Financial Stability Oversight Council Should Investigate Whether Bank of American Needs to Be Broken Up

Today, Public Citizen filed a petition and a number of economists and law professors signed a letter asking the Financial Stability Oversight Council (FSOC) to use Section 121 of the Dodd-Frank Act to investigate and possibly to break up Bank of America (BofA).  The issue is "Too Big to Fail."

If regulators are serious about ending the presumption and the practice of bailing out large financial institutions, BofA's current size, complexity, and deteriorating financial condition indicate that Bof A is the place to start.  

At 10:00 A.M. today, a panel of experts (including Public Citizen's David Arkush; Lawrence Baxter, Professor of Law at Duke University School of Law; Art Wilmarth, Professor of Law and Executive Director, Center for Law, Economics & Finance The George Washington University Law School; Bill Black, Professor of Economics and Law at University of Missouri-Kansas City School of Law as well as former bank and thrift regulator; and Dean Baker, Co-director, Center for Economic and Policy Research) conducted a telephone conference call, open to members of the press, in which they succinctly presented the case for investigating splitting BofA into business components that would be capable of more efficient management -- or capable of being liquidated more effectively, should that become necessary.  Either way, preparing in advance should mean avoiding another big bank bailout on TBTF grounds. 

Calling BofA a "ticking time bomb,"  David Arkush pointed out that because BofA holds assets equal to one-seventh of the U.S. GDP and because of the complexity and international reach of its operations, "orderly liquidation" will not work.  "Regulators need to get ahead of this problem," he said. "Why Bank of America? Because it is the most dangerous of the systemically significant institutions."

Lawrence Baxter characterized the requested action by FSOC to investigate and possibly to break up BoA as a "stress test" of the new Dodd-Frank machinery.  To date, FSOC has recommended using exceptions to size caps if that should be needed for future rescues.  Baxter pointed out that this sends the wrong message and continues the highly undesirable TBTF presumption.

Art Wilmarth seconded Baxter's point that regulators appear to have been "moving in exactly the wrong direction," exemplified by the informally reported action (not denied by the Federal Reserve) that allowed BofA to transfer a large portfolio of OTC derivatives from a broker/dealer subsidiary to the FDIC-insured bank.  The effect was to allow BoA to avoid putting up required reserves and transferred risk of loss to the deposit insurance fund -- and ultimately to the taxpayers.  In addition, BoA holds a large portfolio of second mortgages that are, for practical purposes, worthless.  Almost-certain losses in this portfolio are not yet reflected.

Bill Black emphasized that any regulatory approach "must start with calling things what they really are:  Systemically Dangerous Institutions (SDIs) rather than Systemically Significant Institutions," a phrase which masks the problem.  These SDIs:  A.  Provide no benefits because they are too large to be efficient; and B.  Constitute a serious danger and destroy markets.

Dean Baker reminded the audience that the existence of TBTF Banks is "against market principles."  Government support to prevent such an institution from failing promotes "misallocation of the country's capital."

BoA holds large liabilities arising from its acquisition of Countrywide, the worst of the mortgage fraudsters, as well as from its own robo-signing problems and other problems caused by its own mismanagement.

The panelists all pointed out that BofA stock had lost 90% of its value as measured from peak.  Shareholders, employees, and customers could be better off if BoA were split into smaller units more capable of being operated profitably.

Link to Letter to Regulators Requesting Investigation and Possible Action under Section 121 of Dodd-Frank Act:  http://www.citizen.org/documents/Letter-to-Regulators-re-Inquiry-and-Action-on-LCFIs.pdf

Link to Petition:  http://www.citizen.org/documents/Public-Citizen-Bank-of-America-Petition.pdf

(ag) Jan. 25, 2012, in Too Big to Fail, Dodd-Frank