If Bank of America shares keep falling, then we are facing a very dangerous situation, especially as it will multiply the problems of the European banks led by Société Générale, France’s third largest bank.

And so as Wall Street gyrated last night and the gold bulls prepared for the yellow metal to reach $US2000 on the back of more American money printing, the biggest event was the slump in Bank of America shares, which fell almost 8% to $US6.42. That brought their total fall for the year close to 60%. Strangely, the percentage fall in Bank of America shares over the year is similar to the Greek-plagued Société Générale.

To see these two giant banks struggle is a warning that markets fear that the banking crisis in Europe is far from over and it could be re-starting in the US. That means that Australian banks will pay more and more for their wholesale overseas deposits.

Last night, Société Générale shares held their ground but when any bank suffers close to a 60% yearly fall, it rings all sorts of alarm bells because capital raising becomes very expensive and all those who deal with the bank become wary.

Bank of America’s problem starts with the US mortgage market, which has descended into a legal frenzy, with most of the participants taking legal action against each other alleging fraud and other practices. The US banks have not had the management capacity or ability to handle the enormous number of housing foreclosures properly and the paper work has been a nightmare, so multiplying the legal problems.

And last night there was disturbing news — the Mortgage Bankers Association said that 8.44% of US home owners missed at least one mortgage payment in the April-June quarter. While that was only a small increase on the previous quarter, the figures are heading in the wrong direction.

And there have been delays in foreclosure filings because they are backlogged in several state courts, including Florida, New Jersey, Illinois and New York. When (and if) the court logjam is cleared, forecloses will increase further, especially as the US faces either recession or long periods of low market activity.

President Barack Obama and Federal Reserve chief Ben Bernanke have never understood that there can be no US recovery until the foreclosure problem is solved. Printing money will not help when foreclosures continue to depress house prices and create more and more bad debts and legal wrangles. In turn, this erodes consumer and business confidence.

Meanwhile, Bank of America is trying to retrench staff and sell assets, but is doing neither well. If it sells too many assets in the current market it will incur big book losses that will reduce its shareholders’ funds. My guess is that is why it does not sell Merrill Lynch. Capital losses will affect capital ratios, etc. The Bank of America problem is very similar to that facing the European banks, where their exposure to problem country loans is overvaluing the books.

*This first appeared on Business Spectator.

Peter Fray

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