WASHINGTON — As the stock prices of the big banks cratered on Monday, particularly for Bank of America Corp., pundits and industry observers began worrying that a second financial crisis was in the offing, including the possibility of the failure of a large financial institution.

The banking sector suffered a triple hit as Standard & Poor's downgraded the United States' debt rating, American International Group Inc. filed a $10 billion lawsuit against B of A, and investors continued to fear the risk exposure of big banks to the European debt crisis.

B of A's stock price fell 20% to the spring 2009 level of $6.53, while Citigroup was down 16%, and JPMorgan Chase & Co. and Wells Fargo & Co. both fell 9%.

The rapid shift in market activity and fear over what may still come reminded many of the mood three years ago, and some speculated the next systemic failure could happen sooner than policymakers — fresh from legislative reforms meant to prepare for the next crisis — had predicted.

"We may be coming to that inflection point very soon. If you look at what's happening to Bank of America today ... it's a very 2008 feeling right now," said Neil Barofsky, the former special inspector general for the Troubled Asset Relief Program, and now a fellow at New York University's law school.

B of A drew the sharpest concerns, and the S&P downgrade appeared somewhat tangential to the bank's problems. AIG's lawsuit seeks damages for losses from faulty mortgage-backed securities. It came on the heels of news that the New York attorney general's office is interested in nullifying a settlement between B of A and a group of other investors, potentially raising damage on the bank from mortgage buybacks.

While the bank continued to tout its high capital, the sharp spiral in B of A's share price was an echo of how market perception pushed firms near a cliff in the financial crisis. Companies like Lehman Brothers never recovered, and others — like B of A, Citi and AIG — received huge government bailouts to stabilize. Yet under the sweeping reforms of the Dodd-Frank Act last year, the government is prohibited from such targeted aid, and instead enables the Federal Deposit Insurance Corp. — authorized by several agencies — to seize firms that cannot stand on their own.

"If B of A's equity is losing this much value, you have to ask the question: are we getting close to that point?" said Tony Fratto, managing partner at Hamilton Place Strategies and a former Treasury Department and White House official in the Bush administration. "If B of A has another day tomorrow like today, I would say that is something Financial Stability Oversight Council needs to be thinking about. I'd be really curious to find out what their plans are."

Fratto said that because the government now has this power, investors may be less willing to provide B of A with a capital infusion, should one be needed.

"You do have to ask this question: will it make it better or worse to use government authority to resolve a financial institution?" Fratto said. "Does that make it more likely or less likely that Bank of America can fend for itself? That's an open question. I think it is a test and we will be watching it."

Others said we are nowhere near that point. Unlike the height of the crisis, when many firms were largely harmed due to a rapid loss of liquidity, banks now have higher capital, liquidity and reserves.

"I don't think we're there at all. … We had a liquidity crisis before, and that's what really drove changes. Now we have fear of long-term economic malaise. We have fear of credit losses turning back around, getting a little worse again. But those are different issues," said Jefferson Harralson, a managing director at KBW Inc.'s Keefe, Bruyette & Woods Inc.

Harralson said capital ratios are stronger than in 2008, and the market is closer to understanding the impact of litigation risk facing B of A and other companies.

"It's a lot different than in 2008, one because we have a lot higher capital ratios. … Secondly, we have twice the reserves now versus then. We've taken on a very significant amount of cumulative losses. We're pretty far down the path. B of A has a special type of risk that most institutions don't have as much of, which is the litigation/reps-and-warranties risk," he said. "I consider it very different from 2008. Versus 2008, we're probably much farther down the path regarding litigation too. We're starting to see settlements."

Jerry Dubrowski, a B of A spokesman, said the company does not have plans to raise capital. He said the bank is in better shape to weather storms than it was during the crisis.

"At the end of the 2nd quarter we had $402 billion in global excess liquidity and a year ago that number was $293 billion," Dubrowski said. "We significantly improved liquidity. The second point is our tier 1 common equity ratio has also significantly improved, going from 8.01% in the second quarter of 2010 to 8.23% in the second quarter of 2011 and that takes into account these significant reserves we set aside to deal with mortgage repurchase issues. Those reserves at the end of the 2nd quarter were $18 billion. A year ago they were $4 billion. We've improved our liquidity significantly. We've improved our tier 1 common equity ratio significantly all the while increasing our reserves for mortgage-related matters. That's why we feel we're in much better position than we were a year ago or two years ago when we were in the middle of a worldwide financial crisis."

But some observers said that might not matter if investors lose confidence in the bank and its management.

"The problem you have to with deal with is market sentiment. Basically it's looking dangerously like the market is going negative on B of A even though it doesn't need to, and once that happens you can't stop it," said Lawrence Baxter, a professor of law at Duke University and a former executive at Wachovia Corp.

One former regulator said he thought a repeat of 2008 was unlikely, but was still concerned because "at some point, declining stock prices turn into declining confidence. It shouldn't matter but it does."

An industry consultant, who also spoke on condition of anonymity, agreed. "You can't come out with a bad announcement every other day and expect people to have confidence in the company," the consultant said.

Matt Stoller, a fellow at the Roosevelt Institute, said conditions at the bank could worsen if its buyback obligations accelerate. One issue not resolved, he said, is the impact of second-lien loans.

"If the second liens are not valued appropriately and there is a lot more legal risk than investors assumed, B of A could be in trouble," he said. "Certainly, the FDIC should start drawing up plans, just in case."


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