Is Bank of America About to Go Bust?

Chris Whalen — analyzing Bank of America’s (NYSE:BAC) move to shift its derivative positions from its Merrill Lynch subsidiary to the lead bank — says this action could be preparation for a Chapter 11 bankruptcy filing.

The move is likely a part of a larger plan which has not yet been disclosed by bank executives. Earlier Fannie Mae took loans off Bank of America’s (NYSE:BAC) books, and the bank integrated sections of the Merrill Lynch business into the bank’s mainstream units.

Investing Insights: Will Weak Bank Earnings Force Investors into Gold?

Whalen agrees with Susan Webber, of Aurora Advisors, when she argues that “BofA has owned Merrill for over a year and a half, and didn’t undertake this move until it was downgraded…If this was all normal business, BofA would have done this a while ago, and not in response to market pressure, and they would have gotten the FDIC on board. The way this was done says something is amiss.”

Though the move has the Fed’s tacit approval, the FDIC — which would foot the bill for depositors’ claims in the event of the bank’s failure — is obviously not happy. Of course, this would also create an interesting environment for the other Big Four banks Citigroup (NYSE:C), JP Morgan (NYSE:JPM), and Wells Fargo (NYSE:WFC).

One interesting question: why would Warren Buffett back Bank of America (NYSE:BAC) on the way into Chapter 11?

Don’t Miss: Customers Get Litigious Over Bank Fees.

More from The Cheat Sheet