The bank has defrauded everyone from investors and insurers to
homeowners and the unemployed. So why does the government keep bailing
it out?
by: Matt Taibbi
Illustration by Victor Juhasz
At least Bank of America got its name right. The
ultimate Too Big to Fail bank really is America, a hypergluttonous ward
of the state whose limitless fraud and criminal conspiracies we'll all
be paying for until the end of time. Did you hear about the plot to rig
global interest rates? The $137 million fine for bilking needy schools
and cities? The ingenious plan to suck multiple fees out of the
unemployment checks of jobless workers? Take your eyes off them for 10
seconds and guaranteed, they'll be into some shit again: This bank is
like the world's worst-behaved teenager, taking your car and running
over kittens and fire hydrants on the way to Vegas for the weekend,
maxing out your credit cards in the three days you spend at your aunt's
funeral. They're out of control, yet they'll never do time or go out of
business, because the government remains creepily committed to their
survival, like overindulgent parents who refuse to believe their
40-year-old live-at-home son could possibly be responsible for those
dead hookers in the backyard.
It's been four years since the government, in the name of preventing a
depression, saved this megabank from ruin by pumping $45 billion of
taxpayer money into its arm. Since then, the Obama administration has
looked the other way as the bank committed an astonishing variety of
crimes – some elaborate and brilliant in their conception, some so crude
that they'd be beneath your average street thug. Bank of America has
systematically ripped off almost everyone with whom it has a significant
business relationship, cheating investors, insurers, depositors,
homeowners, shareholders, pensioners and taxpayers. It brought tens of
thousands of Americans to foreclosure court using bogus, "robo-signed"
evidence – a type of mass perjury that it helped pioneer. It hawked
worthless mortgages to dozens of unions and state pension funds,
draining them of hundreds of millions in value. And when it wasn't
ripping off workers and pensioners, it was helping to push insurance
giants like AMBAC into bankruptcy by fraudulently inducing them to spend
hundreds of millions insuring those same worthless mortgages.
But despite being the very definition of an unaccountable corporate
villain, Bank of America is now bigger and more dangerous than ever. It
controls more than 12 percent of America's bank deposits (skirting a
federal law designed to prohibit any firm from controlling more than 10
percent), as well as 17 percent of all American home mortgages. By
looking the other way and rewarding the bank's bad behavior with a
massive government bailout, we actually allowed a huge financial company
to not just grow so big that its collapse would imperil the whole
economy, but to get away with any and all crimes it might commit. Too
Big to Fail is one thing; it's also far too corrupt to survive.
All the government bailouts succeeded in doing was to make the bank
even more prone to catastrophic failure – and now that catastrophe might
finally be at hand. Bank of America's share price has plunged into the
single digits, and the bank faces battles in courtrooms all over America
to avoid paying back the hundreds of billions it stole from everyone in
sight. Its credit rating, already downgraded to a few rungs above junk
status, could plummet with the next bad analyst report, causing a
frenzied rush to the exits by creditors, investors and stockholders – an
institutional run on the bank.
They're in deep trouble, but they won't die, because our current
president, like the last one, apparently believes it's better to project
a false image of financial soundness than to allow one of our
oligarchic banks to collapse under the weight of its own corruption.
Last year, the Federal Reserve allowed Bank of America to move a huge
portfolio of dangerous bets into a side of the company that happens to
be FDIC-insured, putting all of us on the hook for as much as $
55 trillion
in irresponsible gambles. Then, in February, the Justice Department's
so-called foreclosure settlement, which will supposedly provide $26
billion in relief for ripped-off homeowners, actually rewarded the bank
with a legal waiver that will allow it to escape untold billions in
lawsuits. And this month the Fed will release the results of its annual
stress test, in which the bank will once again be permitted to
perpetuate its fiction of solvency by grossly overrating the mountains
of toxic loans on its books. At this point, the rescue effort is so
sweeping and elaborate that it goes far beyond simply gouging the tax
dollars of millions of struggling families, many of whom have already
been ripped off by the bank – it's making the government, and by
extension all of us, full-blown accomplices to the fraud.
Anyone who wants to know what the Occupy Wall Street protests are all
about need only look at the way Bank of America does business. It comes
down to this: These guys are some of the very biggest assholes on
Earth. They lie, cheat and steal as reflexively as addicts, they laugh
at people who are suffering and don't have money, they pay themselves
huge salaries with money stolen from old people and taxpayers – and on
top of it all, they completely suck at banking. And yet the state won't
let them go out of business, no matter how much they deserve it, and it
won't slap them in jail, no matter what crimes they commit. That makes
them not bankers or capitalists, but a class of person that was never
supposed to exist in America: royalty.
