Sleight of hand: BofA moves dodgy Merrill derivatives to bank (U.S. taxpayer on the hook for $55+T?)

The New York Post ^ | 2011-10-21 | Mark Decambre

[rabscuttle385]

A plan by beleaguered Bank of America to foist trillions of dollars of funky Merrill Lynch derivatives onto its depositors is raising eyebrows on Wall Street.

The rarely used move will likely save the bank millions of dollars in collateral but could put depositors’ cash behind the eight ball.

The move also brought to light fissures between the nation’s top banking regulators, the Federal Deposit Insurance Corp. and the Federal Reserve, in the wake of new regulations meant to curb the free-wheeling habits that fostered the worst crisis in a generation back in 2008.

At issue is BofA’s decision to shift what sources say is some $55 trillion in derivatives at Merrill Lynch to the retail bank unit, which houses trillions in deposits insured by the FDIC.

Critics say the move potentially imperils everyday depositors by placing their money and savings at risk should BofA run into trouble.

[Texas Songwriter]

Repeal of Glass-Steagall was essential to this planned economic destruction. It also is indebted to the Community Reinvestment Act signed by Carter as well as the approval by the Federal Reserve. Remember back in 1988 Greenspan, unilaterally, declared that "Banks" (Wall Street -too big to fail banks) could engage in the buying and selling of derivitives. He decreed, by fiat, that banks could not only be holding companies and lending institutions, but also investing entities (essentiall what Gramm-Leachman did later by statute in 1999). Then the bankers literally 'cooked up' an entirely new investment class called derivitives which allowed them to leverage buy or sell almost anything. This last conconction has become our undoing. When Lehman fell September 16, 2008 it was because there was a run on the money markets (Lehman was the largest money market). Lehman then filed a claim against AIG, its counterparty in trillions of notional derivitive value which became actual demand of payment. Of course AIG did not have that kind of money, so it made claim to its counter party derivitive holders to pay them (AIG) so AIG could pay Lehman. Then all of the counter party entities which AIG made demand on,...they then would make a claim on many others who sold this "insurance" to them..... I do not believe any of us knew how close to a complete global economic meltdown we came to on Sept.16,2008. Bernanke printed 700 billion and stopped the nuclear chain reaction...temporarily. Then of course the rest is the history of TARP, multiple stimulus plans, and multiple quantative easing...none of which did anything but put our children in debt to the level where they can never get out but by one way...a total collapse of the economic system and the restructuring of the system/systems...I believe, as Sarcoze affirmed, the only good thing that will come of this is a unified world currency. That is what is going to happen. The timeline will accellerate, probably at the end of October when the German and French leadership declare how Greece will be dealt with. Unfortunantly all of Europe is linked at the hip with Greece for their economic fidelity, and the USA (US megabanks) are linked at the hip with European banks. I look for war to come as the ulitmate settler of political and economic disagreements. Coersion will be the only tool left to deal with the tumult ahead. It will be the darkest days of nations on earth. And all because someone in congress thought it would be fine to trust bankers and politicians. What a crying shame. I guess it had to come to this. Remember the prophet Jeramiah...."the human heart is deceitful above all things, and desperately wicked, who can know it."

[mikey_hates_everything]

"but could put depositors’ cash behind the eight ball"

Anyone who still has their cash in BofA should know better by now and gets what they deserve.

[Toddsterpatriot]

in 1988 Greenspan, unilaterally, declared that "Banks" (Wall Street -too big to fail banks) could engage in the buying and selling of derivitives.

Futures and options contracts are derivatives.

Lehman then filed a claim against AIG, its counterparty in trillions of notional derivitive value which became actual demand of payment.

That would only make sense if Lehman was betting against themselves.

[Texas Songwriter]

Futures and Options contracts are not "over the counter derivitives". They are an unregulated private contract between two parties and even Greenspan has said he does not know how to regulate them. The are an etherial, self-delusional agreement between 2 parties which 'gives the appearance' of a no-lose investment. Bank of International Settlement puts the notional value of current derivitive contracts at about 1.5 Quadrillion dollars. The earth and all that is in it does not come close to the current dollar valuation of 1.5 Quadrillion. That is a number which is large, even to astronomers. As long as their value remains notional everything is fine, but when counterparty claims are made, it will be next to impossible to stop the carnage. Bernanke did stop it with the bailouts to AIG and the "to big to fail" banks. The next time, I fear, we will not be so lucky. Right now, the dollar is leveraged 20:1. That is how much debt that is out there. It cannot be fixed in a year, or 10 years or 50 years. It can only continue as long as the public remains ignorant about about these matters....and even then when the public realizes what politicians and the big banks have done only civic upheaval will come...but that will repair nothing.

