If you’re concerned over the recent news you’re hearing about Bank of America, you’re not alone. The memories of Lehman Brothers, Goldman Sachs, Morgan Stanley, and Bear Sterns are still fresh in the minds of investors as well as those who kept funds in these banks.
Virtually overnight Lehman Brothers went from a healthy, thriving financial institution to a bank wiped off the financial map.
Before discussing Bank of America’s problems specifically, it is important to remember that your money on deposit is safe even if Bank of America ceases to operate. In the United States, The Federal Deposit Insurance Corporation, or FDIC, insures your account up to $250,000. The process to reclaim your assets may be frustrating, but in the end you won’t lose anything.
What’s Going on with Bank of America?
Bank of America has its financial hand in 99% of the 100 largest companies in America, as well as other companies in 149 other countries outside of the United States. It holds 12.2% of all deposits in America, and it is the largest bank by holdings, serving 57 million customers. If your money isn’t at Bank of America, you probably know one of their customers.
Banks make profits by not only lending money to you and charging interest, but they also invest the money that you ask them to hold in the form of deposits. They purchase companies, other loan portfolios, and they lend money to other banks and corporations at wholesale rates using complicated means like commercial paper and the money market – special markets only available to large net worth companies and financial institutions.
One company they purchased, Countrywide Financial, held the mortgages of 20% of all Americans. When the housing market lost a significant amount of value, Countrywide Financial was left with a huge amount of unpaid mortgages, which continues to weigh on Bank of America.
Adding insult to injury, a series of lawsuits has made investors worried and when lawsuits start, they have a way of multiplying. Not only is there the multibillion dollar robosigning lawsuit, where allegedly false information was being provided to judges in order to simplify foreclosure cases, an employee was awarded nearly $1 million for being fired for telling authorities about illegal practices at Countrywide Financial.
Every investor knows that fear is contagious and that, according to some, is what is causing Bank of America to continue the downward trend in its stock price. In fact, they have lost well over 50% of their market value.
As a way to put investors at ease and reduce the size of their footprint on the world’s financial markets, Bank of America continues to sell assets that they own as well as lay off employees. Recently BOA announced that 30,000 would lose their jobs as restructuring continued, but this may backfire as investors grow worried that the bank may not have as much money as they claim.
On the other hand, despite government claims to the contrary, Bank of America probably is “too big to fail.” If they were to close their doors, the American banking system would have a difficult time handling the shock, and for that reason, the government probably wouldn’t let that happen.
Bottom Line
Unlike 2008, banks as a whole are in somewhat better shape, and they are still the best place to put your money that you don’t want to expose to risk of the stock market. Even though that savings account isn’t going to make you much more than 1% per year, depositing your money into any of the major banks comes with free insurance from the FDIC. And some growth is better than no growth, considering the high likelihood of increased inflation.
Personally, I bank with a small, regional bank and a well-known credit union. I prefer to avoid the large banks, not so much because of instability, but because I don’t like their customer no-service policies.