Self-appointed royalty, it's true – but just as dumb and inbred as
the real thing, and every bit as expensive to support. Like all royals,
they reached their position in society by being relentlessly dedicated
to the cause of Bigness, Unaccountability and the Worthlessness of
Others. And just like royals, they spend most of their lives getting
deeper in debt, and laughing every year when our taxes go to covering
their whist markers. Two and a half centuries after we kicked out the
British, it's really come to this?
Bank
of America started out in San Francisco in 1904 as an emblem of
American capitalism. Founded by a first-generation Italian-American
named Amadeo Giannini – it was even originally called the Bank of Italy –
the bank set out to serve immigrants denied credit by other banks, and
it was instrumental in helping to rebuild the city after the devastating
earthquake of 1906.
But like many of the truly bad ideas in history, the present-day
version of Bank of America was the product of a testosterone overdose.
The concept of an overmassive, acquiring-everything-in-sight, bicoastal
megabank was hatched in the terminal inferiority complex of a greed-sick
asshole – actually two greed-sick assholes, both of them CEOs of
Southern regional banks, who launched a cartoonish arms race of bank
acquisitions that would ultimately turn the American business world
upside down.
The antagonists were Hugh McColl Jr. and Ed Crutchfield, the
respective leaders of North Carolina National Bank (which would take
over Bank of America) and First Union (which turned into Wachovia), both
based in Charlotte, North Carolina. Obsessed with each other, these two
men transformed their personal competition into one of the most
ridiculous and elaborate penis-measuring contests in the history of
American business – even engaging in the garish Freudian spectacle of
vying to see who would have the tallest skyscraper in Charlotte. First
Union kicked things off in 1971 by erecting the 32-story Jefferson First
Union Tower, then the biggest building in town – until McColl's bank
built the 40-story NCNB Plaza in 1974. Then, in the late Eighties,
Crutchfield topped McColl with the city's first postmodern high-rise,
One First Union Center, at 42 stories. That held the prize until 1992,
when McColl went haywire and put up the hideous 60-story Bank of America
Corporate Center, a giant slab of gray metal affectionately known
around Charlotte as the "Taj McColl." When asked by reporters if he was
pleased that his 60-story monster overwhelmed his rival's 42-story
weenie, McColl didn't hesitate. "Do I prefer having the tall one?" he
said. "Yes."
For a time, this ridiculous rivalry between two strutting Southern
peacocks was restrained by the law – specifically, the McFadden-Pepper
Act of 1927 and the Douglas Amendment to the Bank Holding Company Act of
1956. These two federal statutes, which made it illegal for a bank
holding company to own and operate banks in more than one state, were
effectively designed to prevent exactly the Too Big to Fail problem we
now find ourselves faced with. The goal, as Sen. Paul Douglas explained
at the time, was "to prevent an undue concentration of banking and
financial power, and instead keep the private control of credit diffused
as much as possible."
But these laws didn't sit well with Hugh McColl. To him, size was
everything. "We realized that if we didn't leave North Carolina," he
explained later in his career, "we would never amount to anything – that
we would not be important." Note that he didn't say the ban on
expansion prevented him from turning a profit or earning good returns
for his shareholders – only that it put a limit on his sense of
self-importance. So McColl and his banking minions set out to break down
the interstate banking laws. First, in 1981, they used a legal loophole
in Florida law to buy a bank branch there – evading the federal ban on
out-of-state owners. Then, following a Supreme Court decision in 1985
that allowed banks to cross state lines within a designated region, he
and Crutchfield went on a conquering spree worthy of a Mongol horde,
buying up a host of banks in other Southern states. McColl, a
silver-haired ex-Marine who would eventually be celebrated for bringing a
"military approach" to his business, went to ridiculous lengths to play
up the manly conquest aspect of his bank's merger frenzy, rewarding key
employees with crystal hand grenades. By 1995, McColl had acquired more
than 200 banks and thrifts across the South, while Crutchfield had
snapped up 50.
A few years later, after Congress repealed most of the barriers to
interstate banking, McColl took over Bank of America, realizing his
dream of creating what one trade publication called "the first
ocean-to-ocean bank in the nation's history." Later, after McColl
retired, his successors kept up his acquisitive legacy, buying notorious
mortgage lender Countrywide Financial in 2008, and using some of the
$25 billion in federal bailout funds they received to acquire dying
investment bank Merrill Lynch. Both firms were infamous for their exotic
gambles and their systematic cutting of regulatory corners – meaning
that the shopping spree had burdened Bank of America with a huge
portfolio of doomed trades and criminal conspiracies.
