Wednesday, January 9, 2013

Bank of America: It Failed Long Ago


Bank of America: It Failed Long Ago

As of September 28, 2012 when I last did a search, Bank of America had settled $22 billion worth of legal disputes.  As I pointed out in “One More Reason I’m Critical of the Finance Business,” the bank neither admitted nor denied the charges in most, if not all, the settlements.   However, the list of allegations covers all sorts of bad conduct: improper collection of fees on overdrafts, bid-rigging on bond auctions, a variety of mortgage claims, several securities frauds, money laundering violations, and improper trading.  You may recall that my post was prompted by a $2.43 billion class action settlement with respect to the Merrill Lynch acquisition.

Please Give Them A Good Look (2002)

The settlement barrage continues.  In recent days, Bank of America entered into an $11 billion settlement with Fannie Mae for improperly selling bad mortgages.  And, the bank joined a host of other financial institutions in agreeing to pay $8.5 billion for improper mortgage foreclosure practices.  I don’t know Bank of America’s share of this settlement, but my running total for all settlements is certainly above $34 billion.  These totals will rise substantially as the bank is under investigation or in litigation over any number of other matters, including its role in the LIBOR scandal.  Moreover, these settlements do not reflect the total damage done by the bank to consumers, businesses, and other lenders.  The settlements have simply been a way to bring some semblance of closure to at least some of this expensive litigation.

Of course, the bank also received tens of billions of dollars in government support that was hugely subsidized by taxpayers, and it had ample servings of cheap credit from the Federal Reserve.  In fairness, Bank of America is not the only major institution with an incredibly long list of settlements, and a huge debt of gratitude to the American taxpayer.  But for the implicit and explicit guarantees of the US government, nobody would do business with an institution with Bank of America’s track record.

The common refrain, of course, is that Bank of America and its ilk are “too big to fail.”  However, the latest settlements make abundantly clear that this bank failed long ago.  Perhaps it has enough capital to remain solvent.  However, solvency alone isn’t the appropriate test for an institution’s viability.  If a money manager, accountancy, law firm, or for that matter any other business enterprise had engaged in the acts described in the long list of legal settlements, they wouldn’t have any clients.  Who would trust a business that foisted bad loans on another business, or improperly foreclosed on its customers?

Bank’s like BoA need to be broken apart, not because they are too large, but because their basic culture is corrupt.  There are thousands of good people who work for Bank of America.  I even have a couple of friends who have survived the job cuts and restructurings.  However, this company lost its right to do business because of the decisions of its leadership and a culture that promoted improper and unethical acts.

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