Alright. Bank of America has weaseled another $20b. out of the US Treasury. Now, just like Citigroup, BofA has received $45b. in direct bailout funds. Now 2009 turns a weird psychological game for Wall Street.
Are the bailout funds supposed to build confidence in the institutions — or do they signal continued weakness? Both banks’ stock prices have been battered in recent days ahead of both the bailout deal and ugly earnings announcements. This is why what comes next is so vital.
Citigroup is basically breaking itself up in a search for value — and bottom. Meanwhile, of greater importance to BofA than the $20b. in federal capital infusion is the additional $118b. in federal guarantees of bad assets BofA holds. A good chunk of that is certain to be in the form of commercial and residential mortgages BofA inherited from Countrywide.
In this way, Ken Lewis’ acquisition of Countrywide may cost him his job in almost exactly the same way Ken Thompson’s deal for Golden West got him booted from Wachovia. Lewis didn’t have to absorb Countrywide — he thought it was a great deal. The difference, what may yet save Lewis, is that throwing CEOs overboard to win back investors is so 2007. Investors do not matter any more, as BofA demonstrated by basically zeroing out its dividend today, the preferred course of federal regulators who now call the shots in the nation’s financial sector.
Next comes the political fallout and it will be brutal. Countrywide’s greatest exposure, and hence Lewis biggest problem, is the horrible PR surrounding Countrywide’s portfolio of dicey deals. Here’s Countrywide caught in a New Hampshire court describing the loan modification programs it swore to Congress and regulators would help keep distressed borrowers in their homes as “mere commercial puffery.”
Not good, Ken. You’d better get John Thain on the phone to Treasury to explain.
Bonus Observation: And just what of the Merrill deal? In his heart-of-hearts, does Lewis still want several thousand brokers and investment banking — at any price?
