EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012

Bon. Ben Beinanke, vice Chaiiman
Financial Stability 0veisight Council
anu Chaiiman, Feueial Reseive Boaiu
2uth Stieet anu Constitution Avenue NW
Washington, BC 2uSS1

Bon. Timothy ueithnei, Chaiiman
Financial Stability 0veisight Council
anu Secietaiy of the Tieasuiy
1Suu Pennsylvania Avenue NW
Washington, BC 2uS2u

}anuaiy 2S, 2u12

Beai Chaiiman Beinanke anu Secietaiy ueithnei,

Public Citizen, a public inteiest nonpiofit oiganization iepiesenting moie than 2Su,uuu
membeis anu suppoiteis nationwiue, heieby petitions the Boaiu of uoveinois of the
Feueial Reseive System (the "Boaiu") anu the Financial Stability 0veisight Council (the
"Council") to iecognize that the Bank of Ameiica Coipoiation ("Bank of Ameiica" oi "the
bank") poses a "giave thieat" to the stability of the 0niteu States financial system anu to
mitigate that thieat, as pioviueu by section 121 of the Bouu-Fiank Wall Stieet Refoim anu
Consumei Piotection Act (the "Bouu-Fiank Act" oi the "Act").
1
Puisuant to the authoiity in
the Act, the Boaiu anu the Council shoulu iefoim Bank of Ameiica into one oi moie
institutions that aie smallei, less inteiconnecteu, less complex, moie manageable anu, as a
iesult, less systemically uangeious.


0nuei section 121 of the Bouu-Fiank Act, if the Boaiu ueteimines that a financial
institution poses a "giave thieat" to 0.S. financial stability, then the Boaiu, with appioval
fiom the Council, "shall" mitigate that thieat.
2
The Act offeis iegulatois the flexibility to
take a iange of actions, incluuing limiting the institution's meigeis anu acquisitions,

1
Nitigation of Risks to Financial Stability, Bouu-Fiank Wall Stieet Refoim anu Consumei Piotection Act,
§ 121, 12 0.S.C. § SSS1 (2u1u).
2
lJ.
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ii
iestiicting oi imposing conuitions on its piouucts oi activities, oi oiueiing it to uivest
assets oi off-balance sheet items.
Bank of Ameiica cuiiently poses a giave thieat to 0.S. financial stability by any ieasonable
uefinition of that phiase. It is the seconu laigest bank holuing company in the 0.S., holus
assets equal to ioughly one-seventh of gioss uomestic piouuct, anu is highly complex anu
inteiconnecteu with othei financial institutions. Bank of Ameiica is too laige anu complex
to manage oi iegulate piopeily, anu its financial conuition is pooi anu coulu ueteiioiate
iapiuly at any moment, potentially causing the maiket to lose confiuence in the bank. An
ensuing iun on the bank coulu cause a uevastating financial ciisis.
If Bank of Ameiica in its piesent foim weie to expeiience a iun, then financial iegulatois'
options woulu be seveiely limiteu, putting at iisk the Bouu-Fiank Act's policies of
minimizing feueial assistance to faileu oi failing financial institutions while safeguaiuing
financial stability. Fiist, theie woulu be tiemenuous piessuie to bail out Bank of Ameiica
iathei than put it thiough an untesteu oiueily liquiuation piocess. In auuition, oiueily
liquiuation woulu be complicateu anu uifficult foi an institution as laige, complex,
inteiconnecteu, anu systemically uangeious as Bank of Ameiica, anu it might not succeeu.
Even a successful oiueily liquiuation woulu iequiie up-fiont funuing by the Tieasuiy anu
likely involve the oveipayment of cieuitois to avoiu financial contagion. This woulu
peipetuate the moial hazaiu that incentivizes financial institutions to take inappiopiiate
iisks. In the absence of aggiessive action by financial iegulatois, a scenaiio in which
iegulatois choose among limiteu, pooi options in the shauow of an imminent ciisis appeais
incieasingly likely.
Foi these ieasons, the Boaiu anu the Council (collectively, "the Agencies") shoulu act
immeuiately unuei section 121 of the Bouu-Fiank Act to mitigate the thieats poseu by
Bank of Ameiica. In theoiy, the Agencies neeu not bieak up the institution, but in piactice,
any sufficient iestiiction on the piouucts oi activities of the institution woulu likely iesult
in the institution being bioken up. Also, the section 121 authoiity coulu be useu in conceit
with liquiuation pioceuuies, foi example by bieaking up Bank of Ameiica anu putting some
poition of the company thiough oiueily liquiuation oi bankiuptcy immeuiately.
This petition uoes not uige a paiticulai couise. The petitioneis aie not piivy to the full
iange of infoimation available to financial iegulatois, which is likely necessaiy to foim
specific iecommenuations. But publicly available infoimation is sufficient to show that
financial iegulatois must take uiamatic, asseitive action to foieclose the possibility of
catastiophic uamage fiom Bank of Ameiica anu fulfill the puiposes of the Bouu-Fiank Act.
The iegulatois shoulu be able to bieak up Bank of Ameiica into smallei institutions that
woulu be less likely to fail anu less uangeious in the event of failuie÷anu foi which oiueily
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iii
liquiuation woulu be moie likely to succeeu shoulu it become necessaiy. The time to use
section 121 is well in auvance of a ciisis. In the case of Bank of Ameiica, that means now.
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
Contents
I. In Its Cuiient Foim, Bank of Ameiica Poses a uiave Thieat to the Stability of the
0niteu States Financial System. .............................................................................................................. 2
A. Bank of Ameiica is systemically uangeious uue to its size anu inteiconnecteuness. ... 2
B. Bank of Ameiica cannot be manageu oi iegulateu sounuly. ................................................... S
C. The thieat that Bank of Ameiica poses is incieaseu by its financial conuition, which
is pooi anu coulu ueteiioiate iapiuly. ............................................................................................. 4
1. Seveial inuicatois suggest cuiient financial uistiess at Bank of Ameiica. ..................... S
a. Neai-teim financial inuicatois: stock piice, piice-to-book value, ueiivatives
tiansfeis, anu CBS spieaus .......................................................................................................... S
b. Long-teim financial inuicatois uemonstiate that Bank of Ameiica is becoming
incieasingly unstable. .................................................................................................................... 7
2. Bank of Ameiica is likely unueicapitalizeu, facing potential liabilities anu maiket
iisks that coulu seveiely uestabilize it. ......................................................................................... 9
S. Bank of Ameiica faces potential liabilities fiom litigation that it may be
unpiepaieu to meet. .......................................................................................................................... 1u
4. Exposuie to financial instability in Euiope coulu uevastate Bank of Ameiica. .......... 14
B. Cuiient policy towaiu Bank of Ameiica peipetuates anu incieases systemic iisk..... 1S
II. The Boaiu anu the Council Shoulu Act Immeuiately to Nitigate the Thieat to 0.S.
Financial Stability That Bank of Ameiica Cuiiently Poses. ....................................................... 16
A. Section 121 pioviues authoiity to pievent ciises causeu by uistiess at institutions
such as Bank of Ameiica, not to iesponu to ciises. .................................................................. 17
B. Section 121 must be exeiciseu to ensuie the efficacy of othei Bouu-Fiank Act
piovisions such as oiueily liquiuation. ........................................................................................ 18
C. The plain teims of section 121 unueiscoie that the Agencies must act immeuiately
to mitigate the thieat that Bank of Ameiica poses. .................................................................. 2u
Conclusion............................................................................................................................................................. 21

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2
I. In Its Current Form, Bank of America Poses a Crave Tbreat to tbe Stability of
tbe United States Financial System.
Bank of Ameiica poses a giave thieat to 0.S. financial stability by any ieasonable uefinition
of that phiase. The Bouu-Fiank Act uoes not uefine "giave thieat," noi uoes it appeai in
banking law. The 0xfoiu English Bictionaiy uefines "giave" in ielevant pait as "Weighty,
impoitant; in latei use chiefly, iequiiing seiious thought, seiious."
S
As applieu to the iisk
that Bank of Ameiica poses to the 0.S. financial system, that uefinition is a vast
unueistatement. As this section uiscusses, Bank of Ameiica's size, inteiconnecteuness, lack
of manageability, anu the moial hazaiu pioblems it peipetuates make it extiaoiuinaiily
uangeious. As a iesult of these factois, the institution at any point coulu expeiience a
suuuen, unexpecteu iun that tiiggeis a financial ciisis.
To be suie, the same analysis applies to othei laige 0.S. financial institutions as well. But
publicly available infoimation suggests that Bank of Ameiica is the iiskiest anu the neaiest
to financial ciisis.
A. Bank of America is systemically dangerous due to its size and
interconnectedness.
Theie is little uoubt that Bank of Ameiica's size anu inteiconnecteuness make it
systemically uangeious. It is cleai that financial iegulatois agiee with this position, having
vieweu Bank of Ameiica as too systemically significant to peimit its failuie (the notion
populaiizeu as "too big to fail"). Foi example, in 2uu8 anu 2uu9, the bank ieceiveu $4S
billion fiom Tioubleu Asset Relief Piogiam. The bank also ieceiveu assistance fiom the
Boaiu. Between 2uu7 anu 2u11, the Boaiu's lenuing to the bank totaleu ovei $1.u17 tiillion
on a non-teim aujusteu basis,
4
anu peakeu at $91.4 billion in Febiuaiy 2uu9.
S
That financial
suppoit woulu have been unjustifieu absent the conclusion that a Bank of Ameiica failuie
woulu be too uamaging to the financial system to peimit. Since those bailouts, the bank's
systemic significance has not uiminisheu.

