just go begging to the Treasury. Fannie has already asked for $4.5 billion to cover losses this year – and if Bank of America doesn't pony up, it'll have to reach even deeper into our pockets, making for yet another shadow bailout to the firm.
It gets worse. Last fall, some of the bank's biggest creditors and counterparties started to get nervous about the mountain of toxic bets still sitting on Merrill Lynch's books – a generation of ill-considered, complex, exotic derivative trades, bets on bets on bets on shaky subprime mortgages, sitting there on the company balance sheet, waiting to explode. Nobody felt good lending Bank of America money with that dangerous shitpile lying there. So they asked the bank to move a chunk of that mess from Merrill Lynch onto Bank of America's own balance sheet. Why? Because Bank of America is a federally insured depository institution. Which means that the FDIC, and by extension you and me, is now on the hook for as much as $55 trillion in potential losses. Black, the former regulator, calls the transfer an "obscenity. As a regulator, I would have never allowed it. Transferring risk to the insured institution crosses the reddest of red lines."
But by far the biggest bailout to Bank of America has come via the sweetheart deals it cut to settle the massive lawsuits filed against it. Some of the deals, which were brokered by the Justice Department and state attorneys general, allowed the bank to get away with paying pennies on the dollar on its mountains of debt. Worst of all was the recent $26 billion foreclosure settlement involving Bank of America and four other major firms. The deal, in which the banks agreed to pay cash to screwed-over homeowners in exchange for immunity from federal prosecution on robo-signing issues, was hailed as a big multibillion-dollar bite out of the banks. President Obama was all but strutting over his beatdown of Wall Street. "We are Americans, and we look out for one another; we get each other's backs," he declared. "We're going to make sure that banks live up to their end of the bargain."
In fact, the government has a lousy track record when it comes to enforcing settlements. The foreclosure deal arrives on the heels of an $8.4 billion investor settlement, whose provisions Bank of America had already been accused of violating, raising rates and abusing homeowners as soon as the deal was struck. The bank also violated a previous settlement with the Federal Trade Commission, illegally slapping $36 million in fees on struggling homeowners after specifically agreeing not to do so. So Bank of America's reward for blowing off its previous settlements for mistreating homeowners was to get another soft-touch deal from the government, which they will presumably be just as free to ignore. Why? Because while state officials have ultimate enforcement authority over the foreclosure settlement, the early enforcement reviews will be handled by "internal quality control groups." In other words, Bank of America itself will be grading its own compliance!
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