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Bank of America Under Fed Scrutiny

Friday, 2 Sep 2011 | 10:34 AM ET
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Bank regulators from the Federal Reserve have been pushing Bank of America to put in place a plan for what to do if conditions worsen, according to The Wall Street Journal.

This is welcome news. Bank of America's stock price has been signaling severe distress for several months. Even the temporary boost from Warren Buffett's $5 billion investment seems to have evaporated.

Under Dodd-Frank rules, bank regulators are supposed to take a proactive role in preventing a disorderly collapse of giant financial institutions. But there has been a lot of concern that, despite the rules, regulators might hesitate to pressure such a large bank to develop credible contingency plans.

One of the things the bank is considering is an offering of Merrill Lynch shares. From the Journal's story, it seems this wouldn't be a pure spin-off but some sort of hybrid offering of a separate class of shares that would leave Bank of America in control of Merrill. No doubt part of this plan would be to allow Merrill to pay dividends, even while the bank is restricted because of concerns about its capital.

This does raise further credibility concerns for the senior management of Bank of America. The bank has been loudly insisting that everything is just fine, that it's capital and liquidity positions are healthy, and that it isn't under any regulatory gun.

Today's news tells a different story. Regulators are concerned.

Were Bank of America's executives really surprised by this? Or have they been misleading the public about their contact with regulators?

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