S
TBE C0NPACT 0XF0RB ENuLISB BICTI0NARY 7u2 (2u Eu. 1987). Neiiiam-Webstei uefines "giave" in ielevant
pait as "meiiting seiious consiueiation," "likely to piouuce gieat haim oi uangei" oi "significantly seiious."
Neiiiam-Webstei.com, NERRIAN-WEBSTER (2u11), ovoiloble ot http:¡¡bit.ly¡iX1ucX. In iecent uecaues, couits
incieasingly have useu uictionaiies to assist theii inteipietation of oiuinaiy woius in statutes. See qenerolly
}effiey Kiichmeiei & Samuel Thumma, Scolinq tbe lexicon Iortress: Tbe 0niteJ Stotes Supreme Court´s 0se of
Bictionories in tbe Twenty-Iirst Century, 94 NARQ. L. REv. 77 (2u1u).
4
}ames Felkeison, $29,000,000,000,000: A BetoileJ look ot tbe IeJ´s Boilout by IunJinq Iocility onJ Recipient,
TBE LEvY EC0N0NICS INSTIT0TE 0F BARB C0LLEuE W0RKINu PAPER C0LLECTI0N, Bec. 2u11, ovoiloble ot
http:¡¡bit.ly¡tAKvKw.
S
Bob Iviy, Biauley Keoun anu Phil Kunt, Secret IeJ loons 6ove Bonks $1S Billion 0nJiscloseJ to Conqress,
BL00NBERu NEWS, Nov. 27, 2u11, ovoiloble ot http:¡¡bloom.bg¡tEtA4u.
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S
A iecent stuuy by the volatility Institute at New Yoik 0niveisity's Stein School of Business
pioviues a moie conciete fiamewoik foi consiueiing systemic iisk. Reseaicheis uefineu
systemic iisk as an aggiegate capital shoitfall in the financial sectoi, then useu publicly
available uata to analyze anu iank each financial institution's inuiviuual contiibution to
that shoitfall÷anu theiefoie to oveiall systemic iisk.
6
Bank of Ameiica ianks most iisky
among 0.S. fiims, contiibuting 19.S peicent of 0.S. systemic iisk.
7
This ianking
uemonstiates that among 0.S. financial institutions, Bank of Ameiica not only is the most
susceptible to financial ciises, but also will contiibute the most to theii cieation oi
extension.
8

B. Bank of America cannot be managed or regulated soundly.
Bank of Ameiica is also "too big to manage." It is the seconu laigest bank holuing company
in the 0.S. It has assets of $2.1 tiillion, equal to moie than 14 peicent of 0.S. gioss uomestic
piouuct,
9
anu $1 tiillion in ueposits, oi 14 peicent of 0.S. ueposits.
1u
It is a conglomeiation
of seveial uiffeient lines of business, many of which aie ielatively new to the institution.
Alieauy a behemoth, between 2uu6 anu 2uu8 Bank of Ameiica acquiieu seveial othei
institutions, incluuing Countiywiue Financial, Neiiill Lynch, NBNA, 0S Tiust, anu La Salle
Bank. It giew S1 peicent baseu on its acquisitions of Countiywiue anu Neiiill Lynch
alone.
11
Bank of Ameiica's acquisitions have iesulteu in a massive uestiuction of value. The
bank spent $148 billion on acquisitions fiom 1998 to 2u11 but is cuiiently woith
appioximately $7u billion.
12
Although Bank of Ameiica conuucteu a yeai's woith of uue

6
viial Achaiya, Thomas F. Cooley, Robeit Engle anu Natthew Richaiuson, 0verseeinq systemic risk, v0X, Feb.
27, 2u11, ovoiloble ot http:¡¡bit.ly¡e4Fp61.
7
NY0 Stein Systemic Risk Analysis of 0.S. Financials, ovoiloble ot http:¡¡bit.ly¡9Ssetu (as of }an. 19, 2u12).
8
viial Achaiya, Thomas F. Cooley, Robeit Engle, anu Natthew Richaiuson, 0verseeinq systemic risk, v0X, Feb.
27, 2u11, ovoiloble ot http:¡¡bit.ly¡e4Fp61.
9
Piess Release, Bank of Ameiica, "Bank of Ameiica Repoits Fouith-Quaitei 2u11 Net Income of $2.u Billion,
oi $u.1S Pei Biluteu Shaie Full-Yeai 2u11 Net Income of $1.4 Billion, oi $u.u1 Pei Biluteu Shaie," (}an. 19,
2u12), ovoiloble ot http:¡¡bit.ly¡wm7gEv. 0.S. uBP was at $14.S8 in 2u1u, accoiuing to the Woilu Bank. See
Woilu Bank, Bata: 0niteu States, ovoiloble ot http:¡¡bit.ly¡cE1hhR.
1u
Piess Release, Bank of Ameiica, "Bank of Ameiica Repoits Fouith-Quaitei 2u11 Net Income of $2.u Billion,
oi $u.1S Pei Biluteu Shaie Full-Yeai 2u11 Net Income of $1.4 Billion, oi $u.u1 Pei Biluteu Shaie," (}an. 19,
2u12), ovoiloble ot http:¡¡bit.ly¡wm7gEv.
11
Richaiu W. Fishei, Two Areos of Present Concern: tbe Fconomic 0utlook onJ tbe Potboloqy of Too-Biq-to-Ioil
{Witb Reference to Frrol Ilynn, }obnny Hercer, 6ory Stern onJ voltoire), Remaiks befoie the Senioi Belegates'
Rounutable of the Fixeu Income Foium, }uly 2S, 2uu9, ovoiloble ot http:¡¡bit.ly¡yI2ijA.
12
Simon }ohnson, Bonk of Americo ls Too Hucb of o Bebemotb to Ioil, BL00NBERu NEWS, 0ct. 2S, 2u11, ovoiloble
ot bttp:,,bloom.bq,nZz8WB. Foi a visual uepiction of the bank's giowth, see Ban Fitzpatiick anu }oann S.
Lubin, Bonk of Americo PonJers Retreot: BuilJinq o TroubleJ Titon lnteroctive 6ropbic, TBE WALL STREET
}00RNAL, }an. 1S, 2u12, ovoiloble ot http:¡¡on.wsj.com¡ymTiu0. Bank of Ameiica's maiket capitalization is
cuiiently appioximately $7u billion, as of }anuaiy 19, 2u11. The bank's maiket capitalization fell to
appioximately $S6 billion in Becembei 2u11. See Bonk of Americo Corporotion Eistoricol Horket Cop Boto,
Ychaits.com, ovoiloble ot http:¡¡bit.ly¡zcShTe.
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4
uiligence befoie acquiiing Countiywiue Financial, the $4 billion acquisition ultimately
might cost Bank of Ameiica $6u billion.
1S

Bank of Ameiica has tacitly acknowleugeu that it is engageu in too many activities. CE0
Biian Noynihan has iepeateuly stateu that one of his chief goals is to focus the bank moie
on coie activities anu sell noncoie assets.
14
These effoits aie lauuable but fall fai shoit of
guaianteeing that the bank will be manageable. Bank of Ameiica's size anu complexity
make it impossible foi management oi financial iegulatois to unueistanu the institution
fully oi to assess auequately the iange anu seveiity of the iisks it faces.
1S
As Richaiu W.
Fishei, Piesiuent anu CE0 of the Feueial Reseive Bank of Ballas, stateu iecently, "theie is
scant chance that manageis of $1 tiillion oi $2 tiillion banking enteipiises can possibly
'know theii customei,' follow time-honoieu piinciples of banking anu fashion ieliable iisk
management mouels foi oiganizations as complex as these megabanks have become."
16

C. Tbe tbreat tbat Bank of America poses is increased by its financial
condition, wbicb is poor and could deteriorate rapidly.
In auuition to its size, complexity, inteiconnecteuness, anu lack of manageability, Bank of
Ameiica's financial conuition is pooi anu coulu woisen iapiuly at any time. This section

1S
Simon }ohnson, Bonk of Americo ls Too Hucb of o Bebemotb to Ioil, BL00NBERu NEWS, 0ct. 2S, 2u11, ovoiloble
ot http:¡¡bloom.bg¡nZz8WB.
14
Bank of Ameiica Coipoiation Special Call, Paiticipating on Faiiholme Capital Nanagement Funuholuei Call,
Weunesuay Aug. 1u, 2u11, tiansciipt ovoiloble ot http:¡¡bit.ly¡nlWBS4; Bank of Ameiica Coipoiation QS
2u11 Eainings Call, 0ct. 18, 2u11, tiansciipt ovoiloble ot http:¡¡bit.ly¡pL0A4z.
1S
See, e.q., Inteiview with Simon }ohnson, Benzinga.com, Sept. 16, 2u11, ovoiloble ot http:¡¡bit.ly¡siiA7N ("I
think Bank of Ameiica has become too big to manage. It neeus to be bioken up. The kinus of measuies they've
taken aie stopgap, anu iepainting the ueck chaiis on the Titanic, in my assessment."); Richaiu W. Fishei,
Hinsky Homents onJ Iinonciol Requlotory Reform, Remaiks befoie the 19th Annual Byman P. Ninsky
Confeience on the State of the 0.S. anu Woilu Economies, Api. 14, 2u1u ovoiloble ot http:¡¡bit.ly¡sB2Zve
("|Tjhese laige institutions aie spiawling anu complex÷so vast that theii own management teams may not
fully unueistanu theii own iisk exposuies, pioviuing feitile giounu foi unintenueu 'incompetence' to take
ioot anu giow. It woulu be futile to expect that theii iegulatois anu cieuitois coulu untangle all the thieaus,
especially unuei iapiuly changing maiket conuitions."); }onathan Weil, Bonk of Americo FJqes Closer to
Tippinq Point, BL00NBERu NEWS, Nov. S, 2u1u, ovoiloble ot http:¡¡bloom.bg¡tuqcfu ("The only ceitainty is
theie is none, asiue fiom the knowleuge that Bank of Ameiica's top executives have no iuea what goes on
insiue the bowels of theii company."); }im Nillstein, Furope´s lorqest Bonks Eove Become Too Biq to Sove,
FINANCIAL TINES, Nov. 14, 2u11, ovoiloble ot http:¡¡on.ft.com¡skTPbL ("The one inescapable conclusion we
must all uiaw fiom the iecent financial ciisis is that the so-calleu "global systemically impoitant financial
institutions" aie not only too big to fail anu too big to save, but most impoitantly, they aie also too big to
manage. The iisks they iun aie too complex foi the small gioup of manageis at the top of any one of these
mammoth oiganisations to fully giasp, foi iegulatois to supeivise anu foi investois to unueistanu anu
uiscipline.").
16
Richaiu W. Fishei, Tominq tbe Too-Biq-to-Ioils: Will BoJJ-Ironk Be tbe Ticket or ls lop-BonJ Surqery
RequireJ? Remaiks befoie Columbia 0niveisity's Politics anu Business Club, Nov. 1S, 2u11, ovoiloble ot
http:¡¡bit.ly¡v0Pkmk. As a iemeuy, Fishei pioposeu "uownsizing the behemoths ovei time into institutions
that can be piuuently manageu . . . ."
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
S
ieviews eviuence iegaiuing the bank's pooi financial conuition anu its laigest outstanuing
souices of iisk.
1. Several indicators suggest current financial distress at Bank of
America.
o. Neor-term finonciol inJicotors: stock price, price-to-book volue,
Jerivotives tronsfers, onJ CBS spreoJs
Seveial shoit-teim inuicatois uemonstiate that Bank of Ameiica's financial conuition is
extiemely pooi. Fiist, the bank's stock piice has plungeu, iecently falling below $S.uu pei
shaie.
17
That is appioximately a 9u peicent ueciease since the fiist hints of financial ciisis
appeaieu in 2uu7,
18
anu appioximately a 6S peicent ueciease uuiing 2u11 alone.
19
The last
time Bank of Ameiica's stock piice fell so low was Naich of 2uu9, when the bank was in the
uepths of ciisis.
2u
Even at its cuiient piice of ioughly $7.uu pei shaie,
21
that is a Su peicent
uecline in the last yeai.
Noie impoitant than the stock piice alone, theie is a shaip uisciepancy between Bank of
Ameiica's claims iegaiuing its value anu the maiket's valuation. Bank of Ameiica's shaie
piice-to-tangible book value is extiemely low, at less than SS peicent.
22
To put this in
peispective, }PNoigan Chase's iatio is ioughly 12u peicent, Citigioup's is 8S peicent, anu
Wells Faigo's is 18u peicent.
2S
Such an extiemely low iatio inuicates that something is
funuamentally wiong with Bank of Ameiica. The maiket believes the bank is ioughly half of
what management claims it is woith.
Anothei ciitical inuicatoi is that counteipaities aie losing confiuence that Bank of Ameiica
will meet its obligations unuei ueiivatives contiacts. Accoiuing to iepoits, the bank's
ueiivatives counteipaities iequesteu that the bank tiansfei a sizeable poition of the bank's

