Bank Of America Dumps $75 Trillion In Derivatives On U.S. Taxpayers With Federal Approval

http://seekingalpha.com/article/301260-bank-of-america-dumps-75-trillion-in-derivatives-on-u-s-taxpayers-with-federal-approval ^

[TigerClaws]

Bloomberg reports that Bank of America (BAC) has shifted about $22 trillion worth of derivative obligations from Merrill Lynch and the BAC holding company to the FDIC insured retail deposit division. Along with this information came the revelation that the FDIC insured unit was already stuffed with $53 trillion worth of these potentially toxic obligations, making a total of $75 trillion.

[cuban leaf]

This has to be satire. I firmly believe the problem is too big for the worlds governemnts/economies to do anything to stop this train wreck, but those numbers are an order of magnitude worse than I thought things were.

When you surprise the “doom and gloomers” with bad news, you KNOW we are in a world of hurt.

[chuckee]

Sounds like a game of hide the salami. The toxic derivatives are still toxic and it is just a question of shifting the corpse around so that eventually it lands on the door of the Fed and ultimately the taxpayer who will ultimately pay for the losses.

[Nervous Tick]

>> There is ZERO chance the net obligation is anything like that.

What if the net obligation is only five percent of $75 trillion?

That’s still three trillion seven-hundred-fifty billion dollars of taxpayer exposure. Two full years of Obama-esque deficits.

Is that acceptable?

If you don’t like five percent as the number, then what number do you prefer?

*Whatever* the risk level of this crapola, I should think that BAC shareholders and bondholders ought to be on the hook — not depositors and the taxpayer by way of the FDIC.

[cuban leaf]

Don't worry. I'm sure the republican politicians will protect us from this.

[montomike]

75 Trillion...

Sooner or later they are going to be talking about some real money!

[aegiscg47]

I think the net obligation is actually around 5% from some of the articles I'm reading, which is still a massive amount that the FDIC couldn't possibly insure. Between BoA and JP Morgan, I read that they have over 125 Trillion in derivatives and there's around $700 Trillion globally. Most of these are insurance, interest driven, or things that will not implode, but even if the listed number of 5% could go toxic that would kill off what's left of the global economy.

[DannyTN]

Here why everyone is freaking out about BofA moving it's derivatives

The above article is a little more balanced approach. Some things should be noted.

• Ever since the Merrill Lynch buyout, BofA was on the hook for the derivatives.
• The FDIC guarantee only comes into play if BofA fails.
• BofA didn't seek regulatory approval, and doesn't think they need to. A gift from both the Republicans and Democrats and Clinton who repealed Glass-Steagall.
• We don't know the consistency of the derivatives. They may be derivatives based on Fannie Mae mortgaged backed assets, which the government was technically on the hook for anyway. But in this case they do have real assets underlying them.
• It sounds like the FDIC may take action against BofA to block the transfer. Just because the FED dissagrees, doesn't mean the FDIC can't act.

[org.whodat]

Have read that the bottom number for this crap is 650 trillion. With a high of such a large number it exceeds a bazillion. Send phil gramm a thank you note.

[listenhillary]

From an old article regarding collateralized-debt obligations or CDO’s

http://broadcatching.wordpress.com/2009/04/06/matt-taiibi-the-big-takeover-rolling-stone-magazine/
(Snip)
The best way to understand the financial crisis is to understand the meltdown at AIG. AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror. This is a company that built a giant fortune across more than a century by betting on safety-conscious policyholders — people who wear seat belts and build houses on high ground — and then blew it all in a year or two by turning their entire balance sheet over to a guy who acted like making huge bets with other people’s money would make his d*ck bigger.

That guy — the Patient Zero of the global economic meltdown — was one Joseph Cassano, the head of a tiny, 400-person unit within the company called AIG Financial Products, or AIGFP. Cassano, a pudgy, balding Brooklyn College grad with beady eyes and way too much forehead, cut his teeth in the Eighties working for Mike Milken, the granddaddy of modern Wall Street debt alchemists. Milken, who pioneered the creative use of junk bonds, relied on messianic genius and a whole array of insider schemes to evade detection while wreaking financial disaster. Cassano, by contrast, was just a greedy little t*rd with a knack for selective accounting who ran his scam right out in the open, thanks to Washington’s deregulation of the Wall Street casino. “It’s all about the regulatory environment,” says a government source involved with the AIG bailout. “These guys look for holes in the system, for ways they can do trades without government interference. Whatever is unregulated, all the action is going to pile into that.”

