Wednesday, May 6, 2009

Bank of America: The Administration's new sacrificial lamb

So now the world knows, one day in advance of the day when it was supposed to be officially announced. Bank of America will have to raise at least $34 billion to comply with the Administration's long-awaited stress test.

These tests, the brainchild of Tim Geithner, former president of the New York Fed who failed to understand how to maintain the Fed's overnight interest rate at its target (I could teach my 8-year old son how to do it in about 2 minutes), but who now runs the Treasury, will have what he needs to bring down B of A CEO, Ken Lewis.

Three months ago this news would have toppled not just the CEO, but the bank entirely. Thankfully, we should be able to avoid that now.

However, make no mistake about it, this is meant to send a message from an Administration that is inordinately focused on public approval at any cost, that no bank is too big to skirt by the Geithner edict. Yet this is a policy course that is laughable in its complete lack of knowledge of the role of the banking system and its relationship to the government. It also fundamentally misunderstands or ignores the fact that bank earnings, asset performance and, hence, capital levels, are all pro-cyclical by nature. Nice timing, Tim!

As a shareholder of Bank of America I am obviously furious that the bank has been singled out like this, but I can't say that I didn't expect it.


googleheim said...

i'm tired of all the credit card companies - raising rates to %.

if there is a bank out there that said, OK we will not raise your % past 15%, then they would make a huge hit with billions of people

mike norman said...

Better yet: Let the government sustain output and employment fully and banks will earn enough so that they wouldn't have to gouge people in such a desperate fashion to try to produce some earnings.

googleheim said...

what is going to be effect of taking away credit and wacking people with large % rates anyway ?

any contrarian ideas on the possible backlash from people who are losing the jobs to begin with ?

The Joker said...

Mike, I agree with you!

mike norman said...


Yes, it's quite simple isn't it? Now all we have to do is get rid of this belief system that causes people to decry, "Socialism!" everytime the government acts in a countervailing fashion.

On second thought, my stock account has almost recouped all of the losses since 2007. If that's Socialism, I'll take it!

R A McRae said...

Geithner is a clown. Just like his master.

mike norman said...

Agreed on Geithner!

googleheim said...

mike's earlier signals last January and before/after were on target as for china stocks, and others.