Waiting for Bank of America’s bankruptcy or break up

I just want to flag something pretty major here. We’ve been talking about Bank of America’s death rattle for months now. Take a look at the BofA archives. This is a company that is very sick and clearly bankrupt. Only regulatory forbearance is keeping it alive. But things are stirring on the BofA issue.

The Wall Street Journal says Bank of America Ponders Retreat, meaning it is ready to get broken up if it doesn’t go bankrupt first:

Bank of America Corp. has told U.S. regulators that it is willing to retreat from some parts of the country if its financial problems deepen, according to people familiar with the situation.

Executives at the Charlotte, N.C., financial giant put the potential move on a list of emergency scenarios submitted to the Federal Reserve last year, these people said. While people close to Bank of America insist that no retreat is imminent, even the possibility of selling branches and losing customers it spent huge sums to lure underscores the depth of its problems.

My interpretation of this is that they need to sell assets or face insolvency. It is that dire. But the Wall Street Journal is quick to point out that it isn’t that dire because that’s not their job.

The drastic moves would be seriously considered only if Bank of America needs to raise more capital to cushion itself from mortgage woes and other turmoil. The exercise wasn’t intended to force immediate action but rather to prepare Bank of America if its situation worsened, according to a person familiar with the Fed’s approach. But Mr. Moynihan, other top executives and directors of the sprawling bank are grappling with scenarios that were unthinkable even during the worst moments of the financial crisis.

Bullshit. BofA is bankrupt and this is just face-saving nonsense for public consumption. How do we know?

The bank still is operating under a secret U.S. sanction known as a memorandum of understanding, which puts the bank under stricter oversight, despite steps taken by Mr. Moynihan to consolidate risk controls and shed assets. Regulators have warned the board that the sanction could escalate to a more formal, public enforcement action if they aren’t satisfied with the results of the ongoing shake-up.

Read between the lines. Bank of America is on government life support. As a result, it is being forced to shed assets and cut staff in the hope that this will be enough to prevent its having to be bailed out or resolved. Moreover, a shrunken BofA will be easier to deal with when that moment does arrive. This is a complete reversal of BofA’s prior strategy as this WSJ chart shows.

Clearly Citi went through this same exercise in 2009 as they were almost insolvent. And the regulatory forbearance seems to have worked. So this is the approach that is being used with BofA.  In a double dip recession, however, both BofA and Citi would be rendered insolvent and they would get the Fannie and Freddie treatment in all likelihood.

I think this is something to watch given some of the impending lawsuits and downbeat economic forecasts like Roubini’s and Stiglitz’s.

Bank of America stock has had a good pop. Now is the time to sell.

Source: WSJ

See also: Dumb things bloggers say, Is Citi being forced to downsize by Obama?, and Remember when I said banks were under-reserving? for a fuller picture.