Posted on 10/21/2011 10:00:33 PM PDT by oneolcop
The Federal Reserve and Bank of America Initiate a Coup to Dump Billions of Dollars of Losses on the American Taxpayer
Bloomberg reports that Bank of America is dumping derivatives onto a subsidiary which is insured by the government – i.e. taxpayers.
Yves Smith notes:
If you have any doubt that Bank of America is going down, this development should settle it …. Both [professor of economics and law, and former head S&L prosecutor] Bill Black (who I interviewed just now) and I see this as a desperate move by Bank of America’s management, a de facto admission that they know the bank is in serious trouble.
The short form via Bloomberg:
Bank of America Corp. (BAC), hit by a credit downgrade last month, hasmoved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…
Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.
That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.
Now you would expect this move to be driven by adverse selection, that it, that BofA would move its WORST derivatives, that is, the ones that were riskiest or otherwise had high collateral posting requirements, to the sub. Bill Black confirmed that even though the details were sketchy, this is precisely what took place.
And remember, as we have indicated, there are some “derivatives” that should be eliminated, period. We’ve written repeatedly about credit default swaps, which have virtually no legitimate economic uses (no one was complaining about the illiquidity of corporate bonds prior to the introduction of CDS; this was not a perceived need among investors). They are an inherently defective product, since there is no way to margin adequately for “jump to default” risk and have the product be viable economically. CDS are systematically underpriced insurance, with insurers guaranteed to go bust periodically, as AIG and the monolines demonstrated. [Background.]
The reason that commentators like Chris Whalen were relatively sanguine about Bank of America likely becoming insolvent as a result of eventual mortgage and other litigation losses is that it would be a holding company bankruptcy. The operating units, most importantly, the banks, would not be affected and could be spun out to a new entity or sold. Shareholders would be wiped out and holding company creditors (most important, bondholders) would take a hit by having their debt haircut and partly converted to equity.
This changes the picture completely. This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. [Background.] So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.
But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.
The FDIC is understandably ripshit. Again from Bloomberg:
The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.
Well OF COURSE BofA is gonna try to take the position this is kosher, but the FDIC can and must reject this brazen move. But this is a bit of a fait accompli,and I have NO doubt BofA and the craven, corrupt Fed will argue that moving the derivatives back will upset the markets. Well too bad, maybe it’s time banks learn they can no longer run roughshod over regulators. And if BofA is at that much risk that it can’t survive undoing this brazen move, that would seem to be prima facie evidence that a Dodd Frank resolution is in order.
Bill Black said that the Bloomberg editors toned down his remarks considerably. He said, “Any competent regulator would respond: “No, Hell NO!” It’s time that the public also say no, and loudly, to this new scheme to loot taxpayers and save a criminally destructive bank.
Professor Black provided a “bottom line” summary in a separate email:
1.The bank holding company (BAC) is moving troubled assets held by an entity not insured by the public (Merrill Lynch) to the Bank of America, which is insured by the public 2. The banking rules are designed to prevent that because they are designed to protect the FDIC insurance fund (which the Treasury guarantees) 3. Any marginally competent regulator would say “No, Hell NO!” 4. The Fed, reportedly, is saying “Sure, no worries” by allowing the sale of an affiliate’s troubled assets to B of A 5. This is a really good “natural experiment” that allows us to test whether the Fed is protects the public or the uninsured and systemically dangerous institutions (the bank holding companies (BHCs)) 6. We are all shocked, shocked [sarcasm] that Bernanke responded to the experiment by choosing to protect the BHC at the expense of the public.
Karl Denninger writes:
So let’s see what we have here.
Bank customer initiates a swap position with Bank. In doing so they intentionallyaccept the credit risk of the institution they trade with.
Later they get antsy about perhaps not getting paid. Bank then shifts that risk to a place where people who deposited their money and had no part of this transaction wind up backstopping it.
This effectively makes the depositor the “guarantor” of the swap ex-post-facto.
That the regulators are allowing this is an outrage.
If you’re a Bank of America customer and continue to be one you deserve whatever you get down the line, whether it comes in the form of higher fees and costs assessed upon you or something worse.
