Five reasons to dismember Bank of America

January 21, 2011

Taxis pass the Bank of America branch in New York's Times Square June 30, 2005.  REUTERS/Shannon Stapleton BANKGBank of America should be broken up. It’s the sick man of finance that isn’t going to get better in its present state.

It would be prudent for shareholders, good for taxpayers and even better for the global financial system. As its stands now, it’s too big to succeed, has more financial migraines than California and Illinois combined and needn’t be a candidate for another public bailout. Been there, done that.

As one of the world’s largest banks with the biggest U.S. branch network, brokerage/wealth management division and the top municipal-bond underwriter, it’s a behemoth that’s difficult to manage and a poor value proposition in its present structure.  The bank just posted its second straight quarterly loss, partially due to a $2 billion write down of mortgage follies, which are far from over.

The value of its parts — the commercial bank, retail operations, Merrill Lynch, credit-card unit (disclosure: I have a BoA credit card) — are likely worth more than its whole.

Estimates of the break-up value range from $29 to $53 a share, potentially liberating up to $170 billion in value. It’s been trading under $20 a share for the past year and trails smaller rivals Wells Fargo and JPMorgan Chase, which have been trading at double BoA’s stock price.

One bad decision after another in the last decade didn’t translate to “bigger is better” at BofA. It took more than a trillion dollars from the Federal Reserve and U.S. Treasury to keep it afloat after the 2008 meltdown. With unknown mounting liabilities in mortgages and related securities, it’s in many ways where GM was five years ago. It will need to spin off some units to survive. Here are some other key reasons:

It will continue to be swamped by mortgage security losses.
No one quite knows when this will end since the bank will likely be in and out of court over the next decade or so. Of 17 leading jumbo mortgage securities firms, BofA had the worst delinquency rates. The bank will be tied up for some time trying to manage its liability in this area.

The resources won’t be available for another bailout.
According to an analysis by ProPublica, when you add in the loan to Merrill, the Fed pumped more than $3 trillion into BofA during the last bailout. Now that BofA is even bigger with the assumption of Merrill and Countrywide (another abyss), it will take even more capital to keep BofA afloat during the next crisis. I doubt if many on Capitol Hill or in the Fed will have a stomach for that.

Break-ups make sense.
Bigger is not necessarily better, although small can be beautiful. Witness the recent break-up of Motorola into two separate entities or Fortune Brands. Smaller companies are more nimble, more innovative and not held back by the sins of the holding company. The stock market embraces the new firms by bidding up shares.

Rebranding can boost shareholder value.
How many analysts still honestly think that by putting “Bank of America” in front of Merrill Lynch boosts Merrill’s brand value? Given the bank’s myriad black eyes and continued pummeling, the nation’s largest wealth-management firm will do much better if it’s weaned from its troubled parent. BofA’s investment, brokerage and wealth management units posted a $1 billion profit in the fourth quarter.

Putback risk.
These two words have a repugnant sound to them and suggest that BofA may have to buy back billions of faulty loans. What’s their total projected liability? It’s impossible to say as mortgage insurers, investors and attorneys general elbow their way into court to flail at BofA.

As if these weren’t enough reasons, there’s one more wild card. Assuming that Julian Assange’s WikiLeaks organization has some dirt on BofA, will it be the straw that broke the elephant’s back?

Did BofA executives know that they were issuing toxic mortgage securities? Did they know that robosigning and using a proxy for mortgage ownership through MERS perhaps wasn’t legit? I don’t know the answer to these nettlesome legal questions, but someone will have to pin down the culpability for the mortgage meltdown.

Mary Bottari, who is director of the Real Economy Project of the Center for Media and Democracy, summed it up nicely: “BofA is a weak institution with a lot of liability.”

Instead of funding a public relations SWAT team to defend against whatever WikiLeaks produces, BofA should spend its money on break-up specialists and investment bankers who can re-value and spin off profitable and money-losing units as stand-alones.

Meanwhile, Fed and Treasury Department mandarins now poring over Dodd-Frank financial reform regulations need to trigger a BofA break-up. They only need be guided by two ominous words that they’ve heard before: systemic risk. The bank is still too big to fail, but not too big to be broken up.

6 comments

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Don’ think they need to dismember anything – just a surgical removal of the leftover countrywide cancer.

As I recall, there was a provision for just that when the Feds pleaded with BofA to buy the toxic countrywide.

Countrywide is still a holding company and can be sliced off and left for bankrupt without affecting BofA. This step is still a safety net and the trigger will be pulled in the near future. BofA still needs more time to siphon off all the remaining good assets out of the holding company.

Posted by Butch_from_PA | Report as abusive

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Posted by endofdaysnews | Report as abusive

Break that scam up ASAP!
If you go away now we won’t arrest you.

Posted by Simplerman | Report as abusive

B if A, as I refer to them, since they outsource much of their customer service to people who have no clue what it is to be an American, along with Countrywide, are part of the problem not part of the solution. Dismember them. Remove them from the financial hemisphere. Instead of bailing out these Banks and their financiers with our money who bought our Congressmen we should embrace capilatism at its best and let them die the cruel death they deserve. Have a well run Bank grow to be the choice Americans want and not this bloated, under managed and underwhelming Bank. Good bye B of (if they really were American) A!

Posted by BigbadJB | Report as abusive

For anyone out there caught up in a present or future mortgage foreclosure involving MERS, take a look at what is happening in Utah-

http://www.sltrib.com/sltrib/news/510062 87-78/mers-property-mortgage-loan.html.c sp

Looks like the wonderful banks can’t legally show to whom the money is owed. Presto, clear tile granted to the owner.

Remember, your tax money is being used to support/underwrite these clowns. Thank you wonderful Banana Ben Bernanke

Posted by delta-dude | Report as abusive

If bigger is better, but they are to big to fail, why did we allow them to become so big? To those that favor deregulation, how do you like the fruits of your labors?

Posted by neeros | Report as abusive

@Alfred.Brock
Do you know first, second, and third world countries are? China is a second world country.

Posted by MontelWilliams | Report as abusive

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