Time and again, they go out of their way to fleece their own customers, without a trace of remorse. In a lawsuit filed last year, homeowners claim they were asked to submit a mountain of paperwork before receiving a modified loan — only to have the bank misplace the documents when it was time to pay up. Even when caught red-handed and nailed by courts for behavior like this, Bank of America has remained smugly unrepentant.
It not only jacked up rates on homeowners, it even instituted a policy punishing any bank employee who spent more than 10 minutes helping a victim get a loan modification.
The disabled? Just a few weeks ago, the government charged Bank of America with violating the Fair Housing Act by illegally requiring proof of disability from people who rely on disability income to make their mortgage payments. The poor? In South Carolina, Bank of America won a contract to distribute unemployment benefits through prepaid debit cards — and then charged multiple fees to jobless folk who had the gall to withdraw their money from anywhere other than a Bank of America ATM.
One-eyed Sri Lankans? Bank of America likes to boast that it has changed its ways, replacing many of the top executives who helped create the mortgage bubble. But the man promoted from within to lead the new team, CEO Brian Moynihan, is just as loathsome and tone-deaf as his previous bosses. After all, he gives to charities! The bank fixed the bids on bonds for schools and cities and utilities all over America, and even conspired to try to game the game itself — by fixing global interest rates!
So what does the government do about a rogue firm like this, one that inflates market-wrecking bubbles, commits mass fraud and generally treats the law like its own personal urinal cake? B ank of America should have gone out of business back in Just as the mortgage market was crashing, it made an inconceivably stupid investment in subprime mortgages, acquiring Countrywide and the billions in potential lawsuits that came with it.
So what did the bank do with that money? Another public lifeline is Fannie Mae and Freddie Mac, the giant, nationalized mortgage lenders. Need to make some cash? Toss a bunch of home loan applications onto a city street, then sell the resulting mortgages to Fannie and Freddie, which are basically a gigantic pile of public money guarded by second-rate managers. Having the government as an ever-ready customer, standing by to buy mortgages at full retail prices, has always been an ongoing hidden bailout to the banks.
But even the government has its limits. In February, Fannie announced it would no longer keep blindly buying mortgages from Bank of America. Because the bank, already slow to buy back its defective mortgages, had gotten even slower. By the end of last year, the government reported, more than half of all the crappy loans that Fannie wanted to return came from a single bad bank — Bank of America. But if you think that Fannie cutting off the bank is good news, think again.
It gets worse. Nobody felt good lending Bank of America money with that dangerous shitpile lying there. Because Bank of America is a federally insured depository institution.
As a regulator, I would have never allowed it. Transferring risk to the insured institution crosses the reddest of red lines. B ut by far the biggest bailout to Bank of America has come via the sweetheart deals it cut to settle the massive lawsuits filed against it.
Some of the deals, which were brokered by the Justice Department and state attorneys general, allowed the bank to get away with paying pennies on the dollar on its mountains of debt. Someone should start a bank or maybe someone has that charges rather than pays interest and does not make loans. Such a bank would be a good example of how Fed actions create unintended outcomes that defeat their goals. The Fed wants to stimulate lending, but an anti-lending bank could be quite successful.
I would be a customer. The Dutch BofA charged customers for safe-keeping, did not make loans and did not allow depositors to get their money out immediately. Unfortunately — and unbeknownst to Smith — the Bank of Amsterdam had starting secretly making risky loans to ventures in the East Indies and other areas, just like any other bank. When these risky ventures failed, so did the BofA. Over the last week, we saw the impact on the emerging markets. That means investments in Argentina are worth 20 percent less in dollar terms than they were a month ago, even if they held their price in Pesos.
The Fed did not plan to impoverish investors by inducing them to buy overpriced Argentinian investments, of course, but that is one of the costly consequences of its actions. If you lost money in emerging markets over the last week, at one level, it is your responsibility. However, it is not crazy for you to blame the Fed for creating volatile prices that made investing more difficult.
They removed the opportunities for safe investments and forced those with liquid assets to scramble for what safety they thought they could find. Furthermore, the uncertainty caused by the Fed has caused many assets to swing wildly in value, creating winners and losers. The Fed played a role in the recent emerging markets turmoil. Next week, they will cause another crisis somewhere else. Eventually, the absurd effort to create wealth through monetary policy will unravel in the U.
