Bank of America Stock Is Up ... But So Are Credit Default Swaps and Puts → Washingtons Blog
Bank of America Stock Is Up ... But So Are Credit Default Swaps and Puts - Washingtons Blog

Thursday, August 11, 2011

Bank of America Stock Is Up ... But So Are Credit Default Swaps and Puts

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.)

Barron's reports:

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.

Financial writers such as Mish and Reggie Middleton pointed out in late 2007 and early 2008 that B of A was again insolvent.

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

Fortune notes:

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

Polls have consistent shown that Americans overwhelmingly think the government should stop providing money to the banks. And see this.

But the government has thrown trillions at the giant banks like B of A, and made it official policy to allow fraud by the banks. And see this.

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 Up

Fator 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.


  1. The Mafia and Cosa Nostra are either dead or in jail, and their place has been taken by the banksters. The only reason they are still free is that they have made huge payments to political campaigns. This is really sick. They have transformed our government into a fascist state, and the middle class is getting creamed.
    Why don't people get mad and start voting out all incumbents? The tea party is full of beans. We need a new group which is more knowledgeable, and which seeks advice from real economists instead of politicians like the Summers-Geithner crowd?
    Economics is a religion with three sects: the Keynesians, who are in power now and who believe that inflation is "good for the soul": the Moniterists with patron saint, Milton Friedman, who believe that a little inflation is O.K. as long as you do not carry it "too far": and the Austrians who believe we should get back on the gold standard so that we can insure everyone that their savings and livlihoods will not be stolen from them by a overwhelmingly greedy, rapacious, power-hungry government.
    The Austrians are the real economists, but they have not had their say in government for nearly a century. Let's get back to real money which is not constantly being inflated away.
    Government loves inflation because it effectively destroys the value of the mountains of debt it accumulates. A "moderate" inflation rate of 5% destroys the buying power of treasury bonds. This is why we have inflation.
    The Byzantine Empire gets a lot of negative attention, but when they saw what was happening to their economy during the Middle Ages through debasement of their coinage, they switched back to the gold standard and continued on for centuries after the economies of Rome, Persia, India, China and the Arab World had collapsed not only economically, but also politically and socially.
    On the other hand, Rome did exactly what the U.S. and Western Europe are doing now during the 4th century and it soon collapsed completely.
    Want proof? Go to the National Archaeological Museum in Athens and look carefully at the chronological Byzantine coin collection and read chapter 3 of Michael Grant's The Climax of Rome and add banksters to the overspending on useless military adventures.
    As Mark Twain said, "History doesn't repeat itself, but it rhymes."

  2. Tried to use BoA ATM yesterday, tellers were outside the bank, saying their network was down all morning. No withdrawals possible.... but I could still do deposits (!!!!)


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