Is Bank of America Gambling on Resurrection (or Is BoA Holding the US Hostage)?

What would you do if you were running an insolvent company? The smart thing is to bet big:  go with a high-risk/high-return strategy.  If the gamble pays off, you’re solvent, and if not, well, you’re already insolvent.  You’re playing with the creditors’ money. (And without a tort of deepening insolvency, there really isn’t a clear downside for management.)  This is gambling on resurrection.

We’ve seen the disastrous results of banks gambling on resurrection.  That was the S&L crisis. Rising interest rates in the late ’70s decapitalized the S&Ls as the S&Ls’ assets were long-term, fixed rate mortgages that paid lower rates than the S&Ls had to pay depositors.  The S&Ls, however, got a pliant Congress to agree to massive deregulation that allowed them to expand into all sorts of new business lines, like commercial real estate and race horses and junk bonds. Insolvent S&Ls went chasing high risk/high return projects.  The result was that the tab for taxpayers to fix the S&L mess was significantly greater.

Today, it looks like Bank of America is repeating the S&Ls’ gamble on resurrection and using this gamble to hold the US government hostage.

Rest here…

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