Is Bank of America Headed Toward Collapse?
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Robert Scheer pointed out that Schneiderman stepped up when everyone from the White House on down was willing to sign off on a sweetheart deal that would “complete the job of saving the banks while ignoring their victims.” Schneiderman deserves credit for his fight, and also has some powerful tools on his side as the New York AG; the Martin Act, which, as Scheer quotes the Wall Street Journal, is “one of the most potent prosecutorial tools against financial fraud” because it doesn't require the AG to prove intent to defraud.
“There are so many people who got bad deals and are stuck with those bad deals that are just seething at the sense that the bankers who put them in the bad deals aren't stuck with the deal," Schneiderman said. “They’re not stuck with taking responsibility for this.”
Now Delaware attorney general Beau Biden (the son of Vice-President Joe Biden) has joined in the petition against Bank of America's settlement, noting the massive conflict of interest on the part of Bank of New York, and claiming his right to intervene and protect Delaware investors.
Yves Smith commented, “The fact that the rule of law is not completely dead in the US is looking increasingly likely to provide a very costly lesson to some very large banks and their asleep at the wheel regulators.”
While the intervention in this settlement by a couple of determined attorneys general certainly isn't enough to sink B of A, that's hardly the only problem facing the bank that many progressive groups call “Bad for America."
Also this week, AIG (yes, the same AIG that helped kick off the financial crisis with its own toxic financial business) filed suit against B of A for $10 billion in losses, making it “possibly the largest mortgage-security-related action filed by a single investor,” according to Gretchen Morgensen and Louise Story at the New York Times . The suit claims that B of A and its subsidiaries Countrywide and Merrill Lynch misrepresented the quality of the mortgages sold as securities to investors—the same subprime mortgages that created and then popped the housing bubble.
Morgensen and Story note that while the Justice Department has brought only three cases against employees at large banks and none against executives, private suits are still a possibility. AIG might have been part of the cause of the economic crisis, but at the moment it is still mostly owned by taxpayers (you and me) thanks to the bailout back in 2008. Kathleen C. Engel, a professor at Suffolk University Law School in Boston, told Morgensen and Story, “To the extent there are places where shareholders and borrowers can pursue claims, they are really serving the function of the government. They are our private attorneys general.”
These suits, and the possibility of others down the line, are creating bigger headaches for Bank of America that it seems to have foreseen when it bought one of the biggest purveyors of toxic mortgages. “Obviously, there aren't many days when I get up and think positively about the Countrywide transaction in 2008," Brian Moynihan, Bank of America's CEO, said in a conference call last week.
There are indications that investors and customers are also betting against Bank of America. Credit default swaps—mechanisms by which investors protect against default on a loan by purchasing insurance against its default, thereby hedging their bets—against B of A surged recently to their highest since April of 2009. The difference between a credit default swap and traditional insurance is that you don't have to have any financial interest in the loan in question—so they effectively become a form of gambling on default. Smith noted that B of A had a near-death experience back in 2009 as well, but wasn't forced to make any significant changes to its operations. Until Schneiderman intervened in the foreclosure settlement, B of A was allowed to keep functioning in essentially the same way it had before the financial crisis, when taxpayer bailouts had to keep it from falling apart.