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COLUMN-Take a pass on TBTF crapshoot: James Saft

(James Saft is a Reuters columnist. The opinions expressed are his own)

April 29 (Reuters) - Bank of America has given investors one more datapoint suggesting that our biggest banks aren't just too big to fail but too big to manage and too big to invest in.

Bank of America, acting under orders from the Fed, suspended its share buyback plan and a planned increase in its dividend after revealing that an error in basic math had caused the bank to overstate its regulatory capital position.

After considering Bank of America's own sorry history both as an investment and a regulated entity, and that of its largest peers, you have to conclude that owning these banks is a total crapshoot.

And given that the Fed too missed this error during its review before the bank's plans were initially approved, perhaps we ought to add too big to regulate. The error, which the bank has been making continuously for more than four years, was discovered during an internal review.

Bank of America failed to record the hit to capital it took when paying off structured notes issued by Merrill Lynch which it acquired at a discount when it bought the ailing brokerage in 2009. This resulted in BofA overstating its common equity Tier 1 capital by $4 billion, which it has now restated down to $130 billion.

An error of this magnitude, sustained for this long, in an industry which is this closely scrutinized and regulated shows that these institutions are too hard to control, from within or without. Committing capital to them, especially given the regulatory risk, requires a prospective return not yet reflected in the largest banks' share prices.

Bank of America shares fell over 6 percent on the news, and have registered less than a fourth of the gain of the S&P 500 index over the past 28 years.

That weakness is actually good news, in that it might be possible for investors to force what regulators and politicians have been unable to do. Ideally if capital becomes expensive enough for banks, as shareholders vote with their feet, the idea of forcing them to slim down to a more manageable size will come back on the agenda.

Shareholders will have to go some way to do so however. A recent study by the New York Federal Reserve estimated that the largest six banks get an annual subsidy of $8.5 billion in borrowing costs which are lower because of their TBTF status.

A CLEAR PATTERN

This is far from the first time Bank of America has been in difficulties over its behavior. The bank last month agreed to pay $9.5 billion to the Federal Housing Finance Agency to settle allegations that it, and companies it later purchased, misled investors over the quality of loans in mortgage-backed securities it sold.

It is now in line for a similar settlement, perhaps of a similar size, with the Justice Department over similar charges.

But let's not just pick on Bank of America.

J.P Morgan Chase earlier settled its own set of mortgage-backed securities difficulties for $13 billion.

And let's not just concentrate on the sins committed before the financial crisis.

J.P Morgan's London Whale fiasco, under which a desk assigned to 'hedge' risk wound up losing something on the order of $6 billion in a series of massive derivative bets, revealed that it too can be considered too big to manage. That's especially true after JP Morgan CEO Jamie Dimon attempted to dismiss the affair as a "tempest in a teapot."

Or have a look at Citigroup, which last month saw its own capital plans rejected by the Federal Reserve. The Fed turned down the bank's plans citing concerns over the "overall reliability of Citigroup's capital planning process." That was the second time in three years that Citi failed the so-called stress test, which itself as an exercise must be in doubt given previous iterations of BofA's plans were based on false data.

Or consider the strong past indications from the Justice Department that it would hesitate to charge a very large bank with a crime in such a way that might threaten its existence, because of the fear that this would somehow damage the economy.

Shareholders might consider that a license to profit without full submission to the law, but that is not the way to look at it. Instead, it is an incitement to the banks, and to their employees, who are the principal beneficiaries of misdeeds, to take risks with other people's money.

Investors with any sense must now realize the largest banks are simply too big to touch. (At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaftzjamessaft.com and find more columns at http://blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

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