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Is Bank of America Headed Toward Collapse?

The nation's largest bank has only gotten bigger since the financial crisis and the government bailouts. But is big trouble ahead for the big bank?
 
 
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Bank of America is no stranger to controversy. The largest bank in the United States has seen, in just the last six months, nationwide protests of its branches by groups like US Uncut, National People's Action and other progressive activists angered by the company's tax dodging, foreclosures, massive bonuses (paid after taxpayer bailouts) and other practices.

But could the too-big-to-fail behemoth actually be headed for failure?

On August 5, Yves Smith of the blog Naked Capitalism started a Bank of America Death Watch, writing:

“It is clear that the Charlotte bank has too much in the way of legal liability that it will not be able to shed and yet-to-be-taken writedowns on balance sheet items (for instance, roughly $125 billion of home equity loans and junior liens on residential real estate as of end of last year) for it not to be at risk of a death spiral.”

Back in 2008, Bank of America snapped up Countrywide, one of the subprime lenders that preyed on low-income home buyers, often with adjustable-rate mortgages that ballooned after a couple of years, leaving homeowners unable to make payments. Though it doesn't seem hard to figure out that many people would be driven into foreclosure by such loans, Countrywide was able to repackage these loans into mortgage-backed securities that were then resold as prime products to investors—investors that often were state pension funds, like CalPERS, the funds responsible for paying the benefits owed to public employees. These are the same public employees who are now being targeted around the country as greedy and unwilling to take cuts to their pensions. The unethical actions of big banks and mortgage lenders are at fault, yet working people are expected to take the hit.

"Countrywide exploited the American dream of homeownership," then-state attorney general, now California governor Jerry Brown said when he announced his state's lawsuit against the lender. "Countrywide was, in essence, a mass-production loan factory, producing ever increasing streams of debt without regard for borrowers," he said. "Californians...were ripped off by Countrywide's deceptive scheme."

As part of a massive settlement of Countrywide's practices, Bank of America was supposed to modify loans to help keep people in their homes, but it's all too often claimed the right to foreclose instead. Meanwhile, if borrowers happen to default again on a modified loan, B of A could profit from tacking added fees to the bill its investors are expected to foot.

But a wrench was thrown into B of A's plans this summer. In June, the bank announced an $8.5 billion settlement with investors, but New York's attorney general Eric Schneiderman, filed a motion to intervene. He called the settlement “unfair and inadequate,” and alleged “fraudulent and deceptive conduct” on the part of Bank of New York Mellon, which is the trustee in this case--supposedly acting on behalf of investors, but, Schneiderman alleges, possibly making a deal with Bank of America that gives the big bank the far better end of the bargain.

Schneiderman, unlike many government officials on the state and federal level, took the step of intervening because signing off on the settlement might affect his ability, later, to file charges against any of the companies involved.

As David Dayen at FireDogLake noted, the suit alleges that Countrywide sold what amounted to non-mortgage-backed securities to those investors. It reads:

“These provisions are central to any mortgage securitization, but they are now vitally important to trust investors in light of the housing market collapse. Any action to foreclose requires proof of ownership of the mortgage. This must be demonstrated by actual possession of the note and mortgage, together with proof of any chain of assignments leading to the alleged ownership. Moreover, complete mortgage files give borrowers assurance that their properties are properly foreclosed upon. The failure to properly transfer possession of complete mortgage files has hindered numerous foreclosure proceedings and resulted in fraudulent activities including, for example, 'robo-signing.' These fraudulent activities have burdened borrowers as well as the courts with flawed foreclosure proceedings.”