How much would you pay to have all of your sins absolved? Bank of America’s (BofA) answer: $20 billion. $20 billion may sound like a lot of simoleons, but the sum does not even cover 5% of the original $424 billion principal balance on the toxic residential mortgage-backed security (RMBS) pools sold by Countrywide and BofA during the boom. [For a look at BofA’s beginnings on the road to absolution, see the October 2010 first tuesday article, The foreclosure machine grinds again.]
The decision by BofA to settle some of its largest claims is an unabashed gesture to assuage investors’ fears regarding the future solvency of the nation’s largest bank. Although the settlement has yet to be, well, settled, BofA stock has already gained 3% and currently trades at $11.14 a share.
Now that the leader of the big bank pack has set the tone, JP Morgan Chase and Wells Fargo are expected to follow. An industry research group has projected that Chase faces upwards of a $9 billion loss while Wells Fargo is expected to take a hit to the tune of $4 billion.
Despite the whopping 10-figure losses the big banks will incur, it seems unlikely any of them will “fail,” as has been the prevailing prognostication of pundits and the public alike. Rather, it seems that paying out a few billion dollars (to investors, not homeowners mind you) in the form of an obligatory “I’m sorry” is all that is required for total absolution.
first tuesday take: While BofA’s show of compunction is unprecedented for a big bank, it is by no means a deviation from the calculated self-interest of the money-making machine.
“Too big to fail,” while generally understood as a remark upon the integral character of BofA to the continued viability of the U.S. economy, could also be interpreted literally — a bank of BofA’s stature simply has too much cash in reserve and extraordinary earning potential (even during economic downturns and in spite of its balance sheet issues) to actually fail.
Thus, the amount of losses the big banks take will not be determined by fairness or the validity of its investors’ claims (which, if paid out in full, may actually precipitate insolvency), but rather by how much each bank is willing to lose and still remain profitable. Being able to avoid standard accounting principles has been a gift to them as their assets are most likely of less value than what they owe depositors.
Of course, the only entity that is “made whole” with this settlement is BofA. The investors are still out billions, homeowners who were placed in the loans that caused the crisis are still either hopelessly underwater or homeless and BofA buys itself a pass to return to the status quo at a steep discount.
Thankfully, our federal regulators have stepped in to limit the possibility of such toxic assets being created in the future. Here’s hoping that the Hydra doesn’t grow another head. [For more information on the federal regulation of mortgage originations and investments, see the June 2011 first tuesday article, A Dodd-Frank report card; for more information on the relative effect of the mortgage crisis on homeowners as opposed to investors, see the June 2011 first tuesday article, American pockets short trillions.]
Re: “Bank of America Settles Claims Stemming From Mortgage Crisis” from the New York Times