Friday, 16 January 2009

An Unprecented Age of Financial Idiocy

Seriously, could you possibly get a more incompetent gaggle of fools running major US financial corporations? The denial, obfuscation and outright lies that have continually been offered up in defense of continuing losses and write-offs have reached comical proportions.

Anyone with a clue, knew that Bank of America clearly paid too much for Countrywide and Merril Lynch. Countrywide was a disaster teetering on the brink of bankruptcy when B of A bought it. However Merril is an even more monumental blunder, given the terms of the government rescue announced today. We now know that Merril was not worth even a tenth of the $29 per share price tag B of A paid.

Much has been said about Ken Lewis, the CEO of B of A as being one of the best CEO's on Wall Street, that doesn't say much for the rest of them. Lewis' blunders in the last 12 months demonstrate that he is at best completely and utterly incompetent.

Whilst Vikram Pandit is not responsible the postion that Citigroup now finds itself. The fact that he has continually defended Citi's financial supermarket model only to turn around and start splitting up the company because it is insolvent proves that he had no idea what he was doing.

So now today the stockmarket is celebrating because the US government has made the biggest US bank a ward of the state alongside Citigroup. It makes you wonder who is stupider, the CEO's on Wall Street or stock market traders. This article siums up the sorry state of the situation, from

Government giving $20 billion to Bank of America
Guaranteeing losses on over $400 billion worth of Citi, Bank of America assets

The U.S. government on Friday announced it was injecting $20 billion into Bank of America and guaranteeing losses on over $400 billion of assets both from Citigroup and the Charlotte, N.C. lender.

In a statement released Friday, the Treasury Department and the Federal Deposit Insurance Corporation said they will invest $20 billion in Bank of America (BAC) from the Troubled Assets Relief Program in exchange for preferred stock paying an 8% dividend.

The government also will provide Bank of America protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans, securities backed by residential and commercial real estate loans and other such assets, which have been marked to current value.

Bank of America will absorb the first $10 billion of losses while the government will share losses from there, up to $10 billion. If that pool of assets sees losses of over $20 billion, then the government will absorb hits on 90% of them.

A similar guarantee was provided to Citigroup: Uncle Sam is on the hook for $301 billion of assets, with Citi (C) taking the first $39.5 billion of hits, and then the government absorbing 90% of the rest.

The Federal Reserve also is ready to backstop "residual risk in the asset pool" if necessary.

The government relief comes as Bank of America stock skidded to a 17-year low, following Thursday's report in The Wall Street Journal that such a relief program was near. Investors were unnerved by the additional losses at Merrill Lynch.

Both Bank of America and Citigroup (C) detailed billions of dollars during the fourth quarter, and that doesn't even include the estimated $15 billion of losses from Merrill Lynch.