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NB's The Nyle Magazine

Monday, October 08, 2012


The Economy

Published September 24, 2011-Updated October 18, 2011

"Bank of America is Spiraling Down”

by Nathan’ette Burdine-Follow on Twitter@nbnylemagazine

            The highlighted sign that Bank of America (BOA) is spiraling down was the report that JP Morgan and Chase was acquiring BOA.  Bank of America denied the reports, but such denial is not uncommon and it doesn’t mean the report didn’t have any validity to it.  Bank of America tried downplaying the reports by stating that it had the necessary funds to function.  However, BOA’s attempt to downplay the severity of the situation was quickly overshadowed by its down share price of $6.90 compared to JP Morgan Chase’s $35.60 share price and the fact that BOA accepted a $5 billion dollar investment from Warren Buffet’s company, Berkshire Hathaway.  Basically, the down stock and Buffet’s investment were red signals that BOA was in dire need of help.  Usually in these cases, these reports come to light because the troubled bank is looking for someone to plug the leaking hole in its financial pipeline and prevent a bust from occurring.  Such was the case with failed banking giants Bear Stearns, Merrill Lynch, and Lehman Brothers.

Like BOA, these companies denied reports that they were in financial trouble and were seeking financial assistance.  Their stocks fluctuated up and down and were not at its normal highs and investors begin pulling out.  The failed banking giants received bailout loans from the government, but it wasn’t enough to sustain them.  The depth of the financial wound was too deep to repair.  Lehman Brothers filed for bankruptcy, JP Morgan and Chase took over Bear Stearns, while BOA took over Merrill Lynch and the mortgage giant Countrywide.  Ironically, the companies BOA acquired are the ones some financial analyst give credit to for BOA’s downwards spiral. 

            In 2008, BOA purchased Countrywide Financial Corporation.  Countrywide Financial Corporation was the countries largest mortgage lender, but the bad mortgages brought the company down and into the hands of Bank of America.  This resulted in Countrywide’s problems transferring over to Bank of America.  BOA attempted to solve this problem by selling the mortgages, but it soon backfired in the form of lawsuits.  AIG alleged that BOA sold it overvalued mortgages and sued BOA for greater than $10 billion dollars.  According to Bloomberg’s article “BONY, Schneiderman feud over mortgage-bond pact,” New York State Attorney General Eric Schneiderman sued BOA and its trustee, Bank of New York Mellon, for violating New York’s law in a settlement requiring BOA to pay $8.5 billion to settle claims for investments in Countrywide Financial Mortgage bonds.  Unfortunately, BOA’s bad investments didn’t end with Countrywide Financial Corp.

Like its purchase of Countrywide, BOA’s purchase of Merrill Lynch was soured from the beginning.  The Wall Street Journal writer Heidi N. Moore wrote an article titled “Bank of America-Merrill Lynch:  A $50 Billion Deal from Hell, ” describing BOA’s acquisition of Merrill Lynch.  Moore pointed to how before Merrill Lynch’s former CEO, John Thain, jumped ship he did as much as possible to further dilute the worth of BOA’s new acquisition by purchasing a $87,000 rug, giving out $25 million dollar packages to individuals he hired, and giving his staff bonuses worth billions of dollars.  And once the acquisition was approved, BOA shares begin dropping tremendously.  Investors lost confidence in the company and begin pulling out as stock prices plummeted.  On September 12, 2008, the Friday before the acquisition, BOA stock closed at $33.74.  While on the date of the acquisition, September 15, 2008, BOA stocks closed at $26.55.  Hence, BOA’s purchase of Merrill Lynch resulted in a downturn in BOA’s closing stock prices.  And this downturn was even more evident on January 21, 2009 after the stocks closed at $6.68.  So from September 12, 2008 to January 21, 2009, BOA closing stock prices took approximately an 80% dive.  According to the Associated Press’ writer Christina Rexrode’s article “Struggling Bank of America shakes up exec ranks,” in 2010, CEO Ken Lewis was forced to step down as BOA’s CEO after his purchase of a failing Merrill Lynch.  Brian Moynihan took over in early 2010 and has been busy changing his top officials and cutting the workforce.  Salli Kraw Check (head of global wealth and investment management) and Joe Price (president of the Consumer Banking division) will be leaving, while David Darnell and Tom Montag will be Co-CEO’s.  On August 19, 2011, it was reported that BOA was cutting 10,000 or greater of its workforce.  Recently, that number has risen to approximately 40,000.  

Whenever something gets too big, it falls down because it has accumulated too much weight for its base too support.  This is the case with banks like Bear Stearns, Lehman Brothers, Merrill Lynch, Countrywide Financial, and now Bank of America.  Bank of America added an extra weight, Countrywide Financial and Merrill Lynch, onto its base and has not been able to support the problems that came along with the extra weight.  As a result, lawsuits from individuals, corporations, to states, and the federal government began to mount.  These lawsuits resulted in more losses for the company and have possibly reached a point whereby BOA may have no other choice but to turn to its rival JP Morgan and Chase for a lifeline.







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