But to McColl, it was all worth it – because he would never have been
important if he hadn't also been big. "I have no regrets about building
it large," he said in 2010, when asked if he considered all the monster
consolidations a mistake in light of the crash of 2008. "I may have
some regrets about not building it larger."
This deeply American terror of not always having the absolutely
hugest dick in the room is what put us in the inescapable box called Too
Big to Fail. When the bailouts were dreamed up to save Bank of America,
the government was essentially committing public resources to preserve
this lunatic spending spree – which means two successive presidential
administrations have now spent nearly half a decade and hundreds of
billions of tax dollars defending the premise that Hugh McColl should
always be allowed to have the "taller one."
And why? The rationale for allowing that merger spree in the first
place was based on a phony assumption: that big banks would somehow be
more efficient and more profitable than small ones. "The whole premise
of a Citibank or a Chase or a Bank of America is wrongheaded," says
Susan Webber, an analyst who writes one of the most popular and
respected financial blogs under the pseudonym Yves Smith. "Studies
consistently show that after a certain size threshold, bank efficiency
taps out. In fact, it turns out that all those cost savings the banks
were supposed to enjoy from being bigger were actually based on cutting
corners and fraud."
And man, what a lot of fraud!
In
the end, it all comes back to mortgages. Though Bank of America would
ultimately be charged with committing a dizzyingly diverse variety of
corporate misdeeds, the bulk of the trouble the bank is in today arises
from the Great Mortgage Scam of the mid-2000s, which caused the biggest
financial bubble in history.
The shorthand version of the scam is by now familiar: Banks and
mortgage lenders conspired to create a gigantic volume of very risky
home loans, delivering outsize mortgages to dubious borrowers like
immigrants without identification, the unemployed and people with poor
credit histories. Then the banks took those dicey home loans and
sprinkled them with bogus math, using inscrutable financial gizmos like
collateralized mortgage obligations to rechristen the risky home loans
as high-grade, AAA-rated securities that could be sold off to unions,
pensioners, foreign banks, retirement funds and any other suckers the
banks could find. In essence, America's financial institutions grew vast
fields of cheap oregano, and then went around the world marketing their
product as high-grade weed.
The holy trinity of Bank of America, Countrywide and Merrill Lynch
represented the worst conceivable team of financial powers to get hold
of this scam. It was a little like the Wall Street version of Michael
Bay's nonclassic
Con Air, in which the world's creepiest serial
killer, most demented terrorist and most depraved redneck are all
thrown together on the same plane. In this case, it was the most
careless mortgage lender (the spray-tanned huckster Angelo Mozilo from
Countrywide, who was named the second-worst CEO of all time by
Portfolio
magazine), the most dangerous mortgage gambler (Merrill, whose CEO was
the self-worshipping jerkwad John Thain, the ex-Goldman banker who
bought himself an $87,000 area rug as his company was cratering in 2008)
and the most relentless packager of mortgage pools (Bank of America),
all put together under one roof and let loose on the world. These guys
were so corrupt, they even shocked one another: According to a federal
lawsuit, top executives at Countrywide complained privately that Bank of
America's "appetite for risky products was greater than that of
Countrywide."
The three lenders also pioneered ways to sell their toxic pools of
mortgages to suckers. Bank of America's typical marketing pitch to a
union or a state pension fund involved a double or even triple
guarantee. First, it promised, in writing, that all its loans had passed
due diligence tests and met its high internal standards. Next, it
promised that if any of the loans in the mortgage pool turned out to be
defective or in default, it would buy them back. And finally, it assured
customers that if all else failed, the pools of mortgages were all
insured, or "wrapped," by bond insurers like AMBAC and MBIA.
It sounded like a can't-lose deal. Not only did the bank offer a
written guarantee of the high quality of the loans it was selling, it
also promised to buy back any bad loans, which were often insured to
boot. What could go wrong?
As it turned out, everything. From tits to toes, the mortgage pools
created, packaged and sold by Countrywide, Merrill Lynch and Bank of
America were a complete sham: worthless and often falling apart
virtually from the day they were delivered.
First of all, despite the fact that the banks had promised that all
the loans in their pools met their internal lending standards, that
turned out to be completely untrue. An SEC investigation later found
out, for instance, that Countrywide essentially had no standards for
whom to lend to. As a federal judge put it, "Countrywide routinely
ignored its official underwriting guidelines to such an extent that
Countrywide would underwrite any loan it could sell." Translation:
Countrywide gave home loans to anything with a pulse, provided they had a
sucker lined up to buy the loan.
