The FDIC, Buffett, Bank of America, and the Attorney General of NY

Friday’s injection of $5 billion in capital into B of A by Warren Buffet made the headlines in a way that few stories do in late August when most traders are hanging out in the Hamptons.  Today’s announcement by B of A that they were divesting $7.3 Billion in CCB (China Construction Bank) shares added fuel to the bullish B of A sentiment.  So much so that BAC ran up an astounding 8.1% today.

With the “Oracle” of Omaha’s (tongue firmly inserted into cheek) bathtub revelation and the CCB deal combining to add $12.3 Billion in capital to a bank that continues to scream, to anyone who is still listening, that they don’t need anymore capital…  the huge gains make sense.


But now there is a twist, or two, that brings into question the rally we saw in BAC today.  Most importantly, after the market closed the FDIC filed an objection with the Supreme Court of NY against B of A’s proposed $8.5 billion settlement with mortgage bond holders.  While the FDIC’s objection is based on the fact that they don’t have “enough information to evaluate the settlement” the development is significant.  You see, the FDIC is the receiver of many failed banks and certificates that would be covered by the proposed settlement.  For the past few years, the debate has focused on whether B of A’s problems were due to the economic downturn scuttling their mortgage book or whether mortgages were sold to people who hadn’t the faintest chance of every paying their debts (the Countrywide acquisition, to wit).  Without the settlement, the toxic Countrywide acquisition will weigh heavily, and potentially terminally, on BAC.

Added to this, almost below the radar, is the filing by the Attorney General of NY.

To quote Forbes, “New York Attorney General Eric Schneiderman is attempting to block the settlement. Earlier this month he urged a state judge to reject the proposed calling it unfair and that Bank of New York Mellon, the trustee representing the investors, committed fraud for failing to ensure that the mortgage securities were created in accordance with state law and for failing to act in the investors’ best interest.”

This is a messy situation.  And I point it out, not only because of my disdain for the charade that is the Buffett cult of personality, but because Bank of America may very well be the canary in the macro-economic coalmine.  BAC is too big to fail.  But, the political environment makes them too big to rescue.  At this stage in the stock market’s history, financial stocks rule the day.  Be they two insolvent Greek banks combining to become one really large insolvent Greek bank (very bullish, apparently), or Bank of America being saved (or not) by the bathtub revelation, the market will go as the financials go.

The FDIC and the AG of New York getting involved can’t be viewed as a catalyst for new highs.