17
0n Nonuay, Becembei 19, 2u11, Bank of Ameiica's stock piice fell to $4.92 anu closeu at $4.99. See Bonk of
Americo Corporotion {BAC) Eistoricol Prices, YAB00! FINANCE, ovoiloble ot http:¡¡yhoo.it¡vZyhSR.
18
The stock tiaueu above $Su foi much of 2uu7. See iJ.
19
0n }anuaiy S, 2u11, the stock closeu at $14.19 pei shaie. See iJ.
2u
The stock hit a low of $S.uu on Naich 6, 2uu9. See iJ. At that time, Boaiu suppoit foi the bank hau just
peakeu at $91.4 billion in loans. Bob Iviy, Biauley Keoun anu Phil Kunt, Secret IeJ loons 6ove Bonks $1S
Billion 0nJiscloseJ to Conqress, BL00NBERu NEWS, Nov. 27, 2u11, ovoiloble ot http:¡¡bloom.bg¡tEtA4u.
21
As of }anuaiy 19, 2u12. See Bonk of Americo Corporotion {BAC) Eistoricol Prices, YAB00! FINANCE, ovoiloble ot
http:¡¡yhoo.it¡vZyhSR.
22
Baseu on Bank of Ameiica's tangible book value pei common shaie of $12.9S. Piess Release, Bank of
Ameiica, "Bank of Ameiica Repoits Fouith-Quaitei 2u11 Net Income of $2.u Billion, oi $u.1S Pei Biluteu
Shaie Full-Yeai 2u11 Net Income of $1.4 Billion, oi $u.u1 Pei Biluteu Shaie," (}an. 19, 2u12), ovoiloble ot
http:¡¡bit.ly¡wm7gEv.
2S
Baseu on }PNoigan's shaie piice of $S6.9S anu tangible book value pei shaie of $Su.29, Citigioup's shaie
piice of $S8.u8 anu tangible book value pei shaie of $42.69, anu Wells Faigo's shaie piice of $Su.1S anu
tangible book value of $16.S7. As of }anuaiy 2u, 2u12. See http:¡¡onfoib.es¡uSA0RT;
http:¡¡onfoib.es¡vKRm91; http:¡¡onfoib.es¡wLB4bf.
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6
ueiivatives contiacts fiom the bank's investment subsiuiaiy, Neiiill Lynch, to the Bank of
Ameiica NA, which is insuieu by the Feueial Beposit Insuiance Coipoiation (FBIC).
24
Bank
of Ameiica is complying with the uemanu. While the ciicumstances anu potential
consequences aie not fully cleai, moving ueiivatives to the FBIC-insuieu subsiuiaiy coulu
benefit the bank anu its counteipaities by tuining the iiskiest assets with high collateial
iequiiements into safei assets that take auvantage of the Feueial Reseive uiscount winuow
subsiuy anu the FBIC subsiuiaiy's highei cieuit iating to help lowei the cost of posting
maigin.
2S
Auuitionally, the possibility exists that the feueial goveinment may use taxpayei
money in the FBIC insuiance funu to subsiuize losses unuei these tioubleu ueiivatives
contiacts.
26

In auuition, the piices of cieuit uefault swaps (CBS) on Bank of Ameiica iecently iose to
iecoiu highs. Because costs to buy cieuit piotection iise as moie investois seek to insuie
against a possible uefault, CBS spieaus can inuicate the maiket's faith in a company.
27

Recently, the five-yeai CBS spieau on Bank of Ameiica iose to 489.72 basis points.
28
In
compaiison, }PNoigan Chase's CBS spieau ieacheu 18S basis points, Citigioup's iose to
S2S basis points, anu Wells Faigo's hit 179 basis points.
29
Accoiuing to Wells Faigo's
Novembei 28, 2u11 Equity Reseaich iepoit, "CBS spieaus foi the top 6 0.S. banks have
wiueneu mateiially ovei the past yeai but laigely iemain below the peak witnesseu in the
cieuit ciisis of 2uu8-2uu9. The exception to this tienu appeais to be BAC . . . wheie its

24
Bob Iviy, Bugh Son anu Chiistine Baipei, BofA SoiJ to Split Requlotors over Hovinq Herrill Berivotives to
Bonk 0nit, BL00NBERu NEWS, 0ct. 18, 2u11, ovoiloble ot http:¡¡bloom.bg¡nzXv17.
2S
lJ. (Saule 0maiova saiu, "Congiess uoesn't want a bank's FBIC insuiance anu access to the Feu uiscount
winuow to somehow benefit an affiliate, so they cieateu a fiiewall."); Yves Smith, Bonk of Americo
Beotbwotcb: Hoves Risky Berivotives from EolJinq Compony to Toxpoyer-BockstoppeJ Bepository, NAKEB
CAPITALISN, 0ct. 18, 2u11, ovoiloble ot http:¡¡bit.ly¡ibtNbu ("If you have any uoubt that Bank of Ameiica is in
tiouble, this uevelopment shoulu settle it . . . . Now you woulu expect this move to be uiiven by auveise
selection, that it, that BofA woulu move its W0RST ueiivatives, that is, the ones that weie iiskiest oi
otheiwise hau high collateial posting iequiiements, to the sub. Bill Black confiimeu that even though the
uetails weie sketchy, this is piecisely what took place.").
26
Simon }ohnson, Bonk of Americo ls Too Hucb of o Bebemotb to Ioil, BL00NBERu NEWS, 0ct. 2S, 2u11, ovoiloble
ot http:¡¡bloom.bg¡nZz8WB ("The move puts the Feueial Beposit Insuiance Coip. on the hook foi any losses.
The FBIC's ueposit-insuiance funus come fiom its membei banks, but because the agency can tap a 0.S.
Tieasuiy line of cieuit if the funu iuns uiy, taxpayeis coulu be at iisk, too . . . If Bank of Ameiica ieally hau
enough capital, it woulun't have neeueu to move its ueiivatives iisk onto its FBIC-insuieu ueposit business.");
Piess Release, Senatoi Sheiiou Biown, "Sen. Biown Leaus 1u Senatois in Letting Raising Concein 0vei Bank
of Ameiica's Nove of Risky Beiivatives to Taxpayei-Backeu Banking 0nit," 0ct. 27, 2u11, ovoiloble ot
http:¡¡1.usa.gov¡vNuiN6 (uiscussing lettei that iaises conceins that the move violateu the spiiit of Section
2SA of the Feueial Reseive Act anu the volckei Rule).
27
See qenerolly Petei Tschii, CBS - EoorJinq onJ BownqroJes onJ Colloterol, ZeioBeuge.com, Sept. 22, 2u11,
ovoiloble ot http:¡¡bit.ly¡o91ygA; Stefano uiglio, CBS SpreoJs onJ Systemic Iinonciol Risk, Baivaiu 0niveisity,
Nay 2u1u, ovoiloble ot http:¡¡bit.ly¡vSYuhS.
28
See Inteiactive Stock Chait foi Bank of Ameiica Coip, BL00NBERu NEWS, ovoiloble ot
http:¡¡bloom.bg¡ulbBNW.
29
Natthew B. Buinell, Beiman Chan anu }ason Baibes, Fquity Reseorcb: lorqe Cop 0.S. Bonks: Horket Honitor,
WELLS FARu0 SEC0RITIES, Nov. 28, 2u11.
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
7
cuiient CBS spieaus enueu the week of Novembei 2S SS peicent wiuei than the peak
expeiienceu in 2uu8-2uu9."
Su
Foi much of 2uu7 befoie the ciisis, these spieaus weie veiy
low, at less than Su basis points.
S1

With the high costs of cieuit piotection anu its iecent cieuit uowngiaue,
S2
Bank of Ameiica
has become a cieuit iisk. The bank's counteipaities coulu ueciue that the costs of
piotection aie too high anu ueciue to unwinu oi assign theii secuiities positions with the
bank. This unwinuing oi assignment of positions coulu have the same effect as a iun if a
piominent souice of the bank's funuing is cut oi if the bank is iequiieu to ietuin collateial
to counteipaities unuei collateial agieements.
SS

b. lonq-term finonciol inJicotors Jemonstrote tbot Bonk of Americo
is becominq increosinqly unstoble.
Bank of Ameiica posteu a net loss of $8.8 billion in the seconu quaitei of 2u11.
S4
0f the
losses, $14.S billion weie attiibuteu to consumei ieal estate seivices.
SS
Although the bank
ueclaieu a net piofit of $6.2 billion in the thiiu quaitei of 2u11
S6
anu a net piofit of $2.u
billion in the fouith quaitei of 2u11,
S7
it uiu so only because of non-cash accounting
aujustments that uo not ieflect the company's tiue financial position anu one-time gains
fiom asset sales anu stock swaps.
Accounting aujustments foi the thiiu quaitei of 2u11 useu by all majoi banks incluue
favoiable aujustment of loan loss piovisions, income tax benefits, anu Bebt-valuation
Accounting (BvA). 0nuei BvA, a bank can ueclaie piofits when its bonus ueciease in value
anu cieuit spieaus wiuen. Because the bank woulu show an impioveu balance sheet if it
hypothetically bought back oi calleu its bonus at the uecieaseu values, BvA peimits it to

Su
lJ.
S1
See Inteiactive Stock Chait foi Bank of Ameiica Coip, BL00NBERu NEWS, ovoiloble ot
http:¡¡bloom.bg¡ulbBNW.
S2
Eileen A} Connelly, S&P BownqroJes 6olJmon Socbs, Bonk 0f Americo, Wells Iorqo AnJ Citiqroup, TBE
B0FFINuT0N P0ST, Nov. 29, 2u11, ovoiloble ot http:¡¡huff.to¡vSQyBq; Naik uongloff, Iitcb BownqroJes o Buncb
of Bonks, lncluJinq Bonk of Americo onJ 6olJmon, TBE WALL STREET }00RNAL NARKETBEAT, Bec. 1S, 2u11,
ovoiloble ot http:¡¡on.wsj.com¡tvwLsn.
SS
Petei Tschii, CBS - EoorJinq onJ BownqroJes onJ Colloterol, ZeioBeuge.com, Sept. 22, 2u11, ovoiloble ot
http:¡¡bit.ly¡o91ygA.
S4
Piess Release, Bank of Ameiica, "Bank of Ameiica Repoits Seconu-Quaitei 2u11 Financial Results," (}uly
19, 2u11), ovoiloble ot http:¡¡bit.ly¡nKBiaj.
SS
lJ.
S6
Piess Release, Bank of Ameiica, "Bank of Ameiica Repoits Thiiu-Quaitei 2u11 Net Income of $6.2 Billion,
oi $u.S6 Pei Biluteu Shaie," (0ct. 18, 2u11), ovoiloble ot http:¡¡bit.ly¡wSNqS6.
S7
Piess Release, Bank of Ameiica, "Bank of Ameiica Repoits Fouith-Quaitei 2u11 Net Income of $2.u Billion,
oi $u.1S Pei Biluteu Shaie Full-Yeai 2u11 Net Income of $1.4 Billion, oi $u.u1 Pei Biluteu Shaie," (}an. 19,
2u12), ovoiloble ot http:¡¡bit.ly¡wm7gEv.
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
8
show those bonu piice ueclines as piofits.
S8
Countei-intuitively, BvA effectively allows the
bank to book piofits when investois become moie neivous about its ability to pay back its
uebts. }PNoigan Chase CE0 }amie Bimon has saiu that BvA "uoes not ielate to the
unueilying opeiations of the company."
S9
In Bank of Ameiica's case, $1.7 billion oi 27
peicent of its ueclaieu piofits fiom the thiiu quaitei of 2u11 aie the iesult of BvA.
4u

