Yesterday brought rough waters for stocks. After recovering some early losses, the DOW closed down by 102 points. Some news outlets attributed this decline to issues in Europe, while others pointed fingers at bribery allegations involving Wal-Mart in Mexico.
Here at Economic Prism, the exact cause isn’t our focus—all we care about is that no one suffered a severe injury over this turmoil. Such incidents, unfortunately, do occur.
Consider the case of Jerry Lee Ries from Los Angeles. On April 11, he and another man arranged a meeting near Parking Structure 10 in Santa Monica for what was likely a business transaction concerning debt collection. A disagreement escalated when Ries pulled out a knife, ultimately slicing off the other man’s ear.
The victim reportedly owed Ries $400 but only managed to provide $360. And unsurprisingly, Ries didn’t even bother to keep the ear as collateral; he simply discarded it in a nearby trash can.
Sadly, the ear couldn’t be reattached, and Ries faced serious consequences, posting a $100,000 bail after being arrested and charged with assault and mayhem—all for a mere $40!
However, Ries is far from alone in experiencing a failed financial deal…
Shareholders Say $20 Million is Insufficient
Back in September 2008, as Lehman Brothers disappeared from existence, Bank of America acquired Merrill Lynch for $20 billion. It was later revealed that Merrill Lynch would incur a staggering $27.6 billion in losses that very year. While nobody lost an ear this time—at least as far as we know—the acquisition would have likely bankrupted Bank of America if it hadn’t received a $20 billion bailout from TARP, in addition to an earlier $25 billion.
Bank of America has since returned the full $45 billion to the government. Yet, this has not satisfied everyone. Some individuals believe that the bank owes them a substantial sum for acquiring Merrill Lynch under unfortunate circumstances. In fact, residents of Delaware are suing, claiming that Bank of America’s proposed $20 million settlement is inadequate, as reported by The New York Times.
We will keep you updated on the unfolding situation, particularly regarding the court date for Bank of America’s directors on May 4, where they will defend the settlement. Meanwhile, the bank appears to be in a strong position…
Recently, Bank of America reported a remarkable first-quarter profit increase of about 40%, reaching $3.7 billion, or $0.31 per share—significantly outperforming the analysts’ estimates of $0.12 per share. Additionally, their stock price has surged over 50% year-to-date.
Thanks to the TARP bailout, Bank of America boasts $2 trillion in assets. The Federal Reserve’s support has also played a significant role, aiding in the inflationary policies that enhance the value of these assets, ultimately contributing to Bank of America’s profitability.
For instance, revenue from sales and trading, excluding accounting adjustments, more than doubled to $5.2 billion in the first quarter. Moreover, revenue from trading in fixed income, currency, and commodities, again excluding adjustments, rose to $4.1 billion during the same period. As asset prices continue to rise, Bank of America’s stock is likely to benefit further.
Destroying the Retirement Dreams of a Generation
We highlight this situation not out of favor for Bank of America, but to illustrate a larger issue at play. After being bailed out in 2008-09, Bank of America, along with other major banks, is now thriving thanks to the Federal Reserve’s monetary policy and intervention in the bond market.
These inflationary policies, while aimed at preserving the banking system, are severely damaging. They are eroding the savings of everyday citizens, thereby compromising the retirement aspirations of an entire generation.
Consider the current rate on Bank of America’s Certificates of Deposit, which stands at a mere 0.35 percent. According to the latest Labor Department report, the Consumer Price Index rose by 0.3 percent in March—translating to an annualized rate of 3.6 percent.
This means that in less than a month, inflation will nearly eliminate any real return from the CDs. Over a 12-month period, the real return on these CDs will drop to a negative 3.25 percent.
In a truly free market, one would find it almost impossible for a CD to offer a negative real yield. However, this wealth transfer is happening blatantly due to central bank interventions favoring financial institutions.
So, the next time you encounter a monthly service fee for the privilege of depositing your money with a bank—only for them to lend it out at a 4 percent spread—remember this.
Sincerely,
MN Gordon
for Economic Prism
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