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The Root of the Problem



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It isn’t tax cuts, or the lack thereof. It isn’t stimulus, or the lack thereof. It isn’t monetary policy that’s either too loose or too tight. It’s the balance sheets of the major banks, which, like the novels of Stephen King, are both fictional and horrifying. Bloomberg’s Jonathan Weil delved into one of these tomes recently and lived to tell the tale:

The problem for anyone trying to analyze Bank of America’s $2.3 trillion balance sheet is that it’s largely impenetrable. Some portions, though, are so delusional that they invite laughter. Consider, for instance, the way the company continues to account for its acquisition of Countrywide Financial, the disastrous subprime lender at the center of the housing bust, which it bought for $4.2 billion in July 2008.

Here’s how Bank of America allocated the purchase price for that deal. First, it determined that the fair value of the liabilities at Countrywide exceeded the mortgage lender’s assets by $200 million. Then it recorded $4.4 billion of goodwill, a ledger entry representing the difference between Countrywide’s net asset value and the purchase price.

That’s right. Countrywide’s goodwill supposedly was worth more than Countrywide itself. In other words, Bank of America paid $4.2 billion for the company, even though it thought the value there was less than zero.

Since completing that acquisition, Bank of America has dropped the Countrywide brand. The company’s home-loan division has reported $13.5 billion of pretax losses. Yet Bank of America still hasn’t written off any of its Countrywide goodwill.

Goodwill, in case it wasn’t clear from the context, is the value of a business above and beyond the value of its assets, e.g. the value of its brand. Question: Is there a more tarnished brand in the country than Countrywide? Shouldn’t this be marked on BofA’s balance sheet as badwill? 

Halloween has passed, but we are still living in a land of zombies, and there is zero consensus in the policymaking community on the question of what to do about it. Taxes and spending are still very important, but incoming and returning GOPers also need to be thinking hard about how the party should respond in the event of another banking crisis. The hard part is going to be resisting efforts to re-TARP the banks. If the Dodd-Frank Act produced anything useful at all, it is the resolution authority that would give government officials the ability to take down some of these institutions while managing the spillover effects. Fed and Treasury officials can no longer complain that they lack the necessary tools. Large-scale bank resolutions would eliminate a lot of the bad debt that is crippling the economy, but they would simultaneously require aggressive Fed action to meet the large spike in demand for money that would accompany the charge-offs. That would be the time for more quantitative easing, not now.



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