Die, Bank of America, Die!

Tim Cavanaugh | October 16, 2009

Bank of America gets slaughtered, with a billion-dollar loss in the second quarter. This takes the shine off recent recovery news, including more slight gains in industrial production and capacity utilization. We just can't wish the problem into the cornfield: There are billions of dollars in bad loans out there, and they're going to keep failing:

Losses on home lending and insurance widened to $1.6 billion from $724 million, and the loss on credit cards expanded to $1.04 billion from $167 million.

The bank said the provision for credit losses was $11.7 billion, with $9.6 billion of loans considered uncollectible. Reserves for future losses increased by $2.1 billion, compared with a $4.7 billion addition in the previous quarter, the statement said. The bank’s reserve is now 4 percent of total loans, compared with 4.7 percent at JPMorgan Chase & Co. and 5.9 percent at Citigroup Inc., analyst John McDonald of Bernstein Research said in a report today.

It looks grim, but the government has the situation well in hand. Treasury Department pay czar Kenneth Feinberg has blocked a big portion of outgoing BoA chief executive Ken Lewis' compensation package. Shows what happens when you're not on Tim Geithner's BFF list. Also White House senior economic adviser Lawrence Summers says it's time for banks to do what's best for the country by listening to Larry Summers.

Another piece of bad news about debt that has not gotten much attention: Remember the increase in the personal savings rate, the silver lining in the great deleveraging? That's over. After peaking at 4 percent in July, according to the Bureau of Economic Analysis [pdf], the personal savings rate plummeted back to 3 percent in August. Historically, personal savings generally remained above 10 percent back when America used to win wars and produce functioning adult men and women. As recently as the early 1990s [pdf], the savings rate rarely fell below 8 percent. The rate went into negative territory during the Greenspanian double-bubble, and it seems to be headed back there now. Over time that will mean dwindling reserves for banks (what can you expect when you pay 0.000 interest on a savings account?), but maybe those can be supplemented by more taxpayer dollars. There seems to be an infinite supply of that stuff.