Is BOA preparing for Bankruptcy?

On Oct 19^th Reuters released an article title: “Is Bank of America preparing for a Chapter 11.” This story circulated the financial press like wild fire and although the author Christopher Whalen related some the of recent facts on how BOA had to foot over a $10 billion plus legal settlement and the recent decision of charging some customers $5 per month for using their debt card which in his opinion spurred the Occupy Wall Street movement. He does point out a recent administrative move of the bank moving all of the derivatives from Merrill Lynch subsidiary to the lead bank. Such move has drawn upon on wanted attention to the bank on the possibility of moving the risk to the Bank Holding Company at book value for the opportunity of FDIC coverage. Click here for the Bloomberg article about this.

Although many large institutions have done this move in the past, the question of timing comes to light on why now. I’m sure many investors such as Warren Buffet and the like might want to know as well. In my opinion BOA being a 2^nd largest bank by asset size in the United States I would highly doubt the FDIC would want to exposed to such a failure. However, there have been calls in place both on youtube and other social media to make a run on the bank in November 5^th and December 7^th of this year. Here is the original article from Reuters and below the 6 month stock price chart for BOA.

Source: http://www.reuters.com/article/2011/10/19/idUS200361147020111019

Why so low 3 and 6 month Treasury

The effects of the Dodd-Frank Act are beginning to have repercussions in the Treasuries market as U.S. banks began to hoard Treasury bonds thus putting a strain on the repo market. This strain was present on Friday April 8^th and Monday April 11 when the 6-month T-Bill touched an all time record low yield of 11 bps and the 3-month T-Bill touched a 13-month low yield of 3 bps.

This Treasury desert amounted to about $40 billion on Friday raising the anxiety level for future higher borrowing costs for money market funds and their respective investors. The rule was implemented by the FDIC on April 1^st and forced many large banks to refrain from lending out their Treasury Holdings thus eliminating bank arbitrage opportunities thanks to the plentiful Treasury bond supply constraint collateral from the Fed’s $600 billion bond buying program.

Before April 1^st banks would typically lend out their Treasury holdings in the overnight Treasury repo market and take those proceeds and leave them at the Fed which paid them some interest on the reserves. Some large banks would also borrow funds from GSE’s such as Fannie Mae or Freddie Mac in the Fed-Funds market and park them in the Fed to earn a little higher spread. Although, these unintended consequences seem to be short term while markets become accustom to the rule, this past week’s yield lows had some effects in profitability for large money market funds around the world.

http://www.reuters.com/article/2011/04/05/markets-money-idUSN0512901520110405