Bank of Ameiica has also benefiteu fiom the Financial Accounting Stanuaius Boaiu's 2uu9
suspension of maik-to-maiket accounting iequiiements. Naik-to-maiket accounting
iequiies a fiim to value its assets baseu on cuiient maiket piices, even if the fiim uoes not
sell those assets.
41
Now, the bank is not iequiieu to show the tiue values of its assets anu
can avoiu iecognizing substantial losses by holuing them inuefinitely.
Bank of Ameiica benefiteu fiom one-time gains in the fouith quaitei of 2u11, incluuing
$2.9 billion fiom the sale of a stake in China Constiuction Bank, $1.2 billion fiom the sale of
uebt secuiities, anu $1.2 billion fiom swapping piefeiieu stock foi common stock.
42

If one looks past the bank's accounting techniques anu one-time gains, its 2u11 thiiu anu
fouith quaitei iesults aie woiiisome. In the thiiu quaitei, net income fiom ueposits was
uown $148 million fiom the seconu quaitei; net income fiom caiu seivices was uown $67S
million; net income fiom global wealth anu investment management seivices was uown
$1S9 million; anu net income fiom global commeicial banking was uown $SS1 million.
4S

These tioubling tienus continueu in the fouith quaitei. Net income fiom ueposits was
uown $1SS million fiom the thiiu quaitei; net income fiom caiu seivices was uown $241
million; net income fiom global wealth anu investment management seivices was uown
$98 million; anu its global banking anu maikets unit, which incluues Neiiill Lynch, suffeieu
a net loss of $4SS million.
44


S8
Elizabeth NacBonalu, Tbe Accountinq Hove Tbot's 6oosinq Bonk Profits, F0X B0SINESS, 0ct. 19, 2u11,
ovoiloble ot http:¡¡fxn.ws¡pZLZ6s.
S9
Piess Release, }PNoigan Chase, "}PNoigan Chase Repoits Thiiu-Quaitei 2u11 Net Income of $4.S Billion, oi
$1.u2 Pei Shaie, on Revenue
1
of $24.4 Billion," (0ct. 1S, 2u11), ovoiloble ot http:¡¡bit.ly¡tqA4Eu.
4u
Piess Release, Bank of Ameiica, "Bank of Ameiica Repoits Thiiu-Quaitei 2u11 Net Income of $6.2 Billion,
oi $u.S6 Pei Biluteu Shaie," (0ct. 18, 2u11), ovoiloble ot http:¡¡bit.ly¡wSNqS6.
41
Kaia Scannell, IASB Foses Hork-to-Horket Rules, TBE WALL STREET }00RNAL, Api. S, 2uu9, ovoiloble ot
http:¡¡on.wsj.com¡2qx0Kw.
42
Bugh Son, Bonk of Americo Swinqs to Iourtb-µuorter Profit os lenJer RebuilJs Copitol, BL00NBERu NEWS, }an.
19, 2u12, ovoiloble ot http:¡¡bloom.bg¡wwKqpa.
4S
Eainings Piesentation, Bank of Ameiica, "SQ11 Financial Results," (0ct. 18, 2u11), ovoiloble ot
http:¡¡bit.ly¡vlRWnl.
44
Eainings Piesentation, Bank of Ameiica, "4Q11 Financial Results," (}an. 19, 2u12), ovoiloble ot
http:¡¡bit.ly¡pqBSQs.
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
9
In an attempt to lowei costs, Bank of Ameiica has announceu it will lay off appioximately
Su,uuu membeis of its woikfoice in the next few yeais, ioughly a 1u peicent ieuuction.
4S

Neuia iepoits also inuicate that the bank plans to close appioximately 7Su of its S,7uu
bianches.
46

2. Bank of America is likely undercapitalized, facing potential
liabilities and market risks tbat could severely destabilize it.
CE0 Biian Noynihan anu CF0 Biuce Thompson have stateu that Bank of Ameiica anu the
financial inuustiy in geneial aie funuamentally moie stable than they weie foui yeais
ago.
47
They have also stateu that Bank of Ameiica is on tiack to clean up its balance sheet,
iaise capital ieseives, anu become a "leanei, moie focuseu company."
48
Bespite these
iepiesentations, Bank of Ameiica's stability is in seiious uoubt.
Seveial analysts pieuict that Bank of Ameiica, which cuiiently has a maiket capitalization
of appioximately $7u billion, is woefully shoit of capital ieseives.
49
Beniy Blouget has
inuicateu that the bank might neeu to iaise between $1uu anu $2uu billion to clean up its
balance sheet.
Su
}effiies' equity ueiivatives specialist Layla Peiuzzi put the figuie between
$4u anu $Su billion,
S1
anu Citigioup analyst Keith Boiowitz founu that the bank may
iequiie as much as $S2 billion.
S2
As the financial ciisis of 2uu8 uemonstiateu, it is viitually

4S
Susanna Kim, Bonk of Americo Confirms S0,000 loyoffs, ABC NEWS, Sept. 12, 2u11, ovoiloble ot
http:¡¡abcn.ws¡vPCT84.
46
Ban Fitzpatiick anu }oann S. Lubin, Bonk of Americo PonJers Retreot, TBE WALL STREET }00RNAL, }an. 1S,
2u12, ovoiloble ot http:¡¡on.wsj.com¡ymTiu0.
47
Bank of Ameiica Coipoiation Special Call, Paiticipating on Faiiholme Capital Nanagement Funuholuei Call,
Weunesuay Aug. 1u, 2u11, tiansciipt ovoiloble ot http:¡¡bit.ly¡nlWBS4.
48
Piess Release, Bank of Ameiica, "Bank of Ameiica Repoits Thiiu-Quaitei 2u11 Net Income of $6.2 Billion,
oi $u.S6 Pei Biluteu Shaie," (0ct. 18, 2u11), ovoiloble ot http:¡¡bit.ly¡wSNqS6.
49
Accoiuing to Bank of Ameiica's fouith quaitei 2u11 iepoit, the company's Tiei 1 common equity iatio was
at 9.86 peicent anu its tangible common equity iatio was at 6.64 peicent. Piess Release, Bank of Ameiica,
"Bank of Ameiica Repoits Fouith-Quaitei 2u11 Net Income of $2.u Billion, oi $u.1S Pei Biluteu Shaie Full-
Yeai 2u11 Net Income of $1.4 Billion, oi $u.u1 Pei Biluteu Shaie," (}an. 19, 2u12), ovoiloble ot
http:¡¡bit.ly¡wm7gEv.
Su
Beniy Blouget, Eere´s Wby Bonk of Americo´s Stock ls Collopsinq Aqoin, B0SINESS INSIBER, Aug. 2S, 2u11,
ovoiloble ot http:¡¡bit.ly¡oTXBXn. Bank of Ameiica quickly iesponueu to Blouget's analysis, saying that he
maue "exaggeiateu anu unwaiianteu claims." Bugh Son, BofA Soys BloJqet´s Anolysis on Bonk ls ´FxoqqeroteJ´,
BL00NBERu NEWS, Auq 24, 2011, ovoiloble ot bttp:,,bloom.bq,o64Hjz.
S1
Chiistophei Bieteiich, Tbe Bebote: Will Bonk of Americo Eove to Sell Iresb Stock, TBE WALL STREET }00RNAL,
Aug. 22, 2u11, ovoiloble ot http:¡¡on.wsj.com¡nNE8Iu.
S2
Ban Fieeu, Bonk of Americo Hortqoqe Woes lurk BebinJ Forninqs, TBESTREET.C0N, }an. 19, 2u12, ovoiloble ot
http:¡¡bit.ly¡zSzmkA.
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
1u
impossible to know whethei financial institutions aie sufficiently capitalizeu until a ciisis
occuis, at which point it may be too late to iemeuy theii shoitfalls.
SS

Recently, Bank of Ameiica has incieaseu its effoits to sell noncoie assets to geneiate
capital.
S4
Since 2u1u, the bank has solu appioximately 2u uiffeient businesses foi about
$SS billion.
SS
These effoits have fallen fai shoit of what is necessaiy because only a fiaction
of the total sale piices aie applieu to capital calculations. Foi example, the bank uisposeu of
Neiiill Lynch's stake in Blackiock foi $2.S billion, but netteu only about $S77 million in
new capital. It also solu half of its China Constiuction Bank foi $8.S billion but netteu only
about $S.S billion. Auuitionally, it solu its Canauian cieuit caiu business foi about $8.S
billion but netteu only about $1uu million accoiuing to FBC Capital Naikets analyst Paul
Nillei. Bank of Ameiica uisputeu this, aiguing that the figuie is $27u million unuei Basel I
stanuaius oi $477 million unuei Basel III.
S6
Eithei amount is fai shoit of the $8.S billion
sale pioceeus. Anu with fewei noncoie assets available to sell, the bank must iaise capital
in othei ways.
0ne such way woulu be thiough a stock offeiing. Bowevei, many analysts believe Bank of
Ameiica coulu have uifficulty uoing so. Because the stock piice is so low, selling enough
stock to impact the bank's capital ieseives woulu be painfully uilutive anu theiefoie
unattiactive to management anu cuiient shaieholueis.
S7

3. Bank of America faces potential liabilities from litigation tbat it
may be unprepared to meet.
0ngoing litigation coulu iesult in substantially gieatei legal liabilities anu asset
uepieciation than Bank of Ameiica has ieseiveu foi.
S8
Two types of cases pieuominate:

