Bank of America in Trouble – Is It Still Safe to Keep My Money In a Bank?

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.

Comments

  1. No company is “too big to fail”…. our government needs to stop saving these companies and let the market do what it always does, which is correct itself. Yes, it is painful, but as the market changes and technology emerges, then the landscape of business is going to change, as well. Either adapt or close. There will be plenty of banks ready to step in and fill the gaps should this giant fall.

    • If BofA was about to fail the Feds would likely put them in a gradual conservancy. Nationalizing then slowly selling assets. If you allow it to fail quickly you risk the massive collateral damage of the commercial paper (short term corporate bond) market freezing. Don’t believe me, just ask Hank Paulson when he got the call that GE couldn’t borrow money. If you don’t think that affects your job, payroll, or asset values think again.

      http://www.propublica.org/article/general-electric-tapped-fed-to-borrow-16-billion

      • You’re wrong. The Federal Reserve Bank of New York has set up “Special Purpose Vehicles” (some waffling MBA grad must have came up with that name) that it extends credit to, in order for it to purchase commercial paper from corporations to avoid a freeze in the market. So your doomsday scenario you suggest would not occur.

        Bank of America is on the ropes! Take it into receivership, punish, and move on!

      • I’m guessing based on what you have written, that you don’t know the difference between the nationalization of banks and temporarily taking banks into receivorship.

    • Appears you don’t have a clue about how the world turns. This is a typical kneejerk reaction commonly spouted by uninformed people. Do some research on the subject before making remarks.

  2. The bank can also be broken apart. They can sell their credit card division, investment group, etc. These might be bought up by other lending institutions to make themselves bigger.

    To get cash they can raise rates on loans, and banking services. Basically nickel and dime you to death. They can offer a special CD with a higher rate to improve liquid cash on hand. They can declare countrywide bankrupt.

    Honestly, given the current economic situation, how everyone is pissed off at the banks, whomever decides not to let the bank fail will be burned at the stake. The arrogance of the banking industry is mind blowing. Their failures in basic customer service and retention, community relations, not to mention incompetence, fraud, etc. should make them humble, it didn’t, they continue to screw up, let them suffer the consequences. We are/having been suffering since before 2008.

  3. Bank America would have been a lot better off had they walked away from the Countrywide deal, and let Countrywide go bankrupt. Now, they should probably just spin it off and let it fade into the dustbin of history and be done with that turkey.

    There’s little risk in depositing your money with BAC as long as the amount is less than $250K.

  4. As long as, the bank of amrika is still “too big to fall”, the money will be still save. However, it may change in future if the crisis is too big to handle.

  5. First, there is no growth if money return is not better than inflation. Bank of America is probably too big to fail. Bad loans are still causing havoc to finance world. It is horrible that people are losing their jobs because of bad business decisions. However, Bank of America will be around when the dust settles.

  6. I am banking at BofA. I am not worried as this is FDIC insured and if BofA fails some other major player will buy the deposits from bankruptcy court. I know my money is safe and I don’t own the stock either.

    Just wondering how many companies will succumb ultimately to the mortgage crisis..

  7. You can’t club all banks with BofA! :) BofA had it coming and I don’t think anyone’s surprised at its troubles.

    Faceless internet banks are more approachable than BofA. I wouldn’t discourage anyone from keeping their money in a bank. Just choose a good one. Credit Unions for starters.

    • Banks appear to be less risky because they can hide and delay there risk by using GAAP. Only suckers believe banks are safe.

Leave a Comment

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>