Even after the Fed created the housing problems, we would have been better of with a small depression rather than the larger depression that lies ahead. Ever since Alan Greenspan intervened to save the stock market on Oct. The trouble with trying to make the world safe for stupidity is that it creates fragility.
Bank of America and other big banks are fragile — and vulnerable to bank runs — because the Fed has set interest rates to zero. If a run gathers momentum, the government will take steps to stem it. But I am convinced they have limited ammunition and unlimited problems. What is the solution?
How can these banks justify gambling so much money on what looks like such a risky bet? Since the mids, the highest annual default rate on leveraged loans was about 10 percent, during the previous financial crisis.
The securities are structured such that investors with a high tolerance for risk, like hedge funds and private-equity firms, buy the bottom layers hoping to win the lottery. The big banks settle for smaller returns and the security of the top layer.
But that AAA rating is deceiving. The credit-rating agencies grade CLOs and their underlying debt separately. Far from it. Remember: CLOs are made up of loans to businesses that are already in trouble. So what sort of debt do you find in a CLO? Fitch Ratings has estimated that as of April, more than 67 percent of the 1, borrowers in its leveraged-loan database had a B rating. That might not sound bad, but B-rated debt is lousy debt. According to Fitch, 15 percent of companies with leveraged loans are rated lower still, at CCC or below.
These borrowers are on the cusp of default. How can the credit-rating agencies get away with this? Back then, the underlying loans were risky too, and everyone knew that some of them would default.
But it seemed unlikely that many of them would default at the same time. The loans were spread across the entire country and among many lenders. Then housing prices fell 30 percent across the board and defaults skyrocketed. For CLOs, the rating agencies determine the grades of the various layers by assessing both the risks of the leveraged loans and their default correlation. In theory, CLOs are constructed in such a way as to minimize the chances that all of the loans will be affected by a single event or chain of events.
The rating agencies award high ratings to those layers that seem sufficiently diversified across industry and geography. But all you have to do is look at a list of leveraged borrowers to see the potential for trouble. These are all companies hard hit by the sort of belt-tightening that accompanies a conventional downturn. We are not in the midst of a conventional downturn. Also added to the list was Hoffmaster, which makes products used by restaurants to package food for takeout.
Companies you might have expected to weather the present economic storm are among those suffering most acutely as consumers not only tighten their belts, but also redefine what they consider necessary. Even before the pandemic struck, the credit-rating agencies may have been underestimating how vulnerable unrelated industries could be to the same economic forces.
A article by John Griffin, of the University of Texas, and Jordan Nickerson, of Boston College, demonstrated that the default-correlation assumptions used to create a group of CLOs should have been three to four times higher than they were, and the miscalculations resulted in much higher ratings than were warranted. Under current conditions, the outlook for leveraged loans in a range of industries is truly grim. Now moviegoing and party-throwing are paused indefinitely—and may never come back to their pre-pandemic levels.
The program is controversial: Is the Fed really willing to prop up CLOs when so many previously healthy small businesses are struggling to pay their debts? As of mid-May, no such loans had been made. Other banks, including Bank of America, reportedly bought lower layers of CLOs in May for about 20 cents on the dollar. Read: How the Fed let the world blow up in Meanwhile, loan defaults are already happening. There were more in April than ever before. Several experts told me they expect more record-breaking months this summer.
It will only get worse from there. Bear Stearns was picked up by JP Morgan and no longer exists. As the financial crisis got worse, the U. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
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Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Markets The Financial Crisis in Review. Partner Links. Related Terms How Too Big to Fail Businesses Can Ruin Financial Systems and Economies "Too big to fail" describes a situation in which a business has become so deeply ingrained in the functionality of an economy that its failure would be disastrous to the economy at large.
Bailout Money Helps Failing Businesses and Countries A bailout is an injection of money from a business, individual, or government into a failing company to prevent its demise and the ensuing consequences. Bear Stearns Bear Stearns was an investment bank that collapsed during the subprime mortgage crisis in Read what happened after the Bear Stearns bailout. Mortgage-Backed Security MBS A mortgage-backed security MBS is an investment similar to a bond that consists of a bundle of home loans bought from the banks that issued them.
What Is a White Shoe Firm? White shoe firm is an old-fashioned slang term for the most prestigious professional employers. It once referred only to law practices, but now includes other industries. Congress in to oversee for the U.
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