SS
Beniy Blouget, So, Wben´s 0bomo 6oinq to Stort Ireokinq 0ut About Tbe Bonks?, B0SINESS INSIBER, 0ct. S,
2u11, ovoiloble ot http:¡¡bit.ly¡viucqa ("If theie's one ovei-aiching lesson of the 2uu8 ciisis, though, it's that
no one will evei know how well capitalizeu the banks aie . . . until it is too late.").
S4
Bank of Ameiica Coipoiation Special Call, Paiticipating on Faiiholme Capital Nanagement Funuholuei Call,
Weunesuay Aug. 1u, 2u11, tiansciipt ovoiloble ot http:¡¡bit.ly¡nlWBS4 (CE0 Biian Noynihan saiu that the
fiim was selling noncoie assets "aggiessively.").
SS
Ben Piotess, Bonk of Americo Sells ConoJion CreJit CorJ Business, N.Y. TINES BEALB00K, Aug. 1S, 2u11,
ovoiloble ot http:¡¡nyti.ms¡oQAcpz; Bugh Son, BofA Sbrinkinq Assets Puts $2.8 Billion Eole in Torqet,
BL00NBERu B0SINESSWEEK, }an. 19, 2u12, ovoiloble ot http:¡¡buswk.co¡A8uuS9.
S6
Kayla Tausche, Bonk of Americo´s Roce to Sell, CNBC.com, Sept. 29, 2u11, ovoiloble ot http:¡¡bit.ly¡t4BNuR.
S7
Chiistophei Bieteiich, Tbe Bebote: Will Bonk of Americo Eove to Sell Iresb Stock, TBE WALL STREET }00RNAL,
Aug. 22, 2u11, ovoiloble ot http:¡¡on.wsj.com¡nNE8Iu (quoting Peiuzzi as stating, "0ui tiaueis anu uesk
stiategist think the ieality is that the maiket is foicing BAC into a capital iaise anu the lowei stock piice goes,
the woise it gets").
S8
Chiistophei Whalen, 0ncertointy onJ inJecision tbreoten Bonk of Americo onJ qlobol morkets, RE0TERS, Aug.
9, 2u11, ovoiloble ot http:¡¡ieut.is¡qCxeFK; ("|Bank of Ameiicaj is now so vast anu unstable that it thieatens
the global economy."); Beniy Blouget, Bonk of Americo is BoomeJ, Soys Cbris Wbolen Stop Iirinq People onJ
}ust Beclore Bonkruptcy Now, B0SINESS INSIBER, Sept. 9, 2u11, ovoiloble ot http:¡¡bit.ly¡uqYqke.
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
11
claims iegaiuing moitgage-ielateu fiauu anu violations of iepiesentations anu waiianties,
anu claims foi secuiities fiauu.
Mortgage related fraud and violations of representations and warranties. Bank of
Ameiica has ieseiveu $16 billion foi its exposuie to iepiesentations anu waiianties
claims.
S9
It has alieauy paiu $1S billion.
6u
Below is infoimation on select penuing cases oi
ielateu potential liabilities.
• Bank of Ameiica iecently settleu one iepiesentations anu waiianties lawsuit with
Fannie Nae anu Fieuuie Nac foi a total estimateu value of $S billion.
61
Bowevei,
because the settlement iequiies the bank to iepuichase ueficient moitgages, it may
cost the bank moie than it oiiginally foiecasteu.
62
In the bank's 2u11 fouith quaitei
eainings piesentation, the bank estimateu that it may be iequiieu to pay $S billion
moie than existing acciuals.
6S

• Cuiiently, Bank of Ameiica is being sueu by twenty-two institutions that investeu in
moitgage-backeu secuiities which weie baseu on ueficient moitgage loans.
64
The
institutions claim that Countiywiue (now owneu by Bank of Ameiica) bieacheu
iepiesentations anu waiianties uictateu by the secuiitization tiust pooling anu
seivicing agieements by misiepiesenting that the unueilying moitgages complieu

S9
Eainings Piesentation, Bank of Ameiica, "4Q11 Financial Results," (}an. 19, 2u12), ovoiloble ot
http:¡¡bit.ly¡pqBSQs.
6u
lJ.
61
Piess Release, Bank of Ameiica, "Bank of Ameiica Announces Fouith-Quaitei Actions With Respect to Its
Bome Loans anu Insuiance Business," (}an. S, 2u11), ovoiloble ot http:¡¡bit.ly¡u4vip0.
62
Bugh Son, BofA Soys loon Repurcbose Costs Hoy FxceeJ Previous Iorecost, BL00NBERu NEWS, Aug. S, 2u11,
ovoiloble ot http:¡¡bloom.bg¡qv0isY.
6S
Eainings Piesentation, Eainings Piesentation, Bank of Ameiica, "4Q11 Financial Results," (}an. 19, 2u12),
ovoiloble ot http:¡¡bit.ly¡pqBSQs ("Estimateu iange of possible loss ielateu to non-uSE iepiesentations anu
waiianties exposuie coulu be up to $SB ovei existing acciuals at Becembei S1, 2u11. The company is not
cuiiently able to ieasonably estimate the possible loss oi iange of possible loss with iespect to uSE
iepiesentations anu waiianties exposuie ovei existing acciuals at Becembei S1, 2u11."); Bank of Ameiica
Coipoiation Foim 1u-Q, Quaiteily Repoit Puisuant to Section 1S oi 1S(u) of the Secuiities Exchange Act of
19S4, Foi the Quaiteily Peiiou Enueu }une Su, 2u11, ovoiloble ot http:¡¡bit.ly¡tvBNij ("While the Coipoiation
has an establisheu histoiy of woiking with the uSEs on iepuichase claims, its expeiience with them continues
to evolve anu impact the Coipoiation's estimateu iepuichase iates anu liability. In auuition, the iecent FNNA
announcement iegaiuing moitgage insuiance iescissions, cancellations anu claim uenials coulu iesult in
incieaseu iepuichase iequests fiom FNNA that exceeu the iepuichase iequests contemplateu by the
estimateu liability . . . . We aie not able to anticipate changes in the behavioi of the uSEs fiom oui past
expeiiences. Theiefoie, it is not possible to ieasonably estimate a possible loss oi iange of possible loss with
iespect to any such potential impact in excess of cuiient acciuals on futuie uSE piovisions if the behavioi of
the uSEs changes fiom past expeiience.").
64
Piess Release, uibbs & Biuns LLP, "22 Institutional Investois in Countiywiue-Issueu RNBS Announce
ulobal Settlement of Noitgage Repuichase anu Seivicing Claims foi SSu Countiywiue-Issueu RNBS Tiusts,"
(}une 29, 2u11), ovoiloble ot http:¡¡bit.ly¡tx9YSe.
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
12
with specific unueiwiiting guiuelines.
6S
In }une 2u11, Bank of Ameiica pioposeu an
$8.S billion settlement, hoping to enu the suit anu calm neivous investois.
66
But
many inteiesteu paities objecteu to the settlement. New Yoik Attoiney ueneial Eiic
Schneiueiman inteiveneu anu iejecteu it as "unfaii anu inauequate."
67
0thei state
attoineys geneial anu the FBIC objecteu, aiguing that they lackeu infoimation
sufficient to assess its auequacy.
68
This suit theiefoie iemains penuing anu is likely
to involve a settlement of substantially moie than $8.S billion.
• AIu is also suing Bank of Ameiica foi $1u billion, claiming that Bank of Ameiica,
Neiiill Lynch, anu Countiywiue Financial misiepiesenteu the quality of the
unueilying moitgages that weie secuiitizeu anu solu to AIu.
69

• Bank of Ameiica's paiticipation in the Noitgage Electionic Registiation System
(NERS) also might iesult in vast liabilities. NERS was cieateu by many banks,
incluuing Bank of Ameiica, to ciicumvent centuiies-olu piopeity law. Insteau of
publicly iecoiuing moitgage conveyances in county inuexes, NERS alloweu the
banks to iecoiu piopeity conveyances electionically. NERS was quick anu
inexpensive, anu alloweu foi incieasing moitgage oiigination anu secuiitization.
Bowevei, in the banks' haste to tuin moitgages into moitgage-backeu secuiities,
they allegeuly faileu to make complete tiansfeis of moitgages, uiu not keep piopei
iecoius of the faileu tiansfeis, anu uiu not comply with the iequiiements of theii
own pooling anu seivicing agieements. Noieovei, it may be uifficult, if not
impossible, to cuie these eiiois. It is allegeu that many banks, incluuing
Countiywiue, engageu in uocument fabiication anu secuiities fiauu in attempts to
iemeuy the ueficiencies.
7u


6S
Bonk of N.Y. Hellon v. Wolnut Ploce llC, No. 11 Civ. S988(WBP), 2u11 WL 49SS9u7, ÷ F. Supp. 2u ÷
(S.B.N.Y. 0ct. 19, 2u11).
66
Piess Release, Bank of Ameiica, "Bank of Ameiica Announces Agieement on Legacy Countiywiue Noitgage
Repuichase anu Seivicing Claims," (}une 29, 2u11), ovoiloble ot http:¡¡bit.ly¡vFBSNE.
67
Nemoianuum of Eiic T. Schneiueiman, Attoiney ueneial of the State of New Yoik, in Suppoit of Notion to
Inteivene, In the matter of the application of The Bank of New York Mellon, Inuex No. 6S1786¡2u11, Supieme
Couit of New Yoik, Aug. 4, 2u11, ovoiloble ot http:¡¡bit.ly¡iBNx4L; veiifieu Pleauing in Inteivention,
Attoiney ueneial of the State of New Yoik, ln tbe motter of tbe opplicotion of Tbe Bonk of New York Hellon,
Inuex No. 6S1786¡2u11, Supieme Couit of New Yoik, Aug. 4, 2u11, ovoiloble ot http:¡¡bit.ly¡iXAvuB.
68
Notice of Intention to Appeai anu 0bject, Feueial Beposit Insuiance Coipoiation, ln tbe motter of tbe
opplicotion of Tbe Bonk of New York Hellon, Case 1:11-cv-uS988-0A, Supieme Couit of New Yoik, Aug. 29,
2u11, ovoiloble ot http:¡¡bit.ly¡tSK0ze; Agnes T. Ciane, Breokinqviews: Biq 0.S. foreclosure settlement isn't
JeoJ yet, Thomson RE0TERS NEWS ANB INSIuBT, Bec. 1, 2u11, ovoiloble ot http:¡¡bit.ly¡vTKSwE.
69
Complaint, Americon lnternotionol 6roup lnc. v. Bonk of Americo Corporotion, Supieme Couit of New Yoik,
Aug. 8, 2u11, ovoiloble ot http:¡¡bit.ly¡sBSeZt.
7u
See L. Ranuall Wiay, Anotomy of Hortqoqe IrouJ Port l, Hers´s Smokinq 6un, TBE B0FFINuT0N P0ST, Bec. 9,
2u1u, ovoiloble ot http:¡¡huff.to¡eBv2Xv; L. Ranuall Wiay, Anotomy of Hortqoqe IrouJ Port ll, Tbe Hotber of
All IrouJs, TBE B0FFINuT0N P0ST, Bec. 1S, 2u1u, ovoiloble ot http:¡¡huff.to¡eoBug2; ln re AqorJ, 444 B.R. 2S1,
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
1S
• In auuition to potential liability, Bank of Ameiica may be unable to piove its inteiest
in piopeities it puipoits to own, anu theiefoie unable to establish stanuing to
foieclose on them. Such a uevelopment coulu cause billions of uollais in auuitional
losses foi the bank.
71

