America's Largest Candidate for Bankruptcy
by Martin D. Weiss, Ph.D.
Monday, August 29, 2011 at 7:30am
One of America's giant financial institutions, which I'll name in a moment, could be a candidate for bankruptcy in a double-dip recession scenario.
It controls nearly $2.3 trillion in assets and has 57 million customers.
It does big business with virtually every other major financial institution in the country.
It is THE largest financial institution in America.
It's so large, in fact, that, if it cannot avoid failure ... it will cause so many other dominoes to fall and so many millions of Americans to lose money ... the entire U.S. economy will be threatened.
And even if it can avoid failure, investors holding its shares will be decimated.
This forecast is not based on conjecture, rumor or hyperbole. It's grounded in solid analysis and hard data.
Nor is it without direct precedent. In fact, this mammoth financial institution already came within a hair of bankruptcy less than three years ago!
The only reason it's still a big player today is because it was one of the main beneficiaries of the largest federal bailout of all time.
But despite the bailout, its business has continued to deteriorate, and its prospects for survival have continued to darken.
Its name: Bank of America Corp., the largest banking conglomerate in the United States and 3.6 times larger than Lehman Brothers was when it failed in the fall of 2008.
Will BofA go the way of Lehman? Probably not. The authorities would likely break it up into pieces they feel must be saved and pieces that can be more easily shut down.
Is a future failure written in stone?
If the U.S. economy can somehow sidestep a double-dip recession, BofA can continue limping along.
Or if its lobbyists in Washington can somehow overcome the stiff resistance of Republicans in Congress to pass another giant TARP bailout bill, it may escape doomsday.
But the realities of our time are already reducing the chances of those escape routes:
- The U.S. economy is already slipping into a double dip with no force on the horizon strong enough to change its course.
- The U.S. Congress is already far stingier than at any time in modern history.
- And, considering his noncommittal speech at Jackson Hole last week, even Fed Chairman Bernanke seems far more reluctant to promise action than he was just one year ago.
Why Bank of America Is in Danger
Right now, BofA is caught in a giant vicious cycle of its own making.
The main reason: Back in January of 2008, it made the horrendous blunder of buying the nation's largest mortgage company, Countrywide Financial, just before the mortgage market's worst collapse in history.
Result: Bank of America's main banking unit is saddled with $3.9 billion in repossessed real estate. (Back in March 2009, even when its stock was in the gutter and it was getting an emergency capital transfusion from Washington, it had less than half that much in repossessed properties — only $1.7 billion.)
And the homes BofA has foreclosed on so far are just the tip of the iceberg. The bank also has a whopping $20 billion in home mortgages that are in the process of foreclosure, up a shocking 224 percent from March '09.
Yes, for a few months last year, there was some hope of a housing market recovery. But now those hopes have been dashed by the reality of sinking home prices — down another 5.9 percent in the second quarter, their biggest drop since 2009.
The main drivers: 3.7 million foreclosed homes in America, making it virtually impossible to sell properties without deep discounting; 6.5 million homes delinquent or in foreclosure; plus millions more on the way as the economy sinks.
See how vicious this cycle is? Prices are being driven lower by massive unsold inventories of foreclosed homes ... while, at the same time, millions of Americans are walking away from their homes and foreclosing precisely because prices are falling!
And see how Bank of America is caught smack in the middle of this storm? It has a total of $421.7 billion tied up in mortgages — more than any other bank on the planet!
More Troubles
But that's not all ...
Bank of America has just been sued by AIG to recover more than $10 billion in losses on $28 billion of investments, claiming that the bank misrepresented the quality of the mortgages. It's the biggest suit of its kind in history, but not the only one. A hoard of investors is suing the bank for similar reasons.
Bank of America continues to hold $52.5 trillion in notional value derivatives. That figure is more than 36 times larger than its total assets and nearly 341 times bigger than its risk-based capital!
Perhaps most frightening of all, the bank's exposure to the credit risks of derivatives — the possibility that some of its trading partners might default — is 182 percent of its capital, according to the Comptroller of the Currency.
These are frightening numbers. And I am NOT alone in forecasting big trouble for the bank ...
1. Former Merrill Lynch analyst Henry Blodget estimates BofA may need to write off between $100 billion and $200 billion in additional losses.
If Blodget is right and the bank can't raise the funds, that would be enough to wipe out the main banking unit's $154 billion in capital.
What about Warren Buffett's $5 billion loan to Bank of America announced last week? It's a drop in the bucket compared to the bank's potential capital needs.
2. Stock investors, recognizing the severity of the crisis, have driven the bank's shares to within striking distance of its March 2009 lows. And ...
3. The market for insurance contracts to protect against a BofA default (credit default swaps), is now saying that the crisis is actually WORSE than it was at height of the debt crisis in 2009.
The proof:
In March of 2009, when the fear of Bank of America's possible demise was sending shock waves of panic through the global financial markets, the cost of insuring $10,000,000 in BofA debt was $343,375 per year (with a ten-year contract).
Now, just this week, the same coverage has cost as much as $378,235, or nearly $35,000 more. (See chart above.)
Conclusion: No matter what you or I may think about the bank's future, the collective wisdom of investors, as reflected in the current premium cost for default insurance, is saying the probability that Bank of America could go bankrupt is now greater than it was at any time during the great debt crisis of 2008-2009!
What to Do
BofA is not going to keel over tomorrow. It still has capital. And the double-dip recession which we feel could be a key cause of its demise is just beginning.
But it's not too soon for you to take preparatory steps ...
Step 1. Make sure your savings are safe.
Step 2. Hedge against a worsening banking crisis with gold. The most convenient vehicle: The largest ETF that invests in gold bullion, symbol GLD.
Step 3. Go on the offensive, aiming to turn this spreading crisis into a monumental profit opportunity.
Good luck and God bless!
Martin
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