Wednesday, February 11, 2009

More Proof that Banks did not Need the Bailout

Bank of America received $45 billion bailout funds.

Bank of America spent $50 billion to acquire Merrill Lynch.

Because 150 + 50 >> 45, it is clear that Bank of American could have survived AND loaned lots of money to customers without a bailout. Whether they would have bought Merrill is another story.


Greg said...


I agree with your point. But I would also like to point out that BAC may have had legal obligations to fund those lines of credit.

Customers with vast liquidity issues (of which there were probably many), could negotiated irrevocable credit arrangements many months ago. Facing a liquidity event, many of BAC's probably drew down the loans. Its plausible that BAC had no legal alternative buy to extend credit on many (or at least a substantial portion) of that debt.

Keep up the awesome blog.

Greg said...

In addition, I just checked BAC's latest 8k - BAC has $51 billion in tangible capital. That's 2.8% of its liabilities ($1.7 trillion).

Right now, if BAC's assets fall in value by 2.83% the firm would have no tangible assets to pay off its creditors. Frankly, 2.83% seems absurdly low. It's entirely plausible that global asset values could fall by 2.83% much within a relatively short time. You could make a credible case that the bank is practically bankrupt now.

I have no idea what percent of BAC's lending was contractually bound (though I suspect a substantial portion of it was). But if you take out the $45 Billion that has been injected, BAC would have $6 Billion in tangible capital. That would be 0.035% of its total liabilities... leaving, essentially, no cushion whatsoever. If this were the case, it would definitely be sayonara to BAC.

Karl Smith said...

In the way your stating in the costs don't add up like that.

The bailout added to BAC capital. But the loans don't draw down capital directly. They have to maintain a 7% capital liability ratio.

So, 117B in loans uses up only 8.19B in capital, so to speak.

The Merrill deal was also all stock, so it doesn't directly affect BAC capital.

Now, Merrill writedowns will come out of capital so that was a effect. But its not quite the same.