How did they make these loans in the first place? By committing every
kind of lending fraud imaginable – particularly by entering fake data
on home loan applications, magically turning minimum-wage janitors into
creditworthy wage earners. In 2006, according to a report by Credit
Suisse, a whopping 49 percent of the nation's subprime loans were
"liar's loans," meaning that lenders could state the incomes of
borrowers without requiring any proof of employment. And no one lied
more than Countrywide and Bank of America. In an internal e-mail
distributed in June 2006, Countrywide's executives worried that 40
percent of the firm's "reduced documentation loans" potentially had
"income overstated by more than 10 percent... and a significant percent
of those loans would have income overstated by 50 percent or more."
"What large numbers of Countrywide employees did every day was commit
fraud by knowingly making and approving loans they knew borrowers
couldn't repay," says William Black, a former federal banking regulator.
"To do so, it was essential that the loans be made to appear to be
relatively less risky. This required pervasive documentation fraud."
So what happened when institutional investors realized that the loans
they had bought from Countrywide were nothing but shams? Instead of
buying back the bad loans as promised, and as required by its own
contracts, the bank simply refused to answer its phone. A typical
transaction involved U.S. Bancorp, which in 2005 served as a trustee for
a group of investors that bought 4,484 Countrywide mortgages for $1.75
billion – only to discover their shiny new investment vehicle started
throwing rods before they could even drive it off the lot. "Soon after
being sold to the Trust," U.S. Bancorp later observed in a lawsuit,
"Countrywide's loans began to become delinquent and default at a
startling rate." The trustees hired a consultant to examine 786 loans in
the pool, and found that an astonishing two-thirds of them were
defective in some way. Yet, confronted with the fraud, Countrywide
failed to repurchase a single loan, offering "no basis for its refusal."
And what about that ostensible insurance that Bank of America sold
with its bundles of mortgages? Well, those policies turned out not to be
worth very much, since so many of the loans defaulted that they blew
the insurers out of business. If you went bust buying bad mortgages from
Bank of America, chances are, so did your insurer. At best, you two
could now share a blanket in the poorhouse.
Many of the nation's largest insurers, in fact, are now suing the
pants off Bank of America, claiming they were fraudulently induced to
insure the bank's "high lending standards." AMBAC, the second-largest
bond insurer in America, went bankrupt in 2010 after paying out some
$466 million in claims over 35,000 Countrywide home loans. After
analyzing a dozen of the mortgage pools, AMBAC found that a staggering
97 percent of the loans didn't meet the stated underwriting standards.
That same year, the Association of Financial Guaranty Insurers, a trade
group representing firms like AMBAC, told Bank of America that it should
be repurchasing as much as $20 billion in defective mortgages.
Some of these institutional investors were at least partial
accomplices to their own downfall. In the boom era of easy money,
financial professionals everywhere were chasing the lusciously high
yields offered by these bundles of subprime mortgages, and everyone knew
the deals weren't exactly risk-free. But ultimately, Bank of America
was knowingly selling a defective product – and down the road, that
product was bound to blow up on somebody innocent. "A teacher or a
fireman goes to work and saves money for their retirement via their
pensions," says Manal Mehta, a partner at the hedge fund Branch Hill
Capital who spent two years researching Bank of America. "That pension
fund buys toxic securities put together by Wall Street that were
designed to fail. So when that security blows up, wealth flows directly
from that pension fund into the hands of a select few."
This is the crossroads where Bank of America now lives – trying to
convince the government to allow it to remain in business, perhaps even
asking for another bailout or two, while it avoids paying back untold
billions to all of the institutional customers it screwed, the list of
which has grown so long as to almost be comical. Last year, the bank
settled with a group of pension and retirement funds, including public
employees from Mississippi to Los Angeles, that charged Bank of America
and Merrill with misrepresenting the value of more than $16 billion in
mortgage-backed securities. In the end, the bank paid only $315 million.
In the first half of last year, Bank of America paid $12.7 billion to
settle claims brought by defrauded customers. But countless other
investors are still howling for Bank of America to take back its
counterfeit product. Allstate, the maker of those reassuring Dennis
Haysbert-narrated commercials, claims it got stuck with $700 million in
defective mortgages from Countrywide. The states of Iowa, Oregon and
Maine, as well as the United Methodist Church, are suing Bank of America
over fraudulent deals, claiming hundreds of billions in collective
losses. And there are similar lawsuits for nonmortgage-related
securities, like a revolting sale of doomed municipal securities to the
state of Hawaii and Maui County. In that case, Merrill Lynch brokers
allegedly dumped $944 million in auction-rate securities on the
Hawaiians, even though the brokers knew that the auction-rate market was
already going bust. "Market is collapsing," a Merrill executive named
John Price admitted in an internal e-mail, before joking about having to
give up pricey dinners at a fancy Manhattan restaurant. "No more $2K
dinners at CRU!!"