The mess Cassano created had its roots in an investment boom fueled in part by a relatively new type of financial instrument called a collateralized-debt obligation. A CDO is like a box full of diced-up assets. They can be anything: mortgages, corporate loans, aircraft loans, credit-card loans, even other CDOs. So as X mortgage holder pays his bill, and Y corporate debtor pays his bill, and Z credit-card debtor pays his bill, money flows into the box.

The key idea behind a CDO is that there will always be at least some money in the box, regardless of how dicey the individual assets inside it are. No matter how you look at a single unemployed ex-con trying to pay the note on a six-bedroom house, he looks like a bad investment. But dump his loan in a box with a smorgasbord of auto loans, credit-card debt, corporate bonds and other crap, and you can be reasonably sure that somebody is going to pay up. Say $100 is supposed to come into the box every month. Even in an apocalypse, when $90 in payments might default, you’ll still get $10. What the inventors of the CDO did is divide up the box into groups of investors and put that $10 into its own level, or “tranche.” They then convinced ratings agencies like Moody’s and S&P to give that top tranche the highest AAA rating — meaning it has close to zero credit risk.

Suddenly, thanks to this financial seal of approval, banks had a way to turn their sh*ttiest mortgages and other financial waste into investment-grade paper and sell them to institutional investors like pensions and insurance companies, which were forced by regulators to keep their portfolios as safe as possible. Because CDOs offered higher rates of return than truly safe products like Treasury bills, it was a win-win: Banks made a fortune selling CDOs, and big investors made much more holding them.

The problem was, none of this was based on reality. “The banks knew they were selling crap,” says a London-based trader from one of the bailed-out companies. To get AAA ratings, the CDOs relied not on their actual underlying assets but on crazy mathematical formulas that the banks cooked up to make the investments look safer than they really were. “They had some back room somewhere where a bunch of Indian guys who’d been doing nothing but math for God knows how many years would come up with some kind of model saying that this or that combination of debtors would only default once every 10,000 years,” says one young trader who sold CDOs for a major investment bank. “It was nuts.”

[volunbeer]

In my layman’s opinion, there is NOTHING that will do as much damage to the world economy as derivatives. We have turned the world banking system into a casino for banks where the banks take the profit and the citizens eat the losses. Sounds familiar, right?

It is the same scheme. The only difference is the staggering amounts of money involved and how these instruments tie the system together. If the housing collapse set off a big bomb in the world banking system the derivatives will be a full scale nuclear war followed by nuclear winter. The numbers are that big.

If you think the folks on this thread sound nutty and outlandishly paranoid you have not studied derivatives. I urge you to take an hour to gain an understanding of the threat we face. The numbers dwarf the entire U.S. economy and the world economy. There is no possibility that the world could cover the losses or that the major banks would stay solvent.

I am sure others will correct me and it’s simplistic but think about derivatives as the mortgage backed securities that became worthless when the housing market imploded. However, the numbers we are talking about for the total derivatives market are 100 times greater than real estate instruments. It is all digital money, right?

Fire or flame away and by all means add your own .02.

[TruthShallSetYouFree]

Is there that much money in the entire world?..........

Not any more.

[Red Badger]

Derivatives should be made illegal...........

[Walmartian]

Is there that much money in the entire world?..........

20% of it all.

[ken5050]

Great "blast from the past" article...thanks..

Allow me to reiminisce further...Before CDOs, there were CMO's..restricted only to mortages..albeit many of lousy credit worthiness. That's where the word "tranche" was first applied...and "tranche" is a French word that means "open running sewer.."

How very appropriate..

[veracious]

I did a web study on the _value_ of everything in the world; found nothing comprehensive but a reasonable estimate seems to be $1 Quadrillion (1,000 Trillion).

[Avalon Hussar]

BFLR

[DJ MacWoW]

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[volunbeer]

Cloward and Piven would happily point out that derivatives will truly “collapse the system.”

[Darth Reardon]

There is no possibility that the world could cover the losses

I don't get this. The world is a closed system.

[andy58-in-nh]

Much of America would never have been built without financial derivatives such as futures and options contracts, due to excessive risk. Of course, some derivatives are more exotic and non-linear in design, but they are hardly dangerous in and of themselves.

The problem isn't really the instruments - rather, it is one of excessive leverage and socialization of risk. When governments assume the risk of adverse financial events in place of private parties (the big banks, for example), moral hazard inevitably follows, and disaster beyond that.