B of A wants out of secret restrictions

Marketplace Staff Aug 6, 2010

B of A wants out of secret restrictions

Marketplace Staff Aug 6, 2010


Kai Ryssdal: Bank of America’s had its share of problems since the collapse of Lehman Brothers. It’s been trying to absorb Merrill Lynch. It’s had to find a new CEO to replace Ken Lewis. It’s had to pay back its TARP money. And now it turns out B of A’s on double secret probation with federal banking regulators. All right, so double secret probation is my interpretation, but Dan Fitzpatrick reports today in the Wall Street Journal that B of A’s been operating under some confidential rules for almost a year and a half now.

Dan, welcome to the program.

Dan Fitzpatrick: Thanks for having me.

Ryssdal: What do we know about this confidential memorandum and how it regulates Bank of America?

Fitzpatrick: Well, we know that it’s been in place for 15 months. We know it requires the bank to take certain steps to improve its risk policies and liquidity management. And we know that it has to complete all these steps before it can be released, and while it’s under the agreement, there’s certain things they can’t do. Like for example, it can’t raise its dividends, which was cut to a penny at the height of the financial crisis. So it’s fairly restrictive and if they don’t take all these steps, there can be harsher penalties, which will be made public.

Ryssdal: Help me out with that part actually, because Bank of America is a publicly traded company, they got a whole bunch of money during the financial crisis — why do they have secret arrangements with the government?

Fitzpatrick: The thinking is that they can handle these problems privately and get them out of the way, before they become too large and before the public needs to know about them. Because once the public knows about large problems with banks, you have the concern about confidence in our financial institutions, which as we all know is something that regulators work pretty hard to protect.

Ryssdal: Yeah, but there were huge problems with banks leading up to the financial crisis that we didn’t know about and look where we got.

Fitzpatrick: Some banks do decide to disclose these sorts of agreements. It’s rare. For whatever reason, B of A has not decided to do that, but they’re pretty anxious to get out of it, to get out from under it.

Ryssdal: Why are they so anxious? Is it affecting their bottom line?

Fitzpatrick: First and foremost, again, there’s certain restrictions, like they don’t raise their dividends and shareholders are clamoring for this dividend to go back up — again, it’s just at a penny. And regulators have much more control over day-to-day operations. And I think also, there’s sort of a stigma attached and I think the bank is sort of desperate to shed that as they re-emerge from a pretty tumultuous time.

Ryssdal: So there was all kinds of discussions during the debate over financial reform about bank regulation, and the general consensus seemed to be that there wasn’t a whole lot in that bill that just passed that actually went to regulating, increasing the regulation of how banks do business. Can we infer from this that there is actually more regulating going on than we know about?

Fitzpatrick: I do think you’re going to see regulators up in the business of these institutions for a long time to come, and I think it’s going to take a while for regulators to act differently. Because I think regulators are smarting from the criticism that they did not pay attention to what some of these banks were doing in the run-up to the crisis.

Ryssdal: Dan Fitzpatrick from the Wall Street Journal. And his story today about B of A’s agreement with the government that I guess we’re not allowed to know about. Dan, thanks a lot.

Fitzpatrick: Thanks so much.

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