In the end, says Mehta, Bank of America's fraud resulted in "one of
the biggest reverse transfers of wealth in history – from pensioners to
financiers. What the 99 percent should understand is that Wall Street
knowingly inflated the bubble by engaging in rampant mortgage fraud –
and then profited from the collapse of their own exuberance by devising a
way to shift the losses to countless pension funds, endowments and
other innocent investors." The assembled worldwide collection of
swindled pensioners and unions and investors is a little like the crowd
that storms the basketball court in the Will Ferrell movie
Semi-Pro
when the home team's owner welshes on his promise to hand out free corn
dogs if the score tops 125 points. Corn dogs, Bank of America! Where
are the freaking corn dogs!
Incredible
as it sounds, owing practically everyone in the world billions of
dollars apiece is only half of Bank of America's problem. The bank
didn't just flee the scene of its various securities rip-offs. It also
made a habit out of breaking the law and engaging in ethical lapses on a
grand scale, all over the globe. Once your money ends up in their
pockets, they just slither off into the night, no matter their legal or
professional obligations.
Case in point: With all those hundreds of thousands of mortgages the
bank bought, it simply stopped filing basic paperwork – even the stuff
required by law, like keeping chains of title. A blizzard of subsequent
lawsuits from pissed-off localities reveals that the bank used this
systematic scam to avoid paying local fees. Last year, a single county –
Dallas County in Texas – sued Bank of America for ducking fees since
1997. "Our research shows it could be more than $100 million," Craig
Watkins, the county's district attorney, told reporters. Think of that
next time your county leaves a road unpaved, or is forced to raise
property taxes to keep the schools open.
But the lack of paperwork also presented a problem for the bank: When
it needed to foreclose on someone, it had no evidence to take to court.
So Bank of America unleashed a practice called robo-signing, which
essentially involved drawing up fake documents for court procedures. Two
years ago, a Bank of America robo-signer named Renee Hertzler gave a
deposition in which she admitted not only to creating as many as 8,000
legal affidavits a month, but also to signing documents with a fake
title.
Yet here's how seriously fucked the financial markets are: Even the
most vocal critics of Bank of America consider the mass, factory-style
production of tens of thousands of fake legal documents per month not
that big a deal. "Robo-signing is like focusing on Bernie Madoff's
accountant," quips April Charney, a well-known foreclosure lawyer who
has spent large chunks of the past two decades in battle with Bank of
America.
Robo-signing is not the disease – it's a symptom of Bank of America's
entire attitude toward the law. A bank that's willing to commit whole
departments to inventing legal affidavits might also, for instance,
intentionally ding depositors with bogus overdraft fees. (A class action
suit accused Bank of America of heisting some $4.5 billion from its
customers this way; the bank settled the suit for a mere 10 cents on the
dollar.)
Or it might give up trying to win government contracts honestly and
get involved with rigging municipal bids – a mobster's crime, for which
the accused used to do serious time, back when the bids were for
construction and garbage instead of municipal bonds, and the defendants
were Eye-talians in gold chains instead of Ivy Leaguers in ties and
Chanel glasses. We now know that Bank of America routinely conspired
with other banks to make sure it paid low prices for the privilege of
managing the moneys of various cities and towns. If the city of
Baltimore or the University of Mississippi or the Guam Power Authority
issued bonds to raise money, the bank would huddle up with the likes of
Bear Stearns and Morgan Stanley and decide whose "turn" it was to win
the bid. Bank of America paid a $137 million fine for its sabotage of
the government-contracting process – and in an attempt to avoid
prosecution, it applied to the Justice Department's corporate leniency
program, essentially confessing its criminal status: As plaintiff
attorneys noted, the application "means that Bank of America is an
admitted felon."
Think about that when you hear about all the bailouts the bank has
gotten in the past four years. A street felon who gets out of jail can't
even vote in some states – and yet Bank of America is allowed to
receive billions in federal aid and dominate the electoral process with
campaign contributions?
Some of the bank's other collusive schemes are even more ambitious.
Last year, the bank was sued, alongside some of its competitors, for
conspiring to rig the London Interbank Offered Rate. Many
adjustable-rate financial products are based on LIBOR – so if the big
banks could get together and artificially lower the rate, they would pay
out less to customers who bought those products. "About $350 trillion
worth of financial products globally reference LIBOR," says one
antitrust lawyer familiar with the case. "Which means," she adds in a
striking understatement, "that the scale of this conspiracy is extremely
large."
