BofA Precarious As U.S. Economy Slides
Anemic growth and high unemployment have now led Wells Fargo economist Mark Vitner to put the odds of a "double-dip recession" in the U.S. at about one in three. If the economy were to slide sharply, Bank of America would be in a particularly precarious position. Bank of America's stock has been hard-pressed to hit $9 the last few days, while all of its big competitors are trading for at least $20 and most are much higher. The problem for Bank of America is a gigantic pile of rotten home loans it got in acquiring Countrywide. BofA is routinely swallowing big quarterly losses from those loans and its stock price is now tied to the most troubled of markets - housing. NYU Stern finance professor Viral Acharya says Bank of America is now the weakest of the big banks and the most "systemically risky." "Given that they have more downside risk, more leverage and more volatility in their stock right now, my fear is that in case things don't turn out right over the next six months, they might be the first ones among the large banks to get hit most significantly," says Acharya. UNC Charlotte banking professor Tony Plath says BofA will be "the canary in the mineshaft, if you will, in the event of a double dip." The popular banking blog "Naked Capitalism" puts it more bluntly. "This blog is starting a Bank of America Death Watch," says an August 5 post. "I think Naked Capitalism may be exercising a little bit of hyperbole," says Plath. "I don't think the situation is that dire." If the recession returns, Bank of America is in no place to survive unscathed. But it will not cease to exist. Plath says a more likely scenario would have Bank of America admitting defeat and handing the giant Countrywide albatross off to the government. "Basically all units of the company are doing well, but their attention is preoccupied by the continuing losses of the Countrywide facility," says Plath. Since the financial crisis of 2008, the federal government has attempted to put a system in place that would help unwind banks considered "too big to fail." A return to recession could put that system to the test.