The Die Is Cast

Last month we published an article concerning the most recent downgrade of the Bank of America Corporation, or BAC, by the credit rating agency Moody’s. The downgrade had triggered a demand for further collateral by the bank’s counterparties–that is, security for those with something to lose should the bank go under.

The collateral offered was the transfer of $22 trillion in derivatives from BAC’s troubled subsidiary, Merrill Lynch, to its commercial bank, Bank of America, which is backed by the FDIC. Thus, the collateral came in the form of the guarantee that, should the bank fail, its assets would be insured by the federal government.

In that article I wrote, “should BAC’s poor decisions and risky behavior end up threatening its capital base, the corporation will—again—be rehabilitated by the United States government, at taxpayer expense.”

Forbes now reports that BAC’s stock has fallen below $5 per share, closing yesterday at $4.99, a significant low-water mark that automatically triggers the sale of some mutual and pension funds’ shares–that is, BAC’s poor decisions and risky behavior have begun to threaten its capital base, and investors are fleeing. This in spite of noises BAC spokespeople have made about renewed fiscal responsibility and trimmed balance sheets: the corporation has not, and will not, recover from the damage it incurred on itself by its blind, short-term greed which helped to cause the mortgage crisis. The acquisitions of Countrywide and Merrill Lynch are proving to be clear examples of this.

BAC opened at $5.11 today and hovers at the $5 mark. Institutional money managers, in a process known as “window-dressing”, are already beginning to drop their losing stocks so that they won’t show up on the year-end report. The die has been cast. It remains to be seen whether the government will again be forced to step in with its ever-helping hand, and whether we will again stand for it.


–Jacob Clary

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