Busted: Bankers and The Global Economy

January 16, 2009

Treasury Bails Out Bank of America

rainy day for B of A

rainy day for B of A

Since the beginning of economic contraction, Bank of America, has been buying up banks and assets from failed institutions such as Merrill Lynch. Now is a rainy day for Bank of America, a toxic debt laden bank in danger of failure.

After taking recent value write offs on toxic debts, the U.S. Treasury and the Federal Deposit Insurance Corporation are providing protection against unusually large losses on approximately $118 billion of loans, securities backed by residential and commercial real estate loans and related faulty assets.

B of A doesn’t get to remove the toxic assets from the balance sheet. Instead the American taxpayer is becoming an owner of Bank of America through preferred shares in exchange for the bailout. The U.S. Treasury will also invest $20 billion in Bank of America from the Troubled Asset Relief Program (TARP) in exchange for preferred stock with an 8 percent dividend to the Treasury, making Americans “wealthy” from the loan. Bank of America has now been effectively nationalized: required to keep obligatory restrictions for executive compensation and required to implement a mortgage loan modification program.

The true value of bank capitalization while failing to resolve toxic assets is a questionable policy. However, the Federal Reserve and U.S. Treasury have been hard pressed to find a way remove most toxic assets from the system because of “tentacles” in banking securities and instruments designed by bankers themselves.

Those “tentacles” of toxic debt remain the single largest problem in resolving the financial crisis. The Treasury keeps insisting on the fairy tale that someday the value of these toxic securities will increase in value again. Considering that many, if not most, are based in failed loans and a complex array of largely unmanageable principles, these toxic assets are unlikely to become less toxic, but instead, result in complete failure of these failed investments in the long term. Technically, that is already the case. ~ E. Manning

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