Time to Break Up Zombie Bank of America?

Does Bank of America pose a “grave threat” to America?

That's what Public Citizen is arguing in a new petition to the Federal Reserve Board of Governors and the Financial Stability Oversight Council, calling for the regulators to step in and break up the nation's second-largest bank before it collapses and kicks off another financial meltdown.

Under Section 121 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the government has the power to force a financial institution that poses such a systemic threat to divest assets, limit activities, or otherwise down-size so it's not “too big to fail.” According to Public Citizen's David Arkush, even though many of the big banks became even larger and more threatening after the financial crisis in 2007 and 2008, “Bank of America looks like it is the most systemically dangerous of the large banks and is at the greatest risk of actually failing.”

In a separate letter to Treasury Secretary Tim Geithner, Federal Reserve Chairman Ben Bernanke, and Acting FDIC Chairman Martin Gruenberg, several economists and activist groups including Marshall Auerback, Dean Baker, William K. Black, National People's Action, and New Bottom Line called on the regulators to look into Bank of America as well as other large banks. They wrote:

 

Recently many questions have been posed regarding the financial condition of Bank of America and several other large and complex financial institutions. If any of these institutions were to deteriorate, it could threaten the U.S. financial system. We urge you to investigate their stability, to analyze potential outcomes in the event of a failure, and to take any actions necessary to ensure systemic stability. The Dodd-Frank Wall Street Reform and Consumer Protection Act charges you with ensuring the stability of the U.S. financial system, and provides you with a broad range of tools to do so.

 

Bank of America has been in trouble for a while; as I reported in August, lawsuits against the big bank stemming from its purchase of Countrywide, one of the worst culprits in the subprime lending bubble, were the primary source of its financial woes, but hardly the only one. Its stock price plummeted 50 percent in 2011, angry depositors rebelled against a proposed $5 fee on their accounts, and JPMorgan Chase surpassed it as the largest financial institution in the country. It still holds assets, Public Citizen noted in its press release, equal to roughly one-seventh of the entire gross domestic product of the United States.

“Ordinarily what you would expect to say if we have a company that is making bad judgment, buying up Merrill Lynch, buying up Countrywide, making a lot of other bad judgments, you'd go 'well the market will put them out of business',” said Dean Baker of the Center for Economic and Policy Research, on a conference call held by Public Citizen. “That doesn't happen with Bank of America because they're basically operating with too-big-to-fail insurance.”

An attempt in 2010 by Senators Sherrod Brown (D-OH) and Ted Kaufman (D-DE) to insert a provision into the Dodd-Frank reform legislation that would have limited the size of the big banks failed in the Senate. As a result, the only real protection it offers from another systemic crisis touched off by the collapse of another major bank is the ability for regulators to step in if that bank appears to be a “grave threat”. This requires regulators to be aware of the shaky standing of a big bank before it goes from unstable to full-on implosion—because by then, it's probably too late to stop the bleeding.

“If Bank of America were to fail, any attempt at the orderly liquidation process in the Wall Street Reform law might not work, basically because the institution is too large, too complex, and because it has branches in too many foreign countries,” Arkush argued.