Posted on 01/17/2009 8:45:18 AM PST by frithguild
Thank God. A crash landing on the way from New York to Charlotte, N.C., and, miraculously, no one is killed.
I'm not talking about US Airways flight 1549, forced to ditch in the Hudson River Thursday, after its engines were apparently knocked out by a flock of geese. I'm talking about the purchase of New York's Merrill Lynch by Charlotte's Bank of America (BAC: 7.18, -1.14, -13.70%). The giant bank has been dangerously destabilized by billions of dollars of unexpected losses from the troubled investment firm.
In both cases, a crash. In both cases, an improvised rescue. In both cases, no fatalities.
Lives were saved in the Hudson because dozens of nearby boats rushed to the scene to pull passengers out of freezing waters. Bank of America was saved from being destroyed by Merrill Lynch's losses by a big capital injection and risk guarantee from the federal government. But there the similarities end. In the case of Bank of America, there was a risk that the rescue might have been as deadly as the crash.
I had to laugh when I saw this Reuters newswire headline Thursday, as bank stocks plummeted before details of the Bank of America rescue became known: "Bank of America, Citigroup sink; gov't aid feared." Exactly! The sad truth is that "aid" is as much to be feared as whatever underlying economic problems afflict large banks.
Rumors were swirling out of control about how the government might "nationalize" Bank of America, Citigroup (C: 3.50, -0.33, -8.61%) or both. That's not "aid," that's a wipe-out. It would be a return to the bad old days of botched government interventions in troubled firms like Lehman Brothers, Bear Stearns, AIG, Fannie Mae, Freddie Mac, Washington Mutual and Wachovia.
A Whiff of Nationalization? Such fears were in the air because members of Congress from both parties were making a lot of noise about denying the Treasury the second $350 billion in rescue funding under the TARP legislation. Or if they granted it, there was the threat that it would come with heavy-duty strings attached, which would turn the government's aid into a back-door form of nationalization.
That would have been a disaster for the banking system, the market and the economy. But in the case of Bank of America, it would have also been a particular injustice.
Remember, the bank's in deep trouble because of the Merrill acquisition. And it made that acquisition, in part, as a public service -- to help stabilize the banking system during that horrible week in September when everything was quite literally falling apart. If Bank of America hadn't stepped in, Merrill may very well have gone the way of Lehman Brothers.
Oh sure, there was a good old-fashioned profit motive, too. Bank of America has always seen itself as destined for greatness, and Merrill Lynch -- the greatest and best-known brokerage name in the world -- was a long-sought trophy. So when Merrill became vulnerable last September and it needed to be taken out by a strong partner for the sake of the greater good, Bank of America swooped in for the kill -- the perfect combination of greed and altruism.
But it has turned out that Merrill was in deeper trouble than apparently Bank of America realized at first. Since the deal was done in September, Merrill has hemorrhaged red ink, losing $15 billion in the fourth quarter alone, and reportedly Bank of America threatened to pull out of the deal unless the government would agree to step in.
So Thursday afternoon a Senate vote cleared the way for another $350 billion in TARP funds for bank rescues. And later in the evening, the Treasury announced a $20 billion investment in Bank of America -- and jointly with the FDIC and the Federal Reserve, the guarantee of a $118 billion portfolio of risky securities the bank got with the Merrill acquisition.
Obama’s Approach at Work The incoming Obama administration had to promise Congress to attach a few strings to the deal. Bank of America had to agree to undertake a foreclosure mitigation program, to help distressed borrowers renegotiate their mortgages -- but the bank probably would have done some form of that anyway. The bank also had to agree to limits on executive compensation, dividends and future acquisitions. But nothing too onerous -- indeed, the bank's most senior managers had already agreed not to pay themselves bonuses this year anyway.
In an important sense, all these strings are really window dressing designed to quell public distaste that taxpayer dollars are being used to underwrite big business's mistakes. I sympathize with that distaste, but what counts here is that we don't stand by and let a banking panic suck the entire economy into a black hole. There seem to be plenty of politicians -- and plenty of ordinary citizens, for that matter -- who don't seem to realize that's what at stake here.
In my view, this rescue of Bank of America marks an important milestone. It's our first clue as to how the incoming Obama administration is going to work with Congress on dealing with the ongoing banking crisis. Yes, officially this was handled by the Henry Paulson Treasury. But make no mistake about it, this was an Obama operation.
What I see here is that the Obama economic strategy team, led by Lawrence Summers, understands the dimensions and implications of the risks to the banking system, and realizes that it must act boldly when troubles arise. Team Obama is willing to make the right noises to placate Congress's antibusiness bias, as necessary. But Job One is simple: When the plane is down in the Hudson River and the passengers are about to freeze to death, you send the boat and you save them.
So this is a very bullish development. Because if we can continue to keep the safety net in place under the banking system, then we'll find our way out of this bear market and this recession. If that's right, then Thursday's lows were a successful test of the November bottom in stocks. And if that's right, then believe it or not, we're in a new bull market.
Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors. You may contact him at don@trendmacro.com.
Ping the list?
I don’t see the double bottom,,looks like triple bottom but I don’t nothing about charts.
I call BS. BofA investment into Countrywide and other bad management decision. I think BofA is trying to blame all the problems on Merrill when in fact bad investments started long before Merrill.
A retest of 7,700 would give it a more calssic look. A higher low after the central peak is bullish. Confirmation will be breaking resistance at 9650 on high volume.
What you see is Govt intervention in the charts. They know if S&P goes under 812 for a period of time that insurance companies will have the mother of all “calls”. Insurance companies will have to belly up more money do to their annuity guarantees.
Yes, and there shall be seven miracles that shall pass before HE will come to bring peace to the earth........
Passage from the Obama Prophecies written ten years ago. We should check to see if any other amazing events around the world have happened.
OK, this is total BS but I'm sure there are those out there in the populace that believe the power of "O" had something to do with this event.
A veritable black hole to chuck every single boneheaded decision into, is difficult to resist. I was in the corporate world years ago, and the corporation that employed me was sued by a competitor. The lawsuit was a weak one, and upper management was very certain of a favorable judgment. You’d be amazed at what suddenly became attributable to product being pulled from the market due to “trade dress” disputes.
I have heard this rumour. Do you know anything to substantiate it?
A good omen would be a solid week or two without some bank needing taxpayer money.
I am confused? You are showing a chart of UTX to show how a stock or index has a bounce after a double bottom reversal? Isn’t this also know as a W pattern which a W is usually very bullish?
Yes, cajungirl was asking about a double bottom, or “W” formation.
Luskin embarasses himself even more than usual with his abject cheerleading for pure Corporatism wrapped up in his characteristic Pollyanna nonsense.
I’ll say it again, the people who have been getting everything right for the past three years knew BAC overpaid for ML at the time. If Luskin is genuinely surprised that ML was a balance-sheet disaster, he’s become even stupider than he was a couple of months ago.
Thanks,,looks good to me.
Following this story yesterday, I heard that the deal between Merrill Lynch and Bank of America was something of a shotgun wedding containing many back room secret deals. I also heard that now the federal government holds the largest share in Bank of America.
I am a Wal*Mart employee — before this sudden change our pension was held by Merrill Lynch. When you consider Wal*Mart is the largest employer in the nation and maybe world wide, this could be a disaster and an example of why it is not always wise to put all of one’s eggs in the same basket.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.