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B of A CEO Quibbles Over $10 Billion

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In an interview with the Financial Times, Bank of America's (NYSE: BAC  ) CEO called his request for $20 billion in aid from the government to complete the acquisition of Merrill Lynch "a tactical mistake" because it led investors to lump the lender in with troubled giant Citigroup (NYSE: C  ) . Instead, he says he should have requested … just $10 billion.

Lewis is right (little picture) and wrong (big picture)
Whether $10 billion or $20 billion, it's still taxpayer-funded support. Ken Lewis is right that B of A and Citi have been lumped together somewhat unfairly, given that there is a difference in quality between the two franchises. However, that is a discussion of degree that obscures a much more important debate regarding a characteristic that the two banks do share: They are both too big to fail (TBTF).

The TBTF doctrine asserts that, beyond a certain size, the government will step in to protect a bank's uninsured depositors and creditors in the event of insolvency. It's been more or less explicit government policy since 1984, when the Comptroller of the Currency characterized the nation's 11 largest banking groups this way (in 1984, the government rescued Continental Illinois, which was later acquired by … Bank of America).

The big bank subsidy comes due
TBTF is a misguided policy that distorts competitive behavior -- it amounts to a taxpayer subsidy to these banks. The trouble is, most of the time, the subsidy is invisible -- big banks don't fail all that often, after all. During a massive banking crisis, however, it hits the taxpayer with the light touch of a Mack truck. So, who are we (potentially) on the hook for? The threshold for TBTF is estimated to be approximately $100 billion in assets. Today, the list of banks that qualify on that count includes:


Total Assets (U.S.$)

Tier 1 Capital Ratio

Wells Fargo (NYSE: WFC  )

$1,310 billion


US Bancorp (NYSE: USB  )

$266 billion


SunTrust Banks (NYSE: STI  )

$185 billion


Goldman Sachs (NYSE: GS  )

$884 billion


Morgan Stanley (NYSE: MS  )

$659 billion


Sources: Standard & Poor's Capital IQ, SEC Filings, and investor presentation.

Mr. Lewis and the Obama administration are missing the point. A stress test won't do the trick; either a bank poses a genuine systemic risk, in which case it should be broken up, or it doesn't, and it should be allowed to fail. That's the state of affairs that bankers and regulators should be pursuing.

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Alex Dumortier, CFA, has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. US Bancorp is a Motley Fool Income Investor selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (3)

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  • Report this Comment On March 05, 2009, at 9:08 AM, GittingsIV wrote:

    It seems that the author is correct here, but who wants to be the first shareholder to have its bank stock fail. Who wants to be the first counterparty to the first bank (at this level) to fail. Maybe some retired bankers will have to start being a greeter at WM. NO ONE.

    OK let it fail and let other banks pick up the pieces as has been suggested. Of course the FDIC will pick up the losses and the other banks will get a good deal in the process.

    Bottom line it all comes back to how well we handle adversity, particularly financial adversity, and I do not think most Americans are very good at it. They like to spend too much.

    Then there are the anti-government intervention critics, just let everything go to hell in a hand bag. The SEC/FASB can not see that mark to market is greasing the slopes. Is it mark to good market or is it mark to bad market, or is it that all assets and all liabilities are not marked to market. The whole thing is way too complex make work.

    Someone once told me that Europeans try to get close to right and Americans want it perfect so it gets all messed up.

    Congress tries to fix problems and then the beureacrats try to misinterpret and enhance what the law means causing everyone grief so they can stay employed while unemploying many in the mainstream.

    Last thought do we have any success stories of government intervention, oh yes Continental Illinois and what was the other one, o yes Chrysler. I think the government did well on those deals. Maybe the government should replace its whole fleet of cars and jumpstart the auto industry.

    How about the good old days of a tax deduction for consumer interest it turned the no to a yes on many transaction. Hmm brings to mind Investment tax credit which made companies buy more stuff to reduce their taxes.

    Please excuse the spelling and grammatical problems, but yesterday I was thinking I started two banks in my life. First time Fed Funds rates were 21% and this time Fed Funds rates are .25%. Don't miss the decimal in front of the 25.

    Enough Said. Beam me up Scotty there is not intelligent life down here and as one great Man said "stay tuned for the rest of the story."

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