Worthy Opinions » Downtime: Bailing Out the Biggest Bullies

by David Haggith

When the present economic downfall was really getting under way last fall, Ken Lewis, the CEO of Bank of America, was lauded around the world for scooping up Merrill Lynch in a fire sale. What a brilliant man, the world thought, for picking up a Rolls Royce like Merrill Lynch for pennies on the dollar. Later, Lewis scooped up another bargain known as Countrywide, turning Bank of America into the largest Thrift Bank in the U.S.A. And he could well afford to do it, Lewis indicated, because BofA was sitting on a fat cash cushion. The CEO’s stunning brilliance was seen in how he was able to assess a multi-BILLION-dollar purchase over a weekend and snarf it up.

A Belly Full of BofA

But, suddenly, BofA started feeling ill and looking a little peckish. Soon Lewis was seen out in the street, holding out his cash-starved hands for $25 Billion from the public trough. And he got it. After all, how could he have been expected to know that Merrill Lynch would have over $15 Billion in write-offs during the final quarter of 2008? Do we expect these CEO’s to have crystal balls in order to know what is coming? You’d think the fact that Merrill Lynch was being sold in a fire sale might be a pretty good clue that it could have some unknown health issues beyond its stock issues that might not reveal themselves in a weekend of analysis. Today, we learn that Bank of America held its hand out for a second scoop of public charity, and the federal government scooped out another cool $20 Billion. But the cherry on top was bigger than the scoop: the federal government also promised a safety net of yet another $98 Billion for future bad debts, should they happen. (Should they happen? Of course, they will. This is Murphy’s Bailout Bonanza. If bad things can go wrong, they’ll go wrong bigger.)

What I want to know is why do I, the little guy, have to pay higher taxes for the rest of my life to bail out one of the biggest bullies on my own block? This is the bank that beat me centsless. In 2004 Bank of America got the greedy idea of setting their minimum payments on credit cards just low enough that I would pay the minimum payment and find the next month that their next finance charge put my credit card over limit — all by itself – and I was charged an over-limit fee of $39. Each month, I paid the “minimum payment due” on time like a good citizen. Though I made no purchases, the next month BofA’s finance charge put my card over its limit again, and the bank charged another over-limit fee. Caching! Caching! said BofA’s cash register every month, as the bank burped and smiled. I didn’t see it happening until it happened three times because I was not making any purchases to check off. So, I just looked at the “minimum payment due” and sent the money in the mail. When the account went over limit three times, however, that enabled Bank of America to raise my interest from its 3% introductory rate to its penalty interest rate of 30% on the full balance. That’s when the bank really smiled. At that point, they also scarred my credit rating. That’s when I remembered (the hard way) that all the family’s credit cards had clauses that said they could automatically raise their interest to the penalty rate if my credit rating ever changed. Like vultures, all of our family’s credit cards ascended to the maximum penalty interest rate overnight, and we were eaten alive by interest.

That same year, Bank of America found itself on the losing end of a class-action law suit for this unscrupulous practice of setting phony minimum payments. Their multi-million-dollar loss didn’t change the fact that all my other creditors had gone over on me like dominoes and that all of them had begun demanding full payment of our full balance and that no credit companies were sending me those nice introductory rates any more, so there was no opportunity to roll over to different companies. BofA eventually did refund over $600 they had taken from me in fees, penalty interest and compound interest on the fees and penalty interest, but they didn’t restore my credit rating, and it was too late for me, even if they would have.

More recently, BofA adopted the practice of posting their customer’s debits and checks each day in the order of the largest debit first and the smallest debits last, even when the largest debit was the last purchase made. That way the bank can collect $39 overdraft charges on each of the smaller checks or debits that clear that day, instead of only on the big one that actually put the account over limit at the end of the day. Caching! Caching! Caching!

Spreading Toxins Down the Financial Food Chain

I want to know what on earth BofA was doing buying Merrill Lynch and Countrywide in the first place if they can’t absorb the risk? Was it so important to become the colossus that they had to make the choice to make an overnight purchase of institutions riddled with bad debt? What kind of maniacal greed drives one to make purchases that are massive even in banking terms over a weekend? What possible good did it do the U.S. to orchestrate the sale of Merrill Lynch to BofA so that we don’t have to bail out Merrill Lynch only to have to bail out Bank of America for having taken over Merrill?

“They were probably the best bank out there, balance-sheet-wise, until they did the Merrill deal,” said the Chief Investment Officer of Bell Rock Capital in Pennsylvania.

Why take a company like Merrill Lynch that is dying of toxic debt and have a massively strong (albeit naughty) bank like BofA absorb it, only wind up with two financial disasters? That’s our bailout program in action. This was BofA’s first quarterly red blood loss in seventeen years. One ameba eats poison and is about to die, so a bigger ameba eats the ameba that ate the poison, and now it’s got such a stomach ache that it will die without repeat infusions of government fortune. What happens down the road after the federal government eats enough amebas that ate the amebas that ate the poison? Wouldn’t it have been better to let Merrill Lynch die on its own, and have BofA a healthy bank still? How far down the financial food chain do we want to send the toxic debt? Wouldn’t quarantine be the better policy?

Speaking of amebas, Citigroup, which was recently eyeing Morgan Stanley for mutual absorption, now wants to split in two to save itself. It hopes to leave one half with all the toxins to dry up in the sun — or live if its lucky — in order to save the its healthier half. As a former champion of super-conglomeration, is Citi the sign that conglomeration is finally dying of its own obesity as it now parts itself off? Citigroup has already received two bailout infusions of $20 Billion. Seems they’re busting at the seams anyway. Citi has already cut over 50,000 jobs and expects to keep cutting all the way through 2010. BofA reported similar expectations.

Bank of America is Eating America

Apparently Congress believes the bailout program is a smashing success (the operative word being “smashing”)  because they’ve already released the second half of the money — $350 Billion. And it all went to the treasury with no new requirements of oversight. Barney Frank, head of the Senate Finance Committee, sponsored a bill to add some new rules, but the money was already being spent by Hank Paulson, our Bailout Czar, before the new rules were in place.

Similar bailout programs around the world have been so successful that the Managing Director of the International Monetary Fund warned this week that the global financial meltdown will be worse than formerly anticipated. This is the second time in two months that the IMF has lowered its expectations for recovery.

The banks that have gotten the biggest by the most predatory practices are now the ones receiving help from the hundreds of millions of little tax payers whose blood they sucked in usurious fees for so many years. Many times class-action law suits have ruled those fees illegal or unethical. Now the same bully is going to suck all your future blood in higher taxes for the remainder of your life because the bailout isn’t free. You’re the one who is going to pay for it — you and your children for the rest of your lives. Somehow, it’s hard for me to want to feed the company that fed off of me, especially when I am feeding it my own future blood supply.