The U.S. second-largest bank, the Bank of America, has posted poor Q3 (July to Sept) 2009 earnings, posting a massive $2.2 billion (a loss of $0.26 per share) loss in the quarter.

Revenue was up 33-percent in Q3 to $26.04 billion, but the increased losses stemming from an increasing number of people defaulting on their mortgage and credit loans resulted in those two units losing more than $1 billion in the period.

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The Obama Administration is getting ready to unveil a new $50 billion+ plan to halt home foreclosures and to help struggling home owners get lower monthly payments to avoid foreclosure. In 2008, foreclosures were up 81% over 2007, with 2.3 million foreclosed. Press Secretary Robert Gibbs said Friday the plan would be designed to help “the 10,000 Americans each day that have their homes foreclosed on, ” The Bank of America along with JPMorgan Chase and Morgan Stanley have agreed to halt foreclosures until March 6, 2009. Read the full story

The U.S. government has issued an additional $20 billion to Bank of American as part of a plan to guarantee $118 billion in risky assets. The Bank of America initially got $25 billion in 2008 from the Troubled Asset Relief Program. Both Citigroup and the Bank of America have now gotten bailouts worth more than the fair value of both companies.

The Bank of America has just announced up to 35,000 job cuts will occur over the next 3 years. The Bank of America recently acquired Merrill Lynch for $50 billion on Sept 14 2008, Merrill stock is now down almost 47% from that time period, resulting in a loss of about $30 million for BA from the acquisition. Both are continuing to struggle from the financial crisis and are trying to cut costs in order to maximize returns and pay back government aid. The Bank of America and Merrill Lynch employee about The Bank of America employees and Merrill both employee about 308,000 (BA employees almost 250,000, Merrill 61,000). The cuts will come from all business divisions across both companies. More job cuts are expected once BA completes additional planning related to the acquisition.

In other news, Office Depot announced it will lay off 2,200 people as it restructures to cut costs to better position itself as a result of the financial crisis. The company will shut down 33 distribution centers and will close 112 retail stores in North America just over the next 3 months. The move is expected to save Office Depot between $280 and $300 million by the end of 2009. The Office Depot Q3 report can be found here.

Many people don’t understand the fundamental reasons why the US financial system is failing and the reasons behind the day to day volatility. In this post, I try to explain to you how this mess happened.

It all started about a decade ago when banks started redlining urban centers which immediately disqualified people from obtaining mortgages in the hypothetical red areas. The problem began when banks thought the solution to redlining was with sub-prime mortgages. Banks deceitfully offered significantly discounted interest rates that would eventually skyrocket after an initial 2 year term. In some cases, the principal was higher after the two year period! The problem was that loans were being granted to people with very poor credit ratings, including to people with Loan to Value (LTV) ratios of more than 88%, compared to the maximum current cut off of 75% which is arguably also pushing it. Another problem was that people were able to provide their own income which was never verified. If you’re wondering why people would take the loans, we can generalize with these main reasons: the banks deceitfully didn’t disclose the teaser rate wouldn’t last, the loan seemed so affordable it was basically free money, and people wanted to own their homes and didn’t have another alternative to get a mortgage.

So, what did the banks do with all of these loans? They grouped the loans into Mortgage Backed Securities (MBS) which were bought by various investment banks who converted the MBS into new financial instruments called Collateralized Debt Obligations (CDO). The banks originally developed MBS because they are only required to hold 1.6% of capital for mortgage backed securities, compared to 4% to hold a mortgage. The CDO instruments were then setup in the Cayman Islands to avoid taxes where they were then artificially rated by credit agencies who received most of their income from structured finance products. The real problems were for firms that invested in CDO securities based on the artificial ratings. Essentially, as people began to default on their mortgages because of the new high rates after the initial 2 year term and falling home values, the CDOs failed along with the firms heavily invested in these securities. Read the full story