No one knows the extent of Bank of Ameiica's moitgage anu moitgage secuiities liability,
much of which is attiibutable to actions taken by moitgage giant Countiywiue Financial
befoie Bank of Ameiica bought it. Countiywiue's liability may be so gieat foi the bank
holuing company that CE0 Biian Noynihan aumitteu to having consiueieu putting the
moitgage unit thiough bankiuptcy.
72

Securities fraud. Bank of Ameiica is also being sueu by shaieholueis in a secuiities fiauu
class action.
7S
The plaintiffs allege that when Bank of Ameiica bought Neiiill Lynch, Bank
of Ameiica uelibeiately faileu to uisclose to investois a $1S.S1 billion loss so that investois
woulu appiove the ueal quickly. The complaint fuithei alleges that Bank of Ameiica's
geneial counsel was unawaie of the loss when he iecommenueu appioval, then was fiieu
when he uiscoveieu the loss anu tiieu to meet with the chief financial officei to uiscuss it.
This suit is still penuing. The Secuiities anu Exchange Commission pieviously sueu Bank of
Ameiica ovei the same issue. In that case, the juuge iejecteu an initial $SS million
settlement as inauequate befoie appioving a $1Su million ueal.
74
The juuge calleu the final
settlement anu the lack of penalties foi the CE0 anu CF0 "half-bakeu justice at best."
7S

The fiim's oveiall liability fiom outstanuing litigation may iange between $Su anu $Su
billion, enough in itself to cause the bank to fail.

2S4 (Banki. E.B.N.Y. 2u11) (The couit "leaves open the issue as to whethei moitgages piocesseu thiough the
NERS system aie piopeily peifecteu anu valiu liens."); Chiistophei Peteison, Ioreclosure, Subprime Hortqoqe
lenJinq, onJ tbe Hortqoqe Flectronic Reqistrotion System, 78 0. CIN. L. REv. 1SS9 (2u1u); Piess Release,
Attoiney ueneial Naitha Coakley, "Five National Banks Sueu by Au Coakley in Connection with Illegal
Foieclosuies anu Loan Seivicing," (Bec. 1, 2u11), ovoiloble ot http:¡¡1.usa.gov¡uBvAPt (iepoiting on lawsuit
by Nassachusetts Attoiney ueneial Naitha Coakley alleging unfaii anu ueceptive tiaue piactices by Bank of
Ameiica, }P Noigan Chase, Citibank, uNAC, Wells Faigo, NERS, anu NERSC0RP).
71
lJ.
72
Bank of Ameiica Coipoiation Special Call, Paiticipating on Faiiholme Capital Nanagement Funuholuei Call,
Weunesuay Aug. 1u, 2u11, tiansciipt ovoiloble ot http:¡¡bit.ly¡nlWBS4. In iesponse to a question about
putting Countiywiue thiough bankiuptcy, CE0 Biian Noynihan saiu, "When you'ie |sicj face liabilities like
this, we thought of eveiy possible thing we coulu, but I uon't think I'u comment on any outcome." Noynihan
also aumitteu iegiets ovei the Countiywiue acquisition, saying, "0bviously, theie aien't many uays that I get
up anu think positively about the Countiywiue tiansaction in 2uu8." lJ.
7S
Consoliuateu Seconu Amenueu Class Action Complaint, ln Re Bonk of Americo Corp, Securities, Berivotive,
onJ Fmployee Retirement lncome Security Act {FRlSA) litiqotion, Case 1:u9-mu-u2uS8-PKC, 0ct. 22, 2u1u,
ovoiloble ot http:¡¡bit.ly¡vaaWSQ.
74
Steven Baviuoff, A $S0 Billion Cloim of Eovoc looms for Bonk of Americo, TBE NEW Y0RK TINE BEALB00K, Sept.
27, 2u11, ovoiloble ot http:¡¡nyti.ms¡n4mWRb.
7S
S.F.C. v. Bonk of Americo Corp., 2u1u WL 624S81 (S.B.N.Y. Feb. 22, 2u1u).
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
14
4. Exposure to financial instability in Europe could devastate
Bank of America.
Bank of Ameiica iisks gieat losses as a iesult of Euiope's ongoing financial ciisis. If the
ciisis becomes acute anu contagion spieaus thioughout Euiope, it woulu thieaten both
Bank of Ameiica anu 0.S. financial stability.
A systemic event in Euiope piesents two iisks to Bank of Ameiica. Fiist, the bank coulu be
exposeu uiiectly thiough lenuing agieements. Seconu, Ameiican banks coulu suffei fiom
inuiiect (counteipaity) exposuie thiough unuiscloseu anu unknown inteiconnections
between financial institutions. While uiiect exposuie may be mouest, inuiiect exposuie
coulu be immense.
The inteiconnections between global financial institutions aie not fully known oi uiscloseu
to shaieholueis, cieuitois, management, oi iegulatois. The potential consequences of these
inteiconnections aie theiefoie unpieuictable until ciisis stiikes. As a iesult, financial actois
aie unable to assess iisk in the financial system anu act accoiuingly. Fuitheimoie, theie aie
no fiiewalls to stop a contagious event. Foimei Feueial Reseive Chaiiman Alan uieenspan
has expiesseu concein ovei these opaque connections, saying "I think it's veiy uangeious.
Eveiyone's got theii fingeis ciosseu . . . This is an integiateu system. The piesumption that
somehow the huge Ameiican banking system . . . is inuepenuent of Euiope is, I think, just
utteily uniealistic . . . It looks inuepenuent until it isn't."
76

Accoiuing to FFIEC Foim uu9, the foim by which banks uisclose theii foieign exposuie to
iegulatois, 0.S. banks iisk $17S billion in uiiect gioss exposuie anu $SSu billion in "othei
potential exposuie" to Poitugal, Italy, Iielanu, uieece, anu Spain (the "PIIuS").
77
These
figuies uo not incluue exposuies to Fiance anu ueimany.
Inuiiect exposuie to ciisis in Fiance anu ueimany coulu be significant. If Fiench oi ueiman
banks have solu CBS on the PIIuS countiies anu those countiies uefault, then the Fiench oi
ueiman banks woulu be liable unuei those CBS contiacts. If the banks aie not auequately
capitalizeu to buffei against those losses, they coulu fail, tiiggeiing substantial iipple
effects among 0.S. banks.
78
Banks claim that theii net exposuies aie much lowei anu moie
manageable than theii gioss exposuies, but because inteiconnections aie so complex anu

76
}eff, Cox, 0S Iocinq 'Bonqerous' Tbreot Irom Furo Bebt: 6reenspon, CNBC.com, 0ct. 7, 2u11, ovoiloble ot
http:¡¡bit.ly¡nykN2Z.
77
}ohn NcBeimott, Tbe Hystery of 0S Bonks´ Furopeon Fxposure, FINANCIAL TINES ALPBAvILLE, 0ct. S, 2u11,
ovoiloble ot http:¡¡on.ft.com¡q2v7kn.
78
See Robeit Reich, Iollow tbe Honey: BebinJ Furope´s Bebt Crisis lurks Anotber 6iont Boilout of Woll Street,
TBE B0FFINuT0N P0ST, 0ct. S, 2u11, ovoiloble ot http:¡¡huff.to¡ibQel7.
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
1S
not fully known, it is uoubtful that losses will be minimizeu as well as banks expect.
79
The
2uu8 financial ciisis uemonstiateu that banks sometimes assume that they have heugeu
iisks bettei than they have.
Bank of Ameiica has aumitteu that a ciisis in Euiope woulu cieate tiouble foi the bank.
CE0 Biian Noynihan has iecognizeu that the "contagion stuff is ieal."
8u
Bowevei, the bank's
thiiu quaitei 1u-Q filing with the Secuiities anu Exchange Commission anu its
supplemental fouith quaitei 2u11 financial infoimation sheu little light on the iisks to
which the bank is exposeu. Accoiuing to the most iecent uisclosuies, the bank is exposeu
by a total $14.4 billion to the PIIuS, but it is not cleai whethei that figuie incluues both
uiiect anu inuiiect exposuies.
81
Auuitionally, Bank of Ameiica's uisclosuies uo not uiscuss
exposuie to Fiench anu ueiman banks.
D. Current policy toward Bank of America perpetuates and increases
systemic risk.
In light of its pooi finances, Bank of Ameiica suivives touay only because of an implicit
guaiantee fiom the 0.S. goveinment. Because the maiket believes Bank of Ameiica is likely
to be baileu out in the event of a ciisis, the fiim enjoys a highei cieuit iating anu
substantially lowei costs of funuing.
82

These subsiuies foi a faileu financial behemoth aie not just a mattei of iesouice
misallocation. They also peipetuate anu inciease moial hazaiu. Because they will not suffei
the full consequences of theii own failuies, Bank of Ameiica anu its cieuitois have the

