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Bank of America Warned by Regulators

Bank of America at Rockefeller Center (photo: Odaeus)

A few months back we launched the Bank of America death watch. It’s very clear that the bank has extreme liabilities, and has ever since they made the terrible twin purchases of Countrywide and Merrill Lynch. Their exposure has more to do with foreclosure fraud and the ongoing Big Shitpile than anything from Europe, but given the interconnected nature of the financial system, that doesn’t help either. And as their attempts to limit their exposure – through settlements with investors over repurchases of mortgage-backed securities, as well as the GSEs – have unraveled, they’ve been madly selling off assets and announcing big layoffs to frantically reduce their size and acquire capital. Their stock is down by 58% this year, including another 5% drop on Monday.

So they know they’re in trouble. Investors know they’re in trouble. And now, we learn in the Wall Street Journal that the government thinks so as well:

Bank of America Corp.’s board has been told that the company could face a public enforcement action if regulators aren’t satisfied with recent steps taken to strengthen the bank, said people familiar with the situation.

The nation’s second-largest lender has been operating under a memorandum of understanding since May 2009, following repeated tussles with regulators over the purchase of securities firm Merrill Lynch & Co. and a downgrade of the company’s confidential supervisory rating. The memorandum, which isn’t public, identified governance, risk and liquidity management as problems that had to be fixed, according to people familiar with the document.

In recent months, regulators met with Bank of America’s board and said they wanted to see more progress on the bank’s compliance with the memorandum. Otherwise the informal order could turn into a formal and public action, which would likely mean intensified scrutiny and greater restrictions as Chief Executive Brian Moynihan tries to shed problems tied to the financial crisis.

Of course, the board denies that they haven’t followed the memorandum; the Bank of America is the Bank of Denial. The enforcement action potential here is for a requirement to raise capital or get clearance for selling off assets. And I don’t think this is about governance, it’s about risk. BofA has way too much of it because of the problems of the past several years.

By the way, these aren’t the hardass regulators speaking up about BofA. We’re talking about the Federal Reserve and the Office of the Comptroller of the Currency, which might as well be called the Office of Bank Advocacy.

The point here is that BofA is in trouble. The defections from depositors due to their aborted debit card fee, contrary to Wall Street opinion, will hurt them more. The downward pressure on the stock price will hurt as well. The PR fallout from them being identified as a problem bank, still more. The death watch continues.

CommunityThe Bullpen

Bank of America Warned by Regulators

A few months back we launched the Bank of America death watch. It’s very clear that the bank has extreme liabilities, and has ever since they made the terrible twin purchases of Countrywide and Merrill Lynch. Their exposure has more to do with foreclosure fraud and the ongoing Big Shitpile than anything from Europe, but given the interconnected nature of the financial system, that doesn’t help either. And as their attempts to limit their exposure – through settlements with investors over repurchases of mortgage-backed securities, as well as the GSEs – have unraveled, they’ve been madly selling off assets and announcing big layoffs to frantically reduce their size and acquire capital. Their stock is down by 58% this year, including another 5% drop on Monday.

So they know they’re in trouble. Investors know they’re in trouble. And now, we learn in the Wall Street Journal that the government thinks so as well:

Bank of America Corp.’s board has been told that the company could face a public enforcement action if regulators aren’t satisfied with recent steps taken to strengthen the bank, said people familiar with the situation.

The nation’s second-largest lender has been operating under a memorandum of understanding since May 2009, following repeated tussles with regulators over the purchase of securities firm Merrill Lynch & Co. and a downgrade of the company’s confidential supervisory rating. The memorandum, which isn’t public, identified governance, risk and liquidity management as problems that had to be fixed, according to people familiar with the document.

In recent months, regulators met with Bank of America’s board and said they wanted to see more progress on the bank’s compliance with the memorandum. Otherwise the informal order could turn into a formal and public action, which would likely mean intensified scrutiny and greater restrictions as Chief Executive Brian Moynihan tries to shed problems tied to the financial crisis.

Of course, the board denies that they haven’t followed the memorandum; the Bank of America is the Bank of Denial. The enforcement action potential here is for a requirement to raise capital or get clearance for selling off assets. And I don’t think this is about governance, it’s about risk. BofA has way too much of it because of the problems of the past several years.

By the way, these aren’t the hardass regulators speaking up about BofA. We’re talking about the Federal Reserve and the Office of the Comptroller of the Currency, which might as well be called the Office of Bank Advocacy.

The point here is that BofA is in trouble. The defections from depositors due to their aborted debit card fee, contrary to Wall Street opinion, will hurt them more. The downward pressure on the stock price will hurt as well. The PR fallout from them being identified as a problem bank, still more. The death watch continues.

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David Dayen

David Dayen