What's most striking in all of these scams is the corporate culture
of Bank of America: These guys are just dicks. Time and again, they go
out of their way to fleece their own customers, without a trace of
remorse. In classic con-artist behavior, Bank of America even tried to
rip off homeowners a second time by gaming President Obama's HAMP
program, which was designed to aid families who had already been
victimized by the banks. In a lawsuit filed last year, homeowners claim
they were asked to submit a mountain of paperwork before receiving a
modified loan – only to have the bank misplace the documents when it was
time to pay up. "The vast majority tell us the same thing," says Steve
Berman, an attorney for the plaintiffs. "Bank of America claims to have
lost their paperwork, failed to return phone calls, made false claims
about the status of their loans and even took actions toward foreclosure
without informing homeowners of their options." The scheme allowed the
bank to bleed struggling homeowners for a few last desperate months by
holding out the carrot of federal aid they would never receive.
Even when caught red-handed and nailed by courts for behavior like
this, Bank of America has remained smugly unrepentant. As part of an
$8.4 billion settlement it entered into with multiple states over
predatory lending practices, the bank agreed to provide homeowners with
modified loans and promised not to raise rates on borrowers. But no
sooner was the deal signed than the bank "materially and almost
immediately violated" the terms, according to Nevada Attorney General
Catherine Cortez Masto. It not only jacked up rates on homeowners, it
even instituted a policy punishing any bank employee who spent more than
10 minutes helping a victim get a loan modification.
The bank's list of victims goes on and on. The disabled? Just a few
weeks ago, the government charged Bank of America with violating the
Fair Housing Act by illegally requiring proof of disability from people
who rely on disability income to make their mortgage payments.
Minorities? Last December, the bank settled with the Justice Department
for $335 million over Countrywide's practice of dumping risky subprime
loans on qualified black and Hispanic borrowers. The poor? In South
Carolina, Bank of America won a contract to distribute unemployment
benefits through prepaid debit cards – and then charged multiple fees to
jobless folk who had the gall to withdraw their money from anywhere
other than a Bank of America ATM. Seriously, who
hasn't this bank conspired to defraud? Puppies? One-eyed Sri Lankans?
Bank of America likes to boast that it has changed its ways,
replacing many of the top executives who helped create the mortgage
bubble. But the man promoted from within to lead the new team, CEO Brian
Moynihan, is just as loathsome and tone-deaf as his previous bosses. As
befits a new royal, Moynihan defended a plan to gouge all debit-card
users with $5 fees by citing his divine privilege: "We have a right to
make a profit." And despite the bank's litany of crimes, Moynihan seems
to think we're just overreacting. After all, he gives to charities! "I
get a little incensed when you think about how much good all of you do,
whether it's volunteer hours, charitable giving we do, serving clients
and customers well," he told employees last October. Then, addressing
would-be protesters: "You ought to think a little about that before you
start yelling at us."
In sum, Bank of America torched dozens of institutional investors
with billions in worthless loans, repeatedly refused to abide by
contractual obligations to buy them back, evaded hundreds of millions in
local fees and taxes, pushed tens of thousands of people into
foreclosure using phony documents, ignored multiple court orders to stop
its illegal robo-signing, and exploited President Obama's signature
mortgage-relief program. The bank fixed the bids on bonds for schools
and cities and utilities all over America, and even conspired to try to
game the game itself – by fixing
global interest rates!
So what does the government do about a rogue firm like this, one that
inflates market-wrecking bubbles, commits mass fraud and generally
treats the law like its own personal urinal cake? Well, it goes without
saying that you rescue that "admitted felon" at all costs – even if you
have to spend billions in taxpayer money to do it.
Bank
of America should have gone out of business back in 2008. Just as the
mortgage market was crashing, it made an inconceivably stupid investment
in subprime mortgages, acquiring Countrywide and the billions in
potential lawsuits that came with it. "They tried to catch a falling
knife and lost their hand and foot in the process," says Joshua Rosner, a
noted financial analyst. It then spent $50 billion buying a firm,
Merrill Lynch, that was rife with billions in debts. With those two
anchors on its balance sheet, Hugh McColl's bicoastal dream bank should
have gone the way of the dinosaur.
But it didn't. Instead, in the midst of the crash, the government
forked over $45 billion in aid to Bank of America – $20 billion as an
incentive to bring its cross-eyed bride Merrill Lynch to the altar, and
another $25 billion as part of the overall TARP bailout. In addition,
the government agreed to guarantee $118 billion in Bank of America
debt.