79
See Baviu Eniich anu Lauia Stevens, Bonks Sit in o TonqleJ Web: Hony Furopeon lenJers Eove SolJ
Sovereiqn-Befoult Protection to 0ne Anotber, TBE WALL STREET }00RNAL, Bec. 12, 2u11, ovoiloble ot
http:¡¡on.wsj.com¡sS6NyR; }ohn NcBeimott, Tbe Hystery of 0S Bonks´ Furopeon Fxposure, Financial Times
Alphaville, 0ct. S, 2u11, ovoiloble ot http:¡¡on.ft.com¡q2v7kn; }ohn NcBeimott, 6olJmon preJicts o fire sole of
0SB ossets by Irencb bonks, FINANCIAL TINES ALPBAvILLE, 0ct. 6, 2u11, ovoiloble ot http:¡¡on.ft.com¡sLb0i8.
8u
Bugh Son, Hoynibon Soys Bonk of Americo ´ConfiJent´ lt Con WitbstonJ Furope Turmoil, BL00NBERu NEWS,
0ct. S, 2u11, ovoiloble ot http:¡¡bloom.bg¡mTuPSy.
81
See Table S8, Bank of Ameiica Coipoiation Foim 1u-Q, Quaiteily Repoit Puisuant to Section 1S oi 1S(u) of
the Secuiities Exchange Act of 19S4, Foi the Quaiteily Peiiou Enueu }une Su, 2u11, ovoiloble ot
http:¡¡bit.ly¡tvBNij; Page S9, Bank of Ameiica Supplemental Infoimation Fouith Quaitei 2u11, ovoiloble ot
http:¡¡bit.ly¡iqlN2 (cuiient to Bec. S1,2u11).
82
In Septembei 2u11, Noouy's uowngiaueu Bank of Ameiica on the belief that the 0.S. goveinment is
somewhat less likely to bail it out in the event of ciisis. }oe Rauch & Baviu Beniy, HooJy´s BownqroJes Biq
Bonks on CbonqeJ Policy, RE0TERS, Sept. 21, 2u11, ovoiloble ot http:¡¡ieut.is¡sFosA2. In contiast, Fitch Ratings
ieaffiimeu in Becembei 2u11that it believes Bank of Ameiica is one of eight fiims that the 0.S. goveinment
woulu bail out. Iitcb Sees 0S 6ovt. Iinonciol Support for Bonks Beclininq, Soys 0nly 8 Are ConJiJotes Ior AiJ,
ASS0CIATEB PRESS, Bec. 1S, 2u11, ovoiloble ot http:¡¡yhoo.it¡zjuuyB. 0n lowei costs of funuing, see Bean Bakei
& Tiavis NcAithui, Tbe volue of tbe "Too Biq to Ioil" Biq Bonk SubsiJy, CENTER F0R EC0N0NIC P0LICY RESEARCB,
Sept. 2uu9. 0n both cieuit iatings anu costs of funuing, see Kenichi 0eua & Beatiice Weuei ui Nauio,
µuontifyinq tbe volue of tbe SubsiJy for Systemicolly lmportont Iinonciol lnstitutions, confeience papei foi
ueiman Institute foi Economic Reseaich (BIW Beilin), Tbe Role of Iinonce in Stobilizinq tbe Post, Present, onJ
Iuture Reol Fconomy, Nay 2u, 2u11, ovoiloble ot http:¡¡bit.ly¡iNnpQ1.
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
16
incentive to take inappiopiiate iisks.
8S
In shoit, 0.S. suppoit of Bank of Ameiica
unueimines iathei than bolsteis the long-teim stability of the 0.S. financial system.
II. Tbe Board and tbe Council Sbould Act Immediately to Mitigate tbe Tbreat to
U.S. Financial Stability Tbat Bank of America Currently Poses.
The Boaiu anu the Council shoulu use theii authoiity unuei section 121 of the Bouu-Fiank
Act to bieak Bank of Ameiica into sepaiate institutions that woulu be less likely to fail,
woulu not enuangei the 0.S. financial system in the event of failuie, anu foi which oiueily
liquiuation woulu be easiei anu moie effective shoulu it become necessaiy.
84
Section 121 is
ciitical to fulfilling the Bouu-Fiank Act's expiess goal to "enu 'too big to fail.'"
8S

Section 121 establishes how the Agencies shoulu iesponu to thieats such as those poseu by
Bank of Ameiica. If the Boaiu ueteimines that a Systemically Impoitant Financial
Institution (SIFI) poses a "giave thieat" to financial stability, the Boaiu "shall" on a two-
thiius vote of the Council mitigate the thieat that the financial institution poses by limiting
the institution's meigeis anu acquisitions, iestiicting oi imposing conuitions on its
piouucts oi activities, oi oiueiing it to uivest assets oi off-balance-sheet items.
86

This authoiity must be exeiciseu well in auvance of financial uistiess at an institution that
poses a giave thieat to 0.S. financial stability. Foiemost, the section 121 authoiities aie
intenueu to pievent the existence of situations in which institutions that pose a giave

8S
See, e.q., Thomas N. Boenig, Financial Refoim÷Post-Ciisis., speech at Women in Bousing anu Finance
confeience, Feb. 2u11, ovoiloble ot http:¡¡bit.ly¡ycLsIF ("In a competitive maiketplace, wheie just a few basis
points make a uiffeience, these funuing auvantages aie huge anu iepiesent a highly uistoiting influence
within financial maikets. I'll name thiee. They uon't have to sell cieuitois on the stiength of theii conuition.
They have significant auvantages in competing foi funus. Anu, they have significant incentives to take on
moie iisk, holu less capital, anu book moie assets."); Richaiu W. Fishei, Hinsky Homents onJ Iinonciol
Requlotory Reform, Remaiks befoie the 19th Annual Byman P. Ninsky Confeience on the State of the 0.S. anu
Woilu Economies, Api. 14, 2u1u, ovoiloble ot http:¡¡bit.ly¡sB2Zve ("|Bjig banks may believe they can act
iecklessly without feai of paying the ultimate penalty. They anu many of theii cieuitois assume the Feu anu
othei goveinment agencies will cushion the fall anu assume some of the uamages, even if theii tioubles stem
fiom negligence oi tiickeiy.").
84
While section 121 uoes not iequiie the Agencies to bieak up a financial institution when it poses a giave
thieat to 0.S. financial stability, any action sufficient to mitigate the thieat that Bank of Ameiica poses woulu
likely iesult in the bank's bieakup. Fiist, meiely limiting the institution's meigeis anu acquisitions is
insufficient to mitigate the iisks the bank piesents. Seconu, any iestiiction oi imposition of conuitions on the
institution's piouucts oi activities that is sufficient to mitigate the fiim's iisk will likely iesult in its bieakup,
whethei nominally voluntaiy oi explicitly oiueieu.
8S
Bouu-Fiank Wall Stieet Refoim anu Consumei Piotection Act, P.L. 111-2uS ("To piomote the financial
stability of the 0niteu States . . . to enu "too big to fail", to piotect the Ameiican taxpayei by enuing bailouts . . .
anu foi othei puiposes."); cf. § 166; 12 0.S.C § SS66 (uiiecting the Boaiu to "piesciibe iegulations
establishing iequiiements to pioviue foi the eaily iemeuiation of financial uistiess" of a SIFI "except that
nothing in this subsection authoiizes the piovision of financial assistance fiom the Feueial uoveinment").
86
Nitigatoiy Actions, Nitigation of Risks to Financial Stability, Bouu-Fiank Wall Stieet Refoim anu Consumei
Piotection Act, § 121(a), 12 0.S.C. § SSS1(a) (2u1u).
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
17
thieat to 0.S. financial stability aie in such uiie financial uistiess that emeigency action is
iequiieu. If such a ciicumstance is peimitteu to aiise, then section 121 will pioviue little oi
no assistance. Noieovei, although the Agencies shoulu move expeuitiously to mitigate
giave thieats to financial stability, the Agencies shoulu use theii section 121 poweis with
uue caie anu uelibeiation, not hastily oi unuei uuiess. That means they must act well in
auvance of any potential ciisis. Action unuei section 121 also must be taken in a mannei
that uoes not foment instability. The Agencies shoulu state that Bank of Ameiica, while not
in immeuiate uangei, is stiuctuially unsounu, anu the Agencies aie acting unuei the Bouu-
Fiank Act to achieve an oiueily tiansition to a moie acceptable stiuctuie.
Section 121 also must be useu well in auvance of financial uistiess at an institution like
Bank of Ameiica to ensuie that othei piovisions of Bouu-Fiank, paiticulaily the oiueily
liquiuation authoiity, woik piopeily. 0iueily liquiuation woulu be uifficult to conuuct foi
an institution as laige anu complex as Bank of Ameiica. The Agencies shoulu use section
121 not just to fashion fiims that aie less likely to fail, but to ensuie that iesolution is moie
likely to succeeu in the event of a failuie.
Finally, the language of section 121 confiims that the "giave thieat" authoiities shoulu be
useu well in auvance of any potential ciisis. By its own teims, the section cannot be applieu
on an emeigency basis. It simply takes too long anu, unlike othei ielevant piovisions of
Bouu-Fiank, it pioviues no emeigency pioceuuies. As a iesult, the Agencies must act
immeuiately to mitigate thieats poseu by Bank of Ameiica, oi they iisk failuie to uo so until
it is too late. The sections below uiscuss each of these points in tuin.
A. Section 121 provides autbority to prevent crises caused by distress
at institutions sucb as Bank of America, not to respond to crises.
The Bouu-Fiank Act iequiies iegulatois to combat systemic iisk pieemptively. To that enu,
the Act chaiges financial iegulatois with iuentifying thieats to the stability of the 0.S.
financial system, piomoting maiket uiscipline, anu iesponuing to emeiging iisks.
87
Section
121 is a ciitical pait of this iegime, pioviuing the Agencies the tools to mitigate giave
thieats that financial institutions pose to 0.S. financial stability well befoie those thieats
can become manifest in financial ciises oi othei haims.
The authoiities that section 121 pioviues÷halting meigeis anu acquisitions, iestiicting oi
placing conuitions on ceitain piouucts oi activities, anu oiueiing uivestituies
88
÷supply
the Agencies with the ability to take an institution that is excessively iisky uue to its size,
activities, complexity, oi inteiconnecteuness, anu iemake it into a set of smallei institutions

87
Puiposes anu Buties of the Council, In ueneial, Council Authoiity, Bouu-Fiank Wall Stieet Refoim anu
Consumei Piotection Act, § 112(a)(1)(A-C), 12 0.S.C. § SS22 (2u1u).
88
Bouu-Fiank Act § 121(a), 12 0.S.C. § SSS1(a).
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
18
that aie less iisky anu moie amenable to piuuent piivate management anu sounu oveisight
by financial iegulatois. The iesulting institutions shoulu be less likely to fail, shoulu pose
less iisk to the financial system in the event of failuie (anu theiefoie shoulu be less likely to
uiaw goveinment suppoit oi iequiie ieceiveiship), anu shoulu be easiei to iesolve
thiough oiueily liquiuation if that becomes necessaiy. The Agencies shoulu exeicise these
authoiities well befoie any potential thieat can mateiialize because, although the Agencies
shoulu act expeuitiously to mitigate giave thieats, uecisions unuei section 121 must be
maue with uue caie anu uelibeiation. The piovisions woulu be uifficult to use in haste oi
unuei the uuiess of impenuing uisastei.
B. Section 121 must be exercised to ensure tbe efficacy of otber Dodd-
Frank Act provisions sucb as orderly liquidation.
If the Agencies uo not use section 121 in auvance of financial uistiess at a fiim that poses a
giave thieat to 0.S. financial stability, they iisk unueimining othei ciitical Bouu-Fiank Act
piovisions. Nany Bouu-Fiank Act piovisions ielateu to systemic iisk woulu be fai easiei to
implement if systemically impoitant institutions weie smallei anu less complex. 0ne of the
most ciitical is the oiueily liquiuation authoiity in Title II.
If a laige, systemically uangeious institution such as Bank of Ameiica weie to fail,
iegulatois woulu have only one couise of action÷to attempt oiueily liquiuation. To peimit
the institution to fail without inteivening woulu iesult in financial uisastei; to bail it out
woulu shaiply contiauict the Bouu-Fiank Act's expiess policy of "piotect|ingj the
Ameiican taxpayei by enuing bailouts."
89
But the Bouu-Fiank Act's oiueily liquiuation
pioceuuies aie untesteu anu coulu piove uifficult to implement in piactice, paiticulaily
with iespect to the laigest anu most complex institutions such as Bank of Ameiica.
0ne potential pioblem with the oiueily liquiuation authoiity is that 0.S. officials lack
juiisuiction ovei extiateiiitoiial entities anu theiefoie may be unable to put globally
significant institutions thiough iesolution. Cuiiently, theie aie no existing inteinational
agieements iegaiuing the iesolution of a uomestic institution's entities that opeiate in
foieign countiies.
9u
Without such agieements in auvance, iegulatois woulu neeu to tiy to
ieach agieements, potentially iequiiing changes in the laws of multiple countiies, in the
miust of a ciisis.