Stand Up to the Coup
Bank of America has repeatedly become insolvent due to fraud and risky bets, and repeatedly been bailed out by the government and American people. The government and banks are engineering an age of permanent bailouts for this insolvent, criminal bank (and the other too big to fails). Remember, this is the same bank that is refusing to let people close their accounts.
This is yet another joint effort by Washington and Wall Street to screw the American people, and totrample on the rule of law.
The American people will be stuck in nightmare of a never-ending depression (yes, we are currently in a depression) and fascism (or socialism, if you prefer that term) unless we stand up to the overly-powerful Fed and the too big to fail banks.
This article has been contributed by SHTF Plan. Visit www.SHTFplan.com for alternative news, commentary and preparedness info.
This is something that should concern the OWS crowd, but we also need grown ups like the Tea Party to make a blunt statement that BoA should not be bailed out.
My 401 does. I can’t change that now.
This IS a backdoor bailout, already.
The FED went over the heads of FDIC. The FDIC wanted nothing to do with this.
This was arranged so that the taxpayers take the brunt of the damage. Do you really think Congress can vote to NOT save ALL those deposits of BofA customers?
This is to put the politicians between a rock and a hard place.
And all you Freepers who think your save because you could still access your BofA accounts, wake up!!!!!
Words mean things, and vicious and vituperative instructions to obedient people have consequences.
I suspect (but do not know for sure) that B of A was having "issues" anyway; and that the Durbin venom may have poisoned a flicker of a recovery.
Speaking of recovery, if B of A swan dives, it would be yet another anchor on our foundering economy.
.
Round up the usual suspects.
Normal accounts are FDIC insured to $250,000.
So how is it people with normal checking/savings accounts will lose their money if BofA dies?
As I understand it BofA was poisoned with the purchase of Countrywide which happened because the Fed demanded BofA buy it.
Having been with B of A for decades, I am in the process of closing my account and switching to Charles Schwab Bank, a great online bank. BofA should prepare for a bank run.
What makes you think the FDIC has any money?
All those banks they have been closing? Since 2008?
The government would have to back up the FDIC.
That is why the FDIC was against it. The derivatives are bigger than the FDIC.
The FED’s won, and they want their bailout. One way or another.
I just got a letter from them yesterday telling me one of my mortgages (on an investment property) had been transfered (to a company in IL). I called the new company to get my new acct# so I could schedule my November payment. I asked about another BofA mortgage I have on another property and was told perhaps in another batch of 100K mortgages they’re transferring over in December. She also said they’re all “primary lien” mortgages (whatever that means).
Here, this is where the failed banks get posted on FDIC friday:
http://www.fdic.gov/bank/individual/failed/banklist.html
Four banks were closed today.
I guess $5 a month wasn’t enough.
And no one with a checking/savings account at those closed banks lost a dime.
Normal people used to mean taxpayers, but for the 47%, it means their tax money goes to pay back those who have assets in insured accounts, as all those assets just got soaked up by paying off the parties to the derivatives. Remember, you don't put your money into a bank, you loan it to the bank to do whatever it please, with the understanding that you can call that loan at any moment. (liquidity of account.)
The fewer assets in the bank when it implodes, the less of a payout the taxpayers have to do, unless Congress suddenly wakes up tomorrow and forbids the taking of FDIC insured assets to pay derivatives. Which won't happen, I'm sure. Too many liberals (R or D) want to give another boon to the banks.
Deposits on a failing bank are guaranteed through fees collected by the FDIC. The FDIC can probably pay these, or with some help from the general fund.
The big question is what happens to all the other obligations of BofA. Will these get paid by the government as BofA gets unwound? If so, then having FDIC insured deposits is meaningless, as they will have to tax you in order to get the money to pay off the derivatives, or print money and pay the derivative payoffs with inflated money, making the value of the guaranteed deposits worthless through inflation.
They will claim that the right hand paid everything, but the left hand will be picking your pockets.
If the FDIC fails to live up to its obligations, all banks in the country will be closed shortly thereafter. You’ll see runs on all the banks healthy or not. For the FDIC not to pay would essentially be a default by the US government.
If that happens, BofA will be the least of your concerns.
Very educational...
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