Options and Futures are leveredged products, but they are highly regulated. They are not the problem. They have margin calls to right a failing position, or in the case of options, the options expire worthless, and the seller derives the benefit. Not so for over the counter derivitives.

[Texas Songwriter]

That would only make sense if Lehman was betting against themselves.

Lehman was basically filing a claim on the "derivitive insurance agreement" so Lehman could collect enough money to pay its demand requirements. It was the law of the jungle of Sept 16 and Lehmans was only concerned with Lehmans. What is Insurance if it is not a contract to protect against an adverse outcome of yourself. Homeowners,collision, life insuance....all are cased when something bad happens to you.

[Toddsterpatriot]

Futures and Options contracts are not "over the counter derivitives".

Correct. They are exchange traded derivatives.

The are an etherial, self-delusional agreement between 2 parties which 'gives the appearance' of a no-lose investment.

Really? Neither side can lose? That must mean that neither side can win.

Bank of International Settlement puts the notional value of current derivitive contracts at about 1.5 Quadrillion dollars. The earth and all that is in it does not come close to the current dollar valuation of 1.5 Quadrillion.

So what? Notional value tells you almost nothing about the amount at risk.

As long as their value remains notional everything is fine, but when counterparty claims are made, it will be next to impossible to stop the carnage.

That's a silly claim. Notional value remains notional, no matter what.

Right now, the dollar is leveraged 20:1.

Huh? Makes no sense.

That is how much debt that is out there.

Huh?

It can only continue as long as the public remains ignorant about about these matters..

We'll see these silly claims until the public gets educated.

Options and Futures are leveredged products, but they are highly regulated.

But they're derivatives!!

or in the case of options, the options expire worthless, and the seller derives the benefit.

You mean one side gains and the other side loses? Just like in OTC derivatives?

What about interest rate swaps? Are you scared of them too?

[Toddsterpatriot]

Lehman was basically filing a claim on the "derivitive insurance agreement"

What Lehman "derivative insurance agreement" do you imagine Lehman owned that would allow them to claim money from AIG? Be specific.

What is Insurance if it is not a contract to protect against an adverse outcome of yourself.

You could buy a contract that pays off when Lehman defaults on their debt. Is that what you think Lehman bought? A contract that pays off when Lehman defaults?

[Walmartian]

I’m printing that for our diner guests to read.

[Texas Songwriter]

What I am "scared of", as you put it, is the ability of one entity to engage in leverage which will put the entire economy at risk. Credit default swaps, derivitives all hold that potential. As I said, as long as notional remains notional value we are hardly aware of their existence. It is only when that notional value is demanded by the counterparty claims that the chain reaction could hold great danger, not only for that bank, but the entire economy. When the freewheeling, wild west, trading agreements, flying under any radar until it crashes the economy is my concern.

I have read many of your posts on many threads. You are a smart guy. But you and I will have to agree to disagree as to the danger which over the counter derivitives hold for our economy.

Thanks for the commentary.

[Toddsterpatriot]

It is only when that notional value is demanded by the counterparty claims

The notional is never demanded.

[4Liberty]

[TigersEye]

Good graphic and frighteningly true.

[gaijin]

TRILLION —it’s the new, IMPROVED billion...!!!

/utter disgust

[OneLoyalAmerican]

Greetings Moonman62 & BenKenobi:

The music is about to stop, fight for a chair. From Barnhardt.biz

Um, I think we should all stop paying taxes now.
Posted by Ann Barnhardt - October 18, AD 2011 7:10 PM MST

I think I’m going to withdraw my consent to be taxed by the Federal Government after this. Bank of America, as we have previously discussed, is exposed on Over-The-Counter forward contracts to the tune of $75 TRILLION, which is more than FIVE TIMES the total economic output of the United States in one year.

[Ann links Bloomberg story here.]

They are now moving contracts from a segregated trading division within the Bank Holding Company which operates under the venerable name “Merrill Lynch” to their retail banking division alongside their customer deposits in order to get these contracts under the umbrella of the FDIC.

It is known that Merrill Lynch had OTC exposure of $22 Trillion. So, in shifting these contracts from Merrill to Bank of America, they are making YOU, THE AMERICAN TAXPAYER the de facto guarantor of these contracts. YOU ARE NOW THE “EXCHANGE”. If the counterparties on these OTC contracts default, Bank of America will have recourse to turn to the FDIC to “bail them out”. Where does the FDIC get its money? From the United States Treasury.

Bank of America just illegally dumped tens of TRILLIONS of dollars of OTC contracts on YOU.

But that isn’t the greatest crime here. The crime is that your evil, corrupt and/or imbecilic and unqualified U.S. government regulators are not only letting this happen, but seem to be encouraging it.