89
P.L. 111-2uS ("To piomote the financial stability of the 0niteu States . . . to enu "too big to fail", to piotect
the Ameiican taxpayei by enuing bailouts . . . anu foi othei puiposes."); cf. 12 0.S.C § SS66 (uiiecting the
Boaiu to "piesciibe iegulations establishing iequiiements to pioviue foi the eaily iemeuiation of financial
uistiess" of a SIFI "except that nothing in this subsection authoiizes the piovision of financial assistance fiom
the Feueial uoveinment").
9u
Simon }ohnson, Tbe Hytb of Resolution Autbority, N.Y. TINES EC0N0NIX BL0u, Nai. S1, 2u11, ovoiloble ot
http:¡¡nyti.ms¡icEK7g.
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
19
A seconu potential uifficulty with liquiuating a laige, systemically uangeious institution is
that the FBIC likely woulu iequiie massive loans fiom the Tieasuiy to covei enough of the
faileu institution's obligations to pievent financial contagion. The laigei anu moie complex
an institution, the moie taxpayei money woulu be placeu at iisk. Noieovei, the laigei,
moie complex, anu moie inteiconnecteu an institution is, the moie uifficulty iegulatois will
have uisceining the extent to which they must meet the faileu institution's obligations to
pievent contagion. Theiefoie they will neeu to eii on the siue of oveipayment÷in effect
implementing at least a paitial "bail out," failing to uiscipline maiket actois appiopiiately,
contiibuting to moial hazaiu, anu contiauicting the expiess intent of the Bouu-Fiank Act.
The authoiities in section 121 coulu vastly uiminish these pioblems. Foiemost, if a laige
anu complex systemically uangeious institution weie bioken piopeily into smallei,
simplei, less inteiconnecteu, less iisky, anu less uangeious institutions, the iesulting fiims
woulu no longei be too big to manage oi iegulate. Fiims that aie easiei to manage anu
iegulate effectively aie less likely to fail. If one uoes fail, then iegulatois shoulu have a
much easiei time using the oiueily liquiuation authoiity successfully. Each of the potential
pioblems foi the oiueily liquiuation piocess stems in laige pait fiom institutional size,
complexity, oi inteiconnecteuness.
In auuition, it is possible that a smallei, simplei, less systemically significant institution
coulu go thiough bankiuptcy iathei than oiueily liquiuation. Foi example, a bankiuptcy of
CIT uioup pioveu successful in 2uu9. CIT uioup, one of the nation's laigest lenueis to small
anu miu-sizeu businesses, hau appioximately $8u billion in total assets at the enu of
2uu8.
91
The bank suffeieu significant losses fiom subpiime moitgages anu stuuent-lenuing.
The fiim faileu anu fileu foi bankiuptcy in Novembei 2uu9. Because the fiim uiu not pose a
systemic thieat, its bankiuptcy uiu not uestabilize the financial system.
92

At a iecent ButtonwooJ 6otberinq sponsoieu by Tbe Fconomist, mock iegulatois simulateu
a bank ciisis, in which they put a giavely uangeious SIFI thiough oiueily liquiuation.
9S

Seveial of the paiticipants expiesseu ieseivations about the ability to manage such a ciisis
effectively. Some even consiueieu a bailout, which the Bouu-Fiank Act expiessly foibius.
The unceitainties that the paiticipants voiceu shoulu inspiie cuiient iegulatois to mitigate
giave thieats pieemptively.

91
Simon }ohnson, Will ClT 6o Bonkrupt?, TBE BASELINE SCENARI0, }uly 14, 2uu9, ovoiloble ot
http:¡¡bit.ly¡14xqWh.
92
See Petei Cohan, Wby ClT 6roup´s Bonkruptcy Boesn´t Hotter, BAILY FINANCE, Nov. 1, 2uu9, ovoiloble ot
http:¡¡aol.it¡Sb7wim; Anuiew Ross Soikin, ClT 6ets Restriction on Bonk lifteJ, N.Y. TINES BEALB00K, Api. 2u,
2u11, ovoiloble ot http:¡¡nyti.ms¡hkko1n.
9S
"The Economist stiess tests Bouu-Fiank," TBE EC0N0NIST, Nov.2, 2u11, ovoiloble ot http:¡¡econ.st¡vvAbbx.
The panel incluueu B. Rougin Cohen, Bonalu Kohn, Petei Fishei, Lawience Summeis, }ay Powell, Biana
Faiiell, anu }ohn Bugan.
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
2u
C. Tbe plain terms of section 121 underscore tbat tbe Agencies must act
immediately to mitigate tbe tbreat tbat Bank of America poses.
The text of section 121 confiims that it must be useu well in auvance of financial uistiess at
an institution that poses a giave thieat to 0.S. financial stability. The piovision's time
fiames aie incompatible with emeigency action, anu theiefoie unueiscoie the neeu foi the
Agencies to begin mitigating Bank of Ameiica's thieat immeuiately.
0nuei the plain teims of section 121, the Agencies lack the powei to exeicise theii "giave
thieat" authoiity in less than one month unless the financial institution allows them to uo
so. Inueeu, section 121 contemplates a piocess taking up to foui months, not incluuing the
time taken to ueteimine whethei to use the piovision in the fiist place. When the Boaiu
consiueis taking mitigatoiy action unuei section 121, it must pioviue wiitten notice to the
ielevant financial institution.
94
The institution has a iight to iequest a heaiing within Su
uays of ieceiving notice fiom the Boaiu.
9S
The heaiing must take place within Su uays of
the institution's iequest,
96
anu the Boaiu must notify the institution of the Agencies' final
uecision within 6u uays of the heaiing oi, if theie is no heaiing, within 6u uays of the
oiiginal notice.
97
These pioceuuies coulu take up to 12u uays, not incluuing the time
iequiieu to ueteimine whethei to issue notice in the fiist place.
This time fiame is wholly incompatible with the iapiu action iequiieu when a systemically
uangeious financial institution becomes uistiesseu. In those instances, iegulatois must
iesponu within a few uays. Foi example, when iumois weie spaikeu that Beai Steains was
suffeiing a solvency ciisis on Fiiuay, Naich 14, 2uu8, the fiim's clients quickly lost
confiuence anu began withuiawing theii funus. With the fiim on the veige of insolvency,
iegulatois met ovei the weekenu to biokei a sale of the financial company. 0n Sunuay,
Naich 16, the Feueial Reseive announceu a ueal in which }PNoigan Chase woulu acquiie
Beai.
98
Similaily, Lehman Biotheis fiist appeaieu in tiouble on Weunesuay, Septembei 1u,
2uu8. The company ueteiioiateu iapiuly uuiing the next few uays. 0n Satuiuay, Septembei
1S, iegulatois met in an emeigency meeting to uiscuss Lehman's options, but ueciueu not
to bail out the fiim. Lehman announceu it woulu ueclaie bankiuptcy on Nonuay,
Septembei 1S.
99
The next uay, on Septembei 16, the Feueial Reseive announceu it woulu

94
Nitigation of Risks to Financial Stability, Bouu-Fiank Wall Stieet Refoim anu Consumei Piotection Act,
§ 121(b)(1), 12 0.S.C. § SSS1(b)(1) (2u1u).
9S
lJ. at § 121(b)(2), 12 0.S.C. § SSS1(b)(2).
96
lJ.
97
lJ. at § 121(b)(S), 12 0.S.C. § SSS1(b)(S).
98
Yalman 0naian, IeJ AiJeJ Beor Steorns os Iirm IoceJ Cbopter 11, Bernonke Soys, BL00NBERu NEWS, Api. 2,
2uu8, ovoiloble ot http:¡¡bloom.bg¡siSwXu.
99
Anuiew Ross Soikin, lebmon Iiles for Bonkruptcy; Herrill ls SolJ, N.Y. TINES, Sept. 14, 2uu8, ovoiloble ot
http:¡¡nyti.ms¡cRKYq.
EMBARCUED until 11:00 AM, Eastern, )anuary 25, 2012
21
pioviue an $8S billion iescue package to AIu.
1uu
The following Thuisuay, Septembei 2S, the
0ffice of Thiift Supeivision seizeu Washington Nutual's assets anu immeuiately solu them
to }PNoigan Chase.
1u1

In contiast to section 121, the Bouu-Fiank Act piovisions foi eaily iemeuiation anu oiueily
liquiuation pioviue means to iesponu to emeigencies. 0nce establisheu, the iegulatoiy
iequiiements unuei the Bouu-Fiank Act eaily iemeuiation piovisions woulu be tiiggeieu
automatically by financial uistiess at a SIFI.
1u2
The oiueily liquiuation piovisions pioviue
foi financial iegulatois to place a financial institution into ieceiveiship without pioviuing
notice anu a heaiing fiist.
1uS
If the institution objects, then the Secietaiy of the Tieasuiy
may petition the 0niteu States Bistiict Couit foi the Bistiict of Columbia to appoint the
FBIC as ieceivei. The couit evaluates the Secietaiy's petition unuei a uefeiential stanuaiu
of ieview. It must issue a iuling within 24 houis oi the petition is automatically gianteu.
1u4

The Agencies must exeicise theii section 121 authoiity to mitigate giave thieats to
financial stability fai in auvance of any potential emeigency.
Conclusion
The Agencies shoulu act immeuiately to mitigate the giave thieat that Bank of Ameiica
poses to 0.S. financial stability by iefoiming it into one oi moie institutions that aie
smallei, less complex, less iisky, less systemically significant, anu moie amenable to sounu
management anu iegulation.

Respectfully submitteu,

Nicah Bauptman Baviu Aikush

Public Citizen

1uu
Piess Release, Boaiu of uoveinois of the Feueial Reseive, "The Feueial Reseive Boaiu on Tuesuay, with
the full suppoit of the Tieasuiy Bepaitment, authoiizeu the Feueial Reseive Bank of New Yoik to lenu up to
$8S billion to the Ameiican Inteinational uioup (AIu) unuei section 1S(S) of the Feueial Reseive Act," (Sept.
16, 2uu8), ovoiloble ot http:¡¡1.usa.gov¡2iWRu}.
1u1
Piess Release, 0ffice of Thiift Supeivision, "Washington Nutual Acquiieu by }PNoigan Chase," (Sept. 2S,
2uu8), ovoiloble ot http:¡¡1.usa.gov¡vWa0fe.
1u2
See qenerolly Eaily Remeuiation Requiiements, Bouu-Fiank Wall Stieet Refoim anu Consumei Piotection
Act, § 166, 12 0.S.C. § SS66 (2u1u).
1uS
}uuicial Review, Bouu-Fiank Wall Stieet Refoim anu Consumei Piotection Act, § 2u2 (a)(1)(A)(i-v), 12
0.S.C. § SS82 (2u1u).
1u4
lJ. at § 2u2(a)(1)(A), 12 0.S.C. § SS82(a)(1)(A).

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