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Bank of America The Next Citigroup?

Companies / Credit Crisis 2009 Jan 15, 2009 - 01:13 AM GMT

By: Mike_Shedlock

Companies Best Financial Markets Analysis ArticleCharles Darwin's theory was survival of the fittest. The Fed's policy is Survival Of The Weakest . Rather than let the weak go under, the Fed tries to prop them up, draining resources from the strong. We see the Fed's losing play in action once again as Bank of America May Need More U.S. Aid to Absorb Merrill Lynch .

Bank of America Corp., the biggest U.S. bank by assets after this month's purchase of Merrill Lynch & Co., may need more money from the federal government to absorb losses linked to the global credit crisis.

The purchases of money-losing Merrill Lynch and Countrywide Financial Corp., the biggest U.S. home lender, will add to credit costs at Charlotte, North Carolina-based Bank of America, which has been setting aside too little reserves for its own loans, Graham Fisher & Co.'s Joshua Rosner said in a note to clients today. The Wall Street Journal reported talks on a federal infusion have been going on since mid-December.

Propping up Bank of America for a second time would put an additional strain on the Treasury's $700 billion rescue fund for banks. The combined company already received a $25 billion infusion. Citigroup Inc. has received $45 billion of government capital and a U.S. guarantee on $306 billion in troubled assets, and it's divesting the Smith Barney brokerage.

“Given our economic outlook, it seems reasonable to consider BofA may be the next ‘Citi,'” wrote Rosner, a managing director in New York at the Graham Fisher investment-research firm.

“Bank of America has all kinds of problems with its acquisitions,” said Gary Townsend, president of Hill-Townsend Capital LLC in Chevy Chase, Maryland. “The problem with Bank of America is that they've been so acquisitive, they find themselves with very little in tangible equity.”

As Citigroup Goes To Sleep attempting to sell off everything but stripped down core applications, the number of strong banks ready, wiling, and able to absorb the pieces is now down to zero.

Bank of America is already choking on Countrywide Financial and Merrill Lynch. JPMorgan is choking on Washington Mutual and a mass of derivatives a mile thick. Wells Fargo needs to digest Wachovia's mass of toxic pay option ARMS.

The irony in the latter was the FDIC was actually going to allow a merger between Wachovia and Citigroup. Citigroup threw a hissy fit over it as noted by the New York Times in Citi Blasts Wachovia-Wells Fargo Merger Plan .

Stop that deal.

That was the message from Citigroup on Friday, as the financial giant saw its four-day-old agreement to buy Wachovia's banking operations set aside in favor of a $15.1 billion merger between Wachovia and Wells Fargo.

Less than four hours after the newer deal was announced, Citi released an angry statement demanding that Wachovia and Wells Fargo terminate their merger agreement, calling it a “clear breach” of an exclusivity agreement between Citi and Wachovia.

Citi also hinted at possible litigation to halt the union, saying it had “substantial legal rights” related to Wachovia and Friday's transaction.

On Monday, Citigroup announced what it called an “agreement-in-principle” to buy Wachovia's troubled banking operations for nearly $2.2 billion in Citi stock, with assistance from the Federal Deposit Insurance Corporation.

But on Friday, Wachovia surprised most of Wall Street with the announcement that it would sell the entire company to Wells Fargo in a stock swap that required no government assistance.

Citi said Friday that it had been negotiating with Wachovia in good faith and had “nearly completed the definitive agreements required to consummate the Citi/Wachovia transaction” when Wachovia opted for the Wells Fargo deal instead. It also said it had been providing “liquidity support” to Wachovia Bank since Monday.

Buying Wachovia's bank would have filled out Citigroup's footprint in the United States, giving it a strong West Coast presence and making it one of the country's largest retail banking franchises.

Notice the unmitigated arrogance (or was it blatant stupidity) of Citigroup to think it could stand to swallow up Wachovia's toxic assets when it clearly dead and buried in its own muck.

Fed's Policy Brings System To Its Knees

The Fed is bringing the system to its knees with its survival of the weakest game. Inquiring minds may wish to consider In Michigan, Bank Lends Little of Its Bailout Funds .

Some banking experts are even questioning if the bailout may be doing more harm than good, in some cases, by giving banks like Independent a cushion as they struggle to fix their problems, rather than forcing them to sink or swim on their own. It could also delay mergers of weaker banks with healthier ones.

“You are keeping a lot of troubled institutions in kind of a status quo state,” said Eric D. Hovde, the chief executive of a Washington-based hedge fund that invests in the banking industry.

In Congress, anger over the management of the TARP program runs deep. Many lawmakers say that there is little oversight, and that they can see no evidence that the taxpayer money is making its way from the coffers of banks to businesses and consumers.

Anger Over Refusal To Lend

Congress is angered of bailout recipients refusal to lend. Yet banks are now acting responsibly for the first time in years.

Keith Lightbody, a senior vice president at Independent Bank, said it was easy, in retrospect, to see how banks like his ended up where they are today.

“We didn't step back and look at the big picture, asking ourselves, are we really doing the right thing with this loan?” he said. “Everyone was making a lot of money.”

Independent is publicly traded and under pressure from investors to shrink its troubled loan portfolio before lending anew. Yet it still very much wants to make loans, said Robert N. Shuster, Independent's chief financial officer.

“Our whole business is predicated on making loans — that is what we do, that is the mission of the bank,” he said. But the bank cannot afford to simply pass out money, Mr. Shuster said, or everyone involved will lose — the borrower, who would probably default on the loan; the bank, which would experience bigger losses; and the federal government, which is counting on Independent to pay back the $72 million, along with 5 percent dividend payments.

With no surge in lending taking place right away — and the bank very much looking for a way to improve its own balance sheet — Independent took the $72 million check that arrived from Treasury in mid-December and immediately transferred it to the Federal Reserve to pay down short-term loans it had taken out.

Check that out. The Fed lends Independent $72 million at bazooka point (See Compelling Banks To Lend At Bazooka Point ) and Independent takes the $72 million and it immediately pays back the Federal Reserve, not wanting to incur any more losses.

Meanwhile Bank of America is now so bloated with accumulated toxic waste it needs another taxpayer bailout. Is this a great strategy by the Fed and Treasury or what?

By Mike "Mish" Shedlock

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2009 Mike Shedlock, All Rights Reserved

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