Wednesday, January 20, 2010

Bailout & Bonuses at BoA

Bank of America has posted its third consecutive quarterly loss. Apparently, the double whammy of paying back TARP and defaults on consumer loans has packed quite a punch to the firm's bottom line.

From Bloomberg:

"'Economic conditions remain fragile and we expect high unemployment levels to continue, creating an ongoing drag on consumer spending and growth,' [Bank CEO Brian] Moynihan said in a statement. 'We are encouraged by signs the economy is improving, as we have seen in the stabilization of our credit costs, particularly in the consumer business.'"

Specks of sun are breaking through, perhaps, but clouds of high unemployment and sluggish consumer spending remain heavy and dark everywhere you look.

Given the gloom surrounding the current economic outlook for consumers outside of Wall Street, why would BoA consider taking the hit now to repay TARP? Wasn't TARP designed to help struggling, massive banks recapitalize?

More from Bloomberg:

"The company repaid $45 billion of government rescue funds in December. Getting out of TARP freed the bank from federal pay limits and as much as $2.85 billion a year in dividends to the U.S."

With TARP repaid, BoA can take money they don't seem to have and pay bonuses to people whose business behaviors left the bank on the rocks.

Of course! It's bonus season. BoA can't afford to lose the people whose questionable business decisions landed them in a swamp. Seems a dubious business practice. But one that is SOP in the financial sector - establishing bonuses that will be awarded no matter how terrible the company does.

As long as the feds back them up with the necessary financing, it's a business model that works - if you're in line for those bonuses. Outside of BoA - well, as Moynihan said, the outlook "remains fragile and we expect high unemployment levels to continue, creating an ongoing drag on consumer spending and growth.”

Not an outlook that offers much to bank on.

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