Fed backstopping Bank of America

The Federal Reserve put you on the hook for $75 trillion ($75,000,000,000,000) of fraudulent derivatives.

JP Morgan will follow suit on a similar amount. No wonder the stock market bounced.

In other news, Quadafi was sodomized with a knife.

At least someone was kind enough to give him a coup de grace to the head. You will have to live through this.

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  • about the lack of follow up Don. Yves Smith had this to say about it at Naked Capitalism on 10/18/11 http://www.nakedcapitalism.com/2011/10/bank-of-america-deathwatch-moves-risky-derivatives-from-holding-company-to-taxpayer-backstopped-depositors.html

    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. 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 Fed will argue that moving the risker 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 afford to undo moving over unacceptably risky exposures measure, 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 yet another route for running a drip feed from taxpayers to banksters.

    I know that the situation over in Europe has dominated the headlines…, and I think the Fed is getting ready for a complete meltdown over there and trying to protect the US banksters from the fallout.


  • Lawmakers criticize Bank of America’s transfers

    By Kirsten Valle Pittman

    Charlotte Observer

    Lawmakers are criticizing Bank of America Corp. again, this time over the reported transfer of financial instruments from Merrill Lynch into the bank’s deposit-taking arm.

    It’s a move the lawmakers say could put taxpayers on the hook for big losses – three years after the bank received billions in bailouts from the federal government.

    More than a dozen Democratic members of Congress, including U.S. Rep. Brad Miller of North Carolina, wrote to federal regulators Thursday, asking why they allowed the move of derivatives into the retail bank, which contains deposits insured by the Federal Deposit Insurance Corp.

    “This kind of transaction raises many issues of obvious public concern,” Miller said in a statement. “If the bank subsidiary failed, innocent taxpayers could end up paying off exotic derivatives.”

    Bank of America spokesman Jerry Dubrowski said the bank’s derivatives trades are subject to risk-management controls and are client-driven, not proprietary trades – meaning the bank is not betting with its own money.

    “Bank of America serves clients’ needs, including with cash and derivatives instruments, through many of its affiliates, including the bank,” he said. “This is permissible in the current regulatory environment, and it is not expected to significantly change with the implementation of Dodd-Frank.”

    The retail subsidiaries of some other big U.S. banks, including JPMorgan Chase & Co. and Citigroup Inc., have as much or more in derivatives as Bank of America, data show.

    Bank of America transferred the derivatives from Merrill Lynch after a credit downgrade in September, moving the contracts to the retail bank, which has a higher credit rating, Bloomberg News reported last week.

    According to the Bloomberg report, the Federal Reserve favored moving the derivatives to give relief to the bank holding company, while the FDIC – which has to pay off depositors if a bank doesn’t have the money to make them whole – objected.

    Fed spokeswoman Barbara Hagenbaugh on Wednesday declined to discuss “supervisory matters pertaining to individual institutions.” FDIC spokesman David Barr also declined to comment.

    The lawmakers’ letters represent politicians’ latest barb at the nation’s second-largest bank. It has repaid the federal government, but now has caught flak over its lingering mortgage woes and, more recently, the $5 monthly fees it will begin charging some customers who make purchases with their debit cards.

    Earlier this month, U.S. Sen. Dick Durbin, D-Ill., railed against Bank of America and encouraged customers to switch banks.

    And Miller introduced a bill aimed at making it easier to leave big banks, saying they “act like they have monopoly power.”

    UNC Charlotte finance professor Tony Plath said there’s some validity to the congressmen’s concern that Bank of America’s derivatives transfer might violate a section of the Federal Reserve Act that limits transactions between the bank and nonbank affiliates to avoid subsidizing risky transactions with deposit insurance.

    “That’s one of the firewalls the Federal Reserve has,” he said. “That in turn prohibits the banking unit … from becoming excessively risky.”

    Derivatives themselves are not FDIC-insured, meaning taxpayers would never be on the hook directly for their repayment, Plath said. But derivatives used in connection with the bank’s trading operation that are held by counterparty creditors have priority if the bank is unable to pay its debt, he said.

    That means there are circumstances where the bank could repay derivatives losses with money that would otherwise be used to cover taxpayer-insured deposits, Plath said.

    He said he would think the bank sought approval from the Fed before it transferred the derivatives. But he wondered why, in that case, the regulator didn’t come out and explain why it permitted the move.

    In the letters to regulators, lawmakers urged the agencies to stop treating the transaction as a private matter.

    They posed a series of questions, including whether the derivatives pose a risk.

    Said U.S. Sen. Sherrod Brown, D-Ohio: “At a time when systemically important banks are increasing their capital relative to their credit risk, these transfers are having the effect of increasing Bank of America, N.A.’s credit risk relative to capital.”

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