BANKTHINK

B of A Learns No Good Deed Goes Unpunished

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At year end 2010 Bank of America had $2.3 trillion in assets, $230 billion of capital, 57 million customers, ranked among the top firms in nearly every major growth market in the U.S., employed 288,000 people, made $150 billion of community development loans a year, donated $200 million to charity annually, and was one of the largest home lenders in the nation.

You might know that B of A acquired two giant firms — Countrywide and Merrill Lynch — during the 2008 crisis. What you might not know is that these acquisitions were done without government aid.

If you are a shareholder of B of A, particularly one with a short-term horizon, you are likely unhappy with the acquisitions. But as a citizen and taxpayer you should be very thankful that B of A stepped up to the plate in the dark days of the financial crisis.

As bad as the crisis was, imagine how much more serious it would have been had Countrywide and Merrill Lynch failed. Countrywide was one of the largest home lenders in the country and Merrill Lynch was the largest investment banking firm. Alternatively, imagine how expensive it would have been for government to provide assistance to resolve those firms.

After completing due diligence on Merrill Lynch in late 2008, B of A concluded that Merrill was in worse shape than anticipated and considered abandoning the deal. Then Secretary of the Treasury Henry Paulson threatened that B of A would regret walking from the deal.

B of A's reward for doing the deals was to be summoned to Congress to explain why senior folks at Merrill Lynch were allowed to receive contractually agreed bonuses at the end of 2008. The Securities and Exchange Commission piled on with an enforcement action claiming the bonuses were not properly disclosed in proxy materials.

Merrill Lynch has proved profitable to B of A, but Countrywide has been very painful. The issue at Countrywide is not so much losses on mortgage loans, but litigation. Other banks find themselves in similar positions, including Wells Fargo which acquired Wachovia (which itself had acquired troubled mortgage lender Golden West Financial) and JPMorgan Chase which acquired Bear Stearns and WaMu.

B of A has been defending tens of billions dollars of legal claims arising primarily from real estate loans at Countrywide and Merrill. Even the Federal Reserve Bank of New York joined the fray, claiming to be duped in its purchase of mortgages.

Having to defend litigation by private parties is unavoidable. B of A's management might be forgiven for assuming that the government would be grateful enough for B of A's acquisition of these two giant problems to go easy on asserting claims against Countrywide and Merrill.

But no good deed goes unpunished. A recent suit against 17 large banks by the Federal Housing Finance Agency involves some $200 billion of loans purchased from the banks by Fannie Mae and Freddie Mac. B of A’s share is $57 billion, mostly related to Countrywide and Merrill. The suit is particularly egregious in that Fannie and Freddie virtually abandoned underwriting standards and embarked on a two-decade long lending binge that was a major contributor to the real estate bubble and collapse.

In addition, B of A and other major banks are facing suits by 50 state attorneys general seeking to reform their foreclosure policies. This has slowed foreclosures to crawl and delayed cleaning up the housing mess.

Bank regulatory agencies have taken enforcement actions against the banks requiring them to conduct massive reviews of their mortgage loan files and foreclosure processes. The banks are spending billions and chewing up scarce personnel resources.

The government says creating jobs and turning around the housing industry and the economy are its highest priorities, but its actions indicate very high priority is being given to punishing the banking industry.

We cannot have a strong economy without a strong banking system. Punishing the banks for political purposes brings to mind a remark credited to Churchill: "Holding a grudge is like drinking poison and expecting the other person to die." It's noteworthy that B of A recently announced it will reduce its workforce by 35,000 people.

We have wasted the past couple years pursuing a mindless vendetta against the banking industry, even though very few banks had anything to do with creating the crisis and most are victims of it. It's past time for government to put the crisis behind and make job number one helping the private sector get back to work.

William M. Isaac, former chairman of the Federal Deposit Insurance Corporation, is senior managing director and global head of financial institutions at FTI Consulting, chairman of Fifth Third Bancorporation, and author of "Senseless Panic: How Washington Failed America." The views expressed are his own.

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Comments (26)
"Punishing the banks for political purposes"?

Really?

Well, maybe fraud isn't a crime for banks any more. Maybe filing false affidavits in courts isn't a crime. Maybe defrauding people into buying houses they can't afford isn't a crime. Maybe defrauding bank shareholders by making loans that had no chance of paying off isn't a crime.

Maybe filling the world with fraudulent RMBSs and CDO Squared isn't a crime.

Or is it just that enforcing criminal laws against banks and their employees is political? Insisting on the rule of law is so political.
Posted by masaccio | Thursday, September 22 2011 at 5:26AM ET
Great article. I agree that teh banks are not innocent, but many forget what it would have cost taxpayers if Merrill, Countrywide, Wachovia and Bear Sterns had failed.
Posted by Brian S | Thursday, September 22 2011 at 10:05AM ET
So....let me get this straight...with all of their superior education and years of big business finance and handling the money of wealthy business executives and corporations, these bankers were out smarted and out-maneuvered by little housewives, teachers and truck drivers. they were out-maneuvered by laborers and factory-workers who duped these innocent bankers into lending them money on a "liar" loan? Did these same innocent bankers then tell these borrower that they didn't want to raise their loan rate and the borrower forced them into it? Did these innocent bankers want to let these evil borrowers out of their loan, but the borrowers had finagled a prepayment penalty so that the banks had to hold them to it? Is that how it worked?

And now these bankers still have a job and the borrowers are losing theirs? Hmmm....perhaps the borrowers should be the ones getting the bonus' and raises! these guys are crafty!

By the way...it is my understanding it has already cost the tax payers at least 16 trillion dollars. What would have been different if they had failed?
Posted by ElaineG | Thursday, September 22 2011 at 1:39PM ET
"Having to defend litigation by private parties is unavoidable. B of A's management might be forgiven for assuming that the government would be grateful enough for B of A's acquisition of these two giant problems to go easy on asserting claims against Countrywide and Merrill."

You have to love the logic here: If private parties want to sue a bank for fraud, well that's unavoidable. But banks should be able to assume that the government will refrain from pursuing them for that same fraud.

I want the government to pursue fraud in these cases. Otherwise we will be back here again in a few years (anyone remember Enron, Tyco, WorldCom?), and bankers will be saying "Who could have seen it coming?"
Posted by Tony S | Thursday, September 22 2011 at 2:32PM ET
Do you seriously believe that "very few banks had anything to do with creating the crisis and most are victims of it." I'm sorry but that goes against all the facts. Yes, Countrywide, New Century, Ameriquest and other non-bank subprime lenders were to blame for no doc loans. But
Posted by berryk | Thursday, September 22 2011 at 2:42PM ET
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