A few years back my brokerage was audited by the regulatory bureaucrats, which is a standard bi-annual occurrence. These people just about had KITTENS over a six dollar interest credit which I had booked, but it was placed in a current account, and the regulators wanted it in a non-current account. Just to repeat, it was SIX DOLLARS. As in a fiver and a single. As in a modest lunch at a drive-thru fast food chain. SIX DOLLARS. This six dollars drug my audit out for WEEKS and cost me I-don’t-know-how-much in CPA billing hours. And these people acted like I was some sort of criminal.

You just got illegally prison raped for $22 TRILLION dollars, America, and the fed regulators are the ones watching the door to the gang showers and videoing the whole thing on their cellphone.

There needs to be a tax strike. And I’m not joking. This has to end.
—

Cheers,
OLA

[stephenjohnbanker]

” if Bank of America’s retail bank fails, guess who’s on the hook for the losses. “

Ahem........

[American Infidel]

You have to dissect the multi-trillion dollar figures thrown around. 80% of this total exposure is in the form of plain vanilla Interest Rate Swaps. In a vanilla Interest Rate Swap, the 2 parties involved in a transaction are only exchanging fixed interest payments for floating interest payments on an agreed-upon notional. It is not the notional itself that is being exchanged or placed at risk. Please place these huge figures into their proper perspective.

For example: 2 parties may engage in a Swap transaction on a $100million notional amount. Bank "A" pays a fixed interest rate to Bank "B" and Bank "B, pays a floating rate (usually the LIBOR rate) to Bank "A". They are not exchanging the entire $100million. They are only exchanging interest payments on that $100 million on a monthly, quarterly, semi-annual or annual basis (whatever they agree to), so the true exposure is nowhere near the $100 million notional amount of the swap. If a bank on one side of the transaction goes under, the other side hasn't lost $100million, or anywhere close to it.

There are also regular bilateral netting and portfolio compression cycles that take place. These are processes by which offsetting trades are effectively "torn up" thereby removing them from the balance sheet of the banks involved in the transactions. Too much to elaborate upon here, but these compression cycles occur regularly and every big bank with derivatives exposure participates. Think of these cycles as maintenance, in which the deadwood and underbrush are removed in order to prevent a potential forest fire from spreading. We just had one of these compression cycles this past Friday in which $8.26 trillion of notional was terminated.

I am no Pollyanna, and I am gravely concerned about the stability of our financial sector, but derivatives have become the 'boogeymen' of world of banking and finance. So few people have any real clue as to how the derivatives market works so it is easy to lull people into the idea that derivatives are these complex and dangerous products with articles such as this one. Most people are not even aware of the various types of derivatives and what the actual risk is. We just see these huge numbers thrown around, hear the term 'derivative' and start calling for intervention to 'ban' these nefarious financial instruments. I only ask that people obtain a basic understanding of derivatives so that they are in a better position to evaluate the true impact of the claims being made in articles such as these.

[Texas Songwriter]

Thank you for writing. You give more clarity than my post. I would ask you this. Recently, just last week, it was reported that Bank of America transferred 44 trillion in notional derivitives off of its books....I think to Morgan...but I am not sure of that.....but they did transfer 44 trillion. If the counterparties make demand on those 44 trillion of notional value, what would that translate in terms of actual liability to the counterparties. If it is only 1%, that is an astronomical number. Can you illucidate?

[Texas Songwriter]

Thank you for writing. You give more clarity than my post. I would ask you this. Recently, just last week, it was reported that Bank of America transferred 44 trillion in notional derivitives off of its books....I think to Morgan...but I am not sure of that.....but they did transfer 44 trillion. If the counterparties make demand on those 44 trillion of notional value, what would that translate in terms of actual liability to the counterparties. If it is only 1%, that is an astronomical number. Can you illucidate?

[Toddsterpatriot]

It is known that Merrill Lynch had OTC exposure of $22 Trillion. So, in shifting these contracts from Merrill to Bank of America, they are making YOU, THE AMERICAN TAXPAYER the de facto guarantor of these contracts. YOU ARE NOW THE “EXCHANGE”. If the counterparties on these OTC contracts default, Bank of America will have recourse to turn to the FDIC to “bail them out”.

You're worried that Bank of America is moving profitable derivatives contracts to the banking division? LOL!

I thought the FDIC only bailed out banks going out of business, not banks with trillions in profitable derivatives? Sounds like Ann is a bit confused.

Where does the FDIC get its money? From the United States Treasury.

The FDIC is funded by charging the insured banks.

A few years back my brokerage was audited by the regulatory bureaucrats

Maybe they know how confused you are?

And I’m not joking.

But you are a joke.

[DoughtyOne]

LMAO, never gonna let go of that are you? Me neither...

What with raising my banking fees, I’m quite disenchanted with the bank right now. I’m looking around...

I’ve been with them since the mid 1980s. Since then they’ve done about all they can to piss me off.