Bank of America In Trouble?

It looks like Bank of America might have started circling the drain before the Occupy movement even had a chance to launch its campaign against the company. For weeks now there have been ominous signs of trouble at the bank, and yesterday we heard yet another dark piece of news.

Last year, there was an uproar when Bank of America announced a plan to slap customers with a monthly $5 fee for debit card usage. The bank eventually backed off that plan when the public and some politicians cried foul.

Now it seems the company is going to try to put a new package on the same crappy idea and sell it again. This time, the plan is to add charges that range from $6 to $25 a month. From an MSNBC report:

Pilot programs in Arizona, Georgia and Massachusetts are experimenting with charging $6 to $9 a month for what's called an "Essentials" account. Other account options being tested in those states carry monthly charges of $9, $12, $15 and $25, but give customers opportunities to avoid the payments by maintaining minimum balances, using a credit card or taking a mortgage with Bank of America, according to an internal memo cited by the [Wall Street] Journal.

It's a very bad sign that a bank is in a desperate cash crunch when it tries repeatedly to gouge its customers. David Trainer, an analyst for Market Watch, a WSJ publication, wrote that the new fees are a sign of series trouble at BAC. He writes:

In my opinion, there are four actions taken by financial services that signal the company is headed to serious trouble.

1. Management shake-up and major layoffs - lots of layoffs over the past year

2. Exploiting accounting rules to boost earnings - SFAS 159

3. Drawing down reserves to boost earnings: to the tune of $13.3 billion in 2011 and 2012

4. Bilking customers with new fees: tried it before and trying it again

Bank of America has taken all four steps. Bilking customers with new fees is a desperate measure of last resort because it requires exploiting the one asset the bank has left, namely its customers.

Trainer in an earlier column urged investors to dump Bank of America for a number of reasons, but mostly because he had reservations about some of the numbers in the bank's most recent SEC filing.

According to him, the bank aggressively exploited a new accounting rule called SFAS no. 159, which allows companies to enables banks to "artificially boost earnings when the value of their own debt declines." In other words, BAC was able to artificially re-state earnings when its own credit quality went into the tank.

Trainer also believes that Bank of America's recent rise in share price is based on a series of impossible, pie-in-the-sky expectations, including "20% annual revenue growth for 18 years."

All of this comes on the heels of an announcement that Fannie Mae was cutting off Bank of America, news that itself came after Bank of America, in its annual report, had earlier announced that it would no longer sell loans to Fannie Mae. Basically, Bank of America tried to quit Fannie Mae before it got fired. It seems Bank of America in the last quarter of 2011 was slower even than usual in honoring repurchase requests, yet another sign of a cash crunch.

Why does all of this matter to the rest of America? Because what happens with Bank of America will be an important litmus test going forward for how we deal with any Too-Big-To-Fail behemoth that gets itself into trouble. We've already seen that the recent foreclosure deal was a huge boon to Bank of America - it spared it from the uncertainty of a generation of robosigning suits.

But what happens if Bank of America is still headed for bankruptcy? Helping the bank avoid a few lawsuits is one thing, and allowing it to move its dangerously toxic derivatives portfolio onto the federally-insured side of the company is another. But a full-blown crash of this firm would require a massive bailout. What will the Obama administration do if faced with that dilemma? One way or another, it will be a momentous decision.

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