The events disclosed in the last few days:
1) Revelations that BAC tried to back out of the ML deal in December
2) ML management sending out propaganda during this time that everything was "on track" and "going well"
3) The fact that BAC took another 20 Byn (up to 45 Byn!!! in Tarp money)
4) BAC sending out a memo that said "BAC is Strong" while the dividend is being cut to 1 cent.
5) Thinking about the black holes of MER and Countrywide....
This feels like 2008 all over to me. When I look at the stock price $7, and think about the write offs looming for banks, I don't see how BAC makes it.
One other thought: with 45 Billion in TARP money, won't the dividends they must pay the govt equal around 4 Byn dollars per year? This reminds me of a loan shark making loans to someone in dire straits- it might keep them alive for a little while, but eventually the loan shark owns you.
And when do the lawsuits from BAC shareholders start? I mean BAC in December tried to back out of the deal but the government told them no. What was BAC's price back then...in the 20's? And the dividend was what, $1.28? So if I was a shareholder, don't you have a valid case against someone? You can't sue the government for the decline in stock price but if Lewis did want to pull out of the deal & Paulson told him no...
They are paying 5% on the first capital injection and 8% on the latest round, very favorable rates. The banks can now also issue fdic insured unsecured debt up to 10yrs, given that 10yr ust's are at a 2.20, and these bonds will probably print at 3.50-3.75, very cheap money for them, hardly loansharking.
You can add
6) The govt. now has a 6 percent stake in BAC
7) The govt. will backstop about $98 bilion in illiquid, possibly 'toxic' assets.
Either the govt. is criminally giving money away or the banks have already failed and they are trying to save the system (but they don't want to tell us just how bad those toxic assets are).
Do they become "The Governments Bank"? I see it like an AIG. The firm will have a hard time hanging onto brokers and clients, neither are happy with whats happend. Brokerage is the only part of the firm that had vaule other than hard assets and it will quickly dissapear. Complete incompetance on BAC's part. Where would they be if not buying Country Wide and Merrill? The Govt has to take them over because the lawsuits will finish them off. Both Country Wide and Merrill should have been left on their own to survive or fall, thats the way it works on wall street.
Does BAC fail?
Only if the Feds stop printing money and dropping it off by the truckload at their front door. The government has decided who will live and who will die. Apparently BAC and General Motors greased the right palms.
It should probably be codified into our next 5 Year Plan, just to make it official.
What I can't figure out is why they are declaring the death of the financial supermarket and breaking up Citi, while simultaneously funding the M&A by BAC of ML.
BAC won't fail, too large, etc... I see them bankrupting Countrywide, like they should have let it do on its own.
Let me see if i have this right: BAC owes 25 Byn @ 5%, and another 20 Byn @ 8%. so their average cost of this capital is 6.3%. Seems like there isn't allot of room to make money. And they can borrow at 3%, sure, for liquidity, but if you borrow at 3% in order to make payments on capital that is costing you 6.3%, how does that work long term??
Phan2om...but it is capital, so they can use it to leverage. That is how they make money. The govt has essentially given them the capital, and an easy way to leverage it (fdic bonds). The bonds they issue depending on the maturity, will probably yield 2.25 -3.5%, but they can issue several times as many bonds as capital they have. They aggregate this with other sources of funds such as retail deposits (real cheap money thanks to current fed targets) and they can make money on a 5.75% car loan.
nope...tarp was a direct capital injection with preferred shares. They are using that capital partly to issue these fdic insured bonds. The fdic bond proceeds have to be used for consumer lending. You need capital to issue more debt, and these banks were running out of capital and the ability to raise capital. Goldman paid warren buffet 10% on his preferred, so what would these weaker financials have to pay in the current market? Without the fdic backed bonds, banks would need to pay astronomical rates to issue debt. I think even wells bonds were trading +400/ us treasuries depending on maturity. Not sure were they are trading now. I havent looked.
So their refinancing their TARP debt with cheaper bonds?
It is sort of like your parents giving you the down payment and co signing the loan on your house. That is the deal the banks are currently getting.
It seems like they're issuing bonds to be able to meet their obligations to the government, in a really simplified interpretation. You guys ever read anything about the Panic of 1907?