So what did the bank do with that money? First, it sat by while
lame-duck executives at Merrill paid themselves $3.6 billion in bonuses –
even though Merrill lost more than $27 billion that year. In all, 696
executives received more than $1 million each for helping to crash the
storied firm. (The bank wound up hit with a $150 million fine for its
failure to inform shareholders about the Merrill losses and bonuses.)
Bank of America, meanwhile, paid out more than $3.3 billion in bonuses
to itself, including more than $1 million each to 172 executives.
In fact, the real bailouts of Bank of America didn't even begin until
well after TARP. In the years since the crash, the bank has issued more
than $44 billion in FDIC-insured debt through a little-known Federal
Reserve plan called the Temporary Liquidity Guarantee Program. The plan
essentially allows companies whose credit ratings are fucked to borrow
against the government's good name – and if the loans aren't paid back,
the government is on the hook for all of it. Bank of America has also
stayed afloat by constantly borrowing billions in low-interest
emergency loans from the Fed – part of $7.7 trillion in "secret" loans
that were not disclosed by the central bank until last year. When the
data was finally released, we found out that, on just one day in 2008,
Bank of America owed the Fed a staggering $86 billion.
That means that when you take out a credit card or a mortgage or a
refinancing from Bank of America, you're essentially borrowing from the
state; the "private" bank is simply taking a cut as a middleman. "For
banks, the cost of capital is the key to success," says former New York
governor Eliot Spitzer. "So by lowering their cost of capital to almost
zero, the Fed has almost guaranteed that the banks will make big
profits."
Another public lifeline is Fannie Mae and Freddie Mac, the giant,
nationalized mortgage lenders. Need to make some cash? Toss a bunch of
home loan applications onto a city street, then sell the resulting
mortgages to Fannie and Freddie, which are basically a gigantic pile of
public money guarded by second-rate managers. Just like the state
pensions in Iowa and Maine and Mississippi, Fannie and Freddie were
targeted for sales of toxic mortgages, and just like those entities,
they have sued Bank of America, claiming they were suckered into buying
more than $30 billion in shitty securities. But unlike those other
suckers, Fannie and Freddie continued to buy crap loans from Bank of
America even after it was clear they'd been hoodwinked. Last year, the
bank created more than $156 billion in mortgages – nearly $38 billion of
which were bought by Fannie. Having the government as an ever-ready
customer, standing by to buy mortgages at full retail prices, has always
been an ongoing hidden bailout to the banks.
But even the government has its limits. In February, Fannie announced
it would no longer keep blindly buying mortgages from Bank of America.
Why? Because the bank, already slow to buy back its defective mortgages,
had gotten even slower. By the end of last year, the government
reported, more than
half of all the crappy loans that Fannie wanted to return came from a single bad bank – Bank of America.
But if you think that Fannie cutting off the bank is good news, think
again. If it can't get the money it's owed from Bank of America, it'll
just go begging to the Treasury. Fannie has already asked for $4.5
billion to cover losses this year – and if Bank of America doesn't pony
up, it'll have to reach even deeper into our pockets, making for yet
another shadow bailout to the firm.
It gets worse. Last fall, some of the bank's biggest creditors and
counterparties started to get nervous about the mountain of toxic bets
still sitting on Merrill Lynch's books – a generation of ill-considered,
complex, exotic derivative trades, bets on bets on bets on shaky
subprime mortgages, sitting there on the company balance sheet, waiting
to explode. Nobody felt good lending Bank of America money with that
dangerous shitpile lying there. So they asked the bank to move a chunk
of that mess from Merrill Lynch onto Bank of America's own balance
sheet. Why? Because Bank of America is a federally insured depository
institution. Which means that the FDIC, and by extension you and me, is
now on the hook for as much as $55 trillion in potential losses. Black,
the former regulator, calls the transfer an "obscenity. As a regulator, I
would have never allowed it. Transferring risk to the insured
institution crosses the reddest of red lines."
But
by far the biggest bailout to Bank of America has come via the
sweetheart deals it cut to settle the massive lawsuits filed against it.
Some of the deals, which were brokered by the Justice Department and
state attorneys general, allowed the bank to get away with paying
pennies on the dollar on its mountains of debt. Worst of all was the
recent $26 billion foreclosure settlement involving Bank of America and
four other major firms. The deal, in which the banks agreed to pay cash
to screwed-over homeowners in exchange for immunity from federal
prosecution on robo-signing issues, was hailed as a big
multibillion-dollar bite out of the banks. President Obama was all but
strutting over his beatdown of Wall Street. "We are Americans, and we
look out for one another; we get each other's backs," he declared.
"We're going to make sure that banks live up to their end of the
bargain."
