Thursday, August 11, 2011
Bank of America Stock Is Up ... But So Are Bets That It Will Fail
Zero Hedge notes:
With Bank of America stock up 9%, its CDS is ...35 points wider: the highest since April 6, 2009.
(Higher credit default swap spreads mean more people are betting the bank will fail.)
Even though the stock is higher Thursday on an up day for banks and the broader stock market, Bank of America's puts are gaining much attention in the options market.
When investors buy put options, they are betting that shares will fall in value.
Desperately Trying to Raise Cash
Just like Lehman before it went belly up, Bank of America is desperately trying to raise cash.
For example, B of A is in talks to sell most of its $17 billion dollar stake in China Construction Bank.
And the Bank's CEO is desperately trying to assure investors with a bunch of fast talk.
But rumors of bankruptcy are swirling around America's biggest bank.
Not The First Time Bank of America Became Insolvent
Bank of America was insolvent in the 1980s, but the government made a concerted decision to cover that up.
Nouriel Roubini noted in January 2009 that the entire U.S. banking system is "bankrupt" and "effectively insolvent":
“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion.” ***
“The problems of Citi, Bank of America and others suggest the system is bankrupt,” Roubini said. “In Europe, it’s the same thing.”
Bailed Out ... Again
Taxpayers may not realize it, but they just bailed out Bank of America again, this time to the tune of more than a half billion dollars.
The Charlotte, NC-based bank was one of the biggest recipients of bailout funds during the financial crisis [the second biggest, to be exact]. But Bank of America ... continues to face deep problems related to its troubled mortgage portfolio and investors have battered the stock, which has plunged over 40% so far this year. That's escalated concerns that the bank may need to raise more capital. Yves Smith at Naked Capitalism has even started a BofA death watch.
But apparently the federal government is determined to resurrect BofA: the Wall Street Journal reports the feds have just used Fannie Mae, which is controlled by the U.S. government [and which gets bailed out again and again], to infuse BofA with $500 million and ease one of the bank's biggest headaches.
Government Policy Is Perpetual Bailouts And Allowing Fraud ... Against Public Wishes
Bailing out Bank of America and the other banking behemoths hasn't really done anything to stabilize them, and another crisis was wholly predictable.
And as I've repeatedly noted:
The too big to fails are - by their very size and the moral hazard created by the government's actions - drawing the American economy down into a black hole.
I pointed out last month that - unless if we don't break up the giant banks now - they'll be bailed out again and again, and virtually all independent economists and financial experts say that will drag the world economy down with them.
Unfortunately, as I've previously noted, the government has decided on perpetual bailouts for the too big to fail banks.
As former chief IMF economist Simon Johnson writes today:
The Dodd-Frank reform process decided not to break up global megabanks, but rather to handle them under the F.D.I.C.’s resolution framework. We’re about to find out if this was a good idea — or if we are just on the brink of more unconditional bailouts.
Break 'Em UpFator Securities writes:
“Our capital levels are adequate.” Perhaps it’s just me but It seems like every time the market sells off more than 10%, we end up hearing that phrase a lot. Hmm, perhaps it has something to do with the huge amount of leverage still sitting on the balance sheets of the TBTF banks and their exposure to the global derivatives market? We need banks in our society, but do we really need these banks? Until the world finally realizes that the concentration of leverage that currently sits on the balance sheets of the world’s largest 15-20 banks is the source of our global instability and protecting these same banks is literally cutting off our nose to spite our face, we will continue to suffer huge bouts of “risk-on/risk-off” madness.It's not just wild volatility in the markets. The very size of the giant banks also depresses lending to Main Street.
And top banking expert Chris Whalen says:
We need to seize and restructure Bank of America NOW! The Founders embedded bankruptcy into the constitution for a reason.We're going into a double dip because the big, insolvent banks - like B of A - were bailed out and allowed to keep on committing fraud.
If we don't break them up now, we'll experience many more years of economic crisis.