BAC to the Future

Well Bank of America is no longer a ward of the state. Score one for the bankers.

Bank of America announced yesterday that they are paying back the entire $45 billion in TARP funds they received from the Treasury last year. In the depths of last winter, there we some question as to whether Bank of America could survive. Now they plan to sell assets and boost their equity by selling restricted stock and senior debt.

So with America’s biggest bank no longer in-the-hole to Treasury, can we say the crisis is over? I don’t think so. While the Dubai tempest-in-a-teapot is not systemically important, it does show that there’s still a hangover from the mid-decade building boom. Seriously, indoor ski-hills in the desert just don’t make economic sense. And fallout from stupid bubblelicious building projects is likely to be with us for a while.

But the larger lesson is this: illogical pro-cyclical accounting rules combined with collective insanity turned a real-estate correction into a full-fledged financial panic. Timely intervention by the Federal Reserve and Treasury stemmed this panic and allowed the economy to stabilize. It’s no surprise that the market bottomed right around the time that the major banks submitted to a stress test. When the banks showed they were solvent, the market recovered.

As Congress now debates financial reform, it’s important to remember: hard cases make bad laws. And sometimes we all just need time to calm down.

Douglas R. Tengdin, CFA
Chief Investment Officer
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