In fact, the government has a lousy track record when it comes to
enforcing settlements. The foreclosure deal arrives on the heels of an
$8.4 billion investor settlement, whose provisions Bank of America had
already been accused of violating, raising rates and abusing homeowners
as soon as the deal was struck. The bank also violated a previous
settlement with the Federal Trade Commission, illegally slapping $36
million in fees on struggling homeowners after specifically agreeing not
to do so. So Bank of America's reward for blowing off its previous
settlements for mistreating homeowners was to get another soft-touch
deal from the government, which they will presumably be just as free to
ignore. Why? Because while state officials have ultimate enforcement
authority over the foreclosure settlement, the early enforcement reviews
will be handled by "internal quality control groups." In other words,
Bank of America itself will be grading its own compliance!
Even if Bank of America coughs up its share of the $26 billion
settlement, the deal is woefully inadequate to address the wider fraud
that went on in creating and pooling mortgages. "It's like handing a box
of tissues to someone whose immune system has been destroyed by AIDS,"
says Rosner. "It doesn't come close to addressing the scale of the
problem." Many Wall Street observers think that without the waiver from
federal prosecution provided by the settlement, Bank of America would
have faced billions in lawsuits for robo-signing offenses alone.
Oh, and one more thing, since we're talking about avoiding bills:
Bank of America didn't pay a dime in federal taxes last year. Or the
year before. In fact, they got a $1 billion refund last year. They
claimed it was because they had pretax losses of $5.4 billion in 2010.
They paid out $35 billion in bonuses and compensation that year. You do
the math.
And here's the biggest scam of all: After all that help – all the
billions in bailouts, the tens of billions in Fed loans, the hundreds of
billions in legal damages made to disappear, the untold billions more
of unpaid bills and buybacks – Bank of America is
still
failing. In December, the bank's share price dipped below $5, and after
being cut off by Fannie in February, the bank announced a truly
shameless plan to jack up fees for depositors by as much as $25 a month –
what one market analyst called a "measure of last resort."
The company reported positive earnings last year, with net income of
$84 million, but analysts aren't convinced. David Trainer, a MarketWatch
commentator, switched his rating of Bank of America to "very dangerous"
in part because its accounting is wildly optimistic. Among other
things, the bank's projections assume a growth rate of 20 percent every
year for the next 18 years. What's more, the bank has set aside only
$8.5 billion for buybacks of those crap corn-dog loans from enraged
customers – even though some analysts think the number should be much
higher, perhaps as high as $27 billion. Because more lawsuits are so
likely, says Mehta, it's "virtually impossible to decipher if Bank of
America requires more equity, or even another taxpayer bailout."
But the only number that really matters is this one: $37 billion.
That's the total bonus and compensation pool this broke-ass,
state-dependent, owing-everybody-in-sight bank paid out to its employees
last year. This, in essence, is the business model underlying Too Big
to Fail: massive growth based on huge volumes of high-risk loans,
coupled with lots of fraud and cutting corners, followed by huge payouts
to executives. Then, with the company on the verge of collapse, the
inevitable state rescue. In this whole picture, the only money that's
ever "real" is the fat bonuses the executives cash out of the bank at
the end of each year. "Fraud is a sure thing," says Black. "The firm
fails, unless it is bailed out, but the controlling officers walk away
wealthy."
The Dodd-Frank financial reform approved by Congress last year was
supposed to fix the problem of Too Big to Fail, giving the government
the power to take over and disband troubled megafirms instead of bailing
them out. "The way to cut our Gordian financial knot is simple," MIT
economist Simon Johnson wrote in
The New York Times. "Force the
big banks to become smaller." But few in the financial community
believe that will ever happen. "If Bank of America crashes, the first
thing that would happen is Dodd-Frank would be revealed as a fraud,"
says Rosner. "The Fed and the Treasury would ask Congress for a bailout
to 'save the economy.' It's the worst-kept secret on Wall Street."
In a pure capitalist system, an institution as moronic and corrupt as
Bank of America would be swiftly punished by the market – the
executives would get to loot their own firms once, then they'd be
looking for jobs again. But with the limitless government support of Too
Big to Fail, these failing financial giants get to stay undead forever,
continually looting the taxpayer, their depositors, their shareholders
and anyone else they can get their hands on. The threat posed by Bank of
America isn't just financial – it's a full-blown assault on the
American dream. Where's the incentive to play fair and do well, when
what we see rewarded at the highest levels of society is failure,
stupidity, incompetence and meanness? If this is what winning in our
system looks like, who doesn't want to be a loser? Throughout history,
it's precisely this kind of corrupt perversion that has given birth to
countercultural revolutions. If failure can't fail, the rest of us can
never succeed.
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