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Whitney begins: "Why is Bank of America moving derivatives from Merrill Lynch to an insured subsidiary? Is it because the derivatives could blow up at any time leaving Merrill with gigantic, unsustainable losses? If that’s the case, then it would make perfect sense to shift them into a depository institution that's covered by the FDIC. That way, the taxpayers would wind up paying for the damage and no one would be the wiser."

In recent months Bank of America has been moving assets and laying off workers. (photo: alertsec.com)
In recent months Bank of America has been moving assets and laying off workers. (photo: alertsec.com)



Is Bank of America Headed for the Glue Factory?

By Mike Whitney, CounterPunch

22 October 11

 

hy is Bank of America moving derivatives from Merrill Lynch to an insured subsidiary? Is it because the derivatives could blow up at any time leaving Merrill with gigantic, unsustainable losses? If that's the case, then it would make perfect sense to shift them into a depository institution that's covered by the FDIC. That way, the taxpayers would wind up paying for the damage and no one would be the wiser. It's like a stealth bailout, right? The only problem is that Bloomberg let the cat out of the bag, so now everyone knows what's going on. And that's going to be a very big problem for B Of A. Here's a clip from the Bloomberg article:

"Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

"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.

"Three years after taxpayers rescued some of the biggest US lenders, regulators are grappling with how to protect FDIC-insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among US firms." ("BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit", Bloomberg)

There are two things worth noting in this article. First, according to Bloomberg, "the transfers (of derivatives) are being requested by counterparties." Well, how do you like that? In other words, the investors on the other side of these contracts want Merrill to put them under an insurance umbrella provided by the FDIC.

Now, why would that be? The only reason I can come up with, is that they know that a lot of these complex instruments are undercapitalized and ready to implode, so they want to make sure they get their money back any way possible. That means they need to latch on to Uncle Sam without anyone knowing about it. But, like we said, the cat is out of the bag.

The other thing worth noting is that the Fed and the FDIC are at loggerheads over the matter. ("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.") Now, that's not good at all, in fact, it's a big red flag that suggests the Fed trying to pull a fast one on the American people. One does not have to look too far for other examples of Fed misbehavior; the endless bailouts (TARP, QE1 and 2, Operation Twist, ZIRP, etc) In fact, the Fed's history is a tedious chronicle of one shifty deal after another. This is just more of the same; another gift to big finance at the public's expense.

It's ironic that the B Of A flap is taking place at the same time the non-partisan Government Accountability Office (GAO) just released its report on conflicts of interest in the Fed. It helps to put the Fed's dubious behavior into context. This is a summary of the report from Washington's Blog:

"The GAO detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves....

"The corporate affiliations of Fed directors from such banking and industry giants as General Electric, JP Morgan Chase, and Lehman Brothers pose 'reputational risks' to the Federal Reserve System, the report said. Giving the banking industry the power to both elect and serve as Fed directors creates 'an appearance of a conflict of interest,' the report added....

Joseph Stiglitz - former head economist at the World Bank and a Nobel-prize winner - said yesterday that the very structure of the Federal Reserve system is so fraught with conflicts that it is 'corrupt' and undermines democracy.

Stiglitz said, 'If we [i.e. the World Bank] had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure.'" ("Non-Partisan Government Report: Federal Reserve Is Riddled with Corruption and Conflicts of Interest," Washington's Blog)

So, no one should be surprised that the Fed is involved in another sketchy deal. Even so, this particular maneuver really seems to have hit a nerve with some prominent and usually even-tempered, financial bloggers, like Yves Smith over at Naked Capitalism. Here's Smith's take on the Fed's subterfuge:

"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 depositories 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....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." (Naked Capitalism)

"Just plain evil." Maybe that should be the Fed's byline?

Anyway, Smith is not alone in her contempt for the Fed, but there are those who feel she may be off-base in her assessment of what is going on vis a vis the derivatives dump. Bank analyst Christopher Whalen at Reuters thinks that the transfer could be a sign that B of A is getting ready to throw in the towel. Here's an excerpt from the article:

".... the move to put the derivatives exposures of Merrill Lynch under the lead bank could be preparatory to a Chapter 11 filing by the parent company. The move by Fannie Mae to take a large junk of loans out of BAC, the efforts to integrate parts of Merrill Lynch into the bank units earlier this year, and now the wholesale shift of derivatives exposure all suggest a larger agenda.

"I don't have any access to inside skinny, but what I see suggests to this investment banker that a restructuring may impend at Bank of America." ("Is Bank of America planning for a Chapter 11?, Reuters)

"Restructuring"? So is B of A headed for the glue factory?

No one knows for sure, but the banking behemoth has been laying off workers by the thousands, slashing expenses, and raising fees while its stock has dropped 49 per cent in a year. These are hardly signs of a thriving business.

So, consider this: If you were in Fed chairman Ben Bernanke's shoes, what would you do?

Let's say the second biggest bank in the country is starting to teeter because it's loaded with all manner of dodgy (toxic?) derivatives that could blow up at any minute and take down the entire global financial system. Would you (a) Wait until the bombshell exploded knowing that the only choice you would then have would be to further expand the Fed's balance sheet by another couple trillion dollars or (b) Try to sleaze the whole thing off on Uncle Sam and let the taxpayers pick up the tab?

I'm not sure, but I think Bernanke may have chosen (b).

 

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+18 # maheanuu 2011-10-22 16:18
If they are headed for the glue factory, then that will surely be some really poisonous stuff. Where would you store that crap? Hazardous Materials is not sufficient a name for it. Besides what a huge release of vermin this breakup would be on the public.
 
 
+33 # Capn Canard 2011-10-22 17:12
Breakup? No, how about they get put where they belong, in jail!
 
 
0 # Obwon 2011-10-26 10:26
The "underlying assets" we have to remember, are houses/real estate. Much of these toxic assets have gone unoccupied for many a year by now. Others have been foreclosed on, but no sale is in sight. Even when there have been sales, the foreclosees have woke up and begun to research, to determine if their ouster has been according to Hoyle. While other properties can not be foreclosed, because the paperwork is not there and there are too many eyes on the "usual suspects".

Meanwhile hurricanes, earthquakes, floods, cold and rainy weather, and soon ice and snow will be assaulting the rest of the horde. Leaky roofs, bursting pipes, trees assaulting foundations, underground streams you name it. Not to mention "Jerrybuilt".
Now how much will you pay?

Our economist back then told us there were some 200 to 500 trillion dollars in toxic paper out there. It's beginning to look like those figures were right. Expect disaster to strike any day now!
If so, the only safe place for the banksters will be the jails.
 
 
+18 # MainStreetMentor 2011-10-22 19:02
One solution to these continual “legal”, but ethically questionable manipulations, is to dissolve the federal reserve system, and go to state/owned/con trolled banks (just like occurred under President Andrew Jackson, such a system would preclude and prevent what Bank of America is proposing within the article above). Bank of America, appears to be an organization rife with problematic activities, concerning lending and foreclosure practices. At the very least they should be required to change their name, for they most certainly are NOT the bank of America nor Americans. A more apropos name would be, “Bank of Avarice”. One of the things they promote is illegal immigrant activities, when they do not require a social security number when applications are submitted for loans. Since 2008, Bank of America has owned Merrill-Lynch ... how’s that for a neat arrangement?
 
 
+7 # mwd870 2011-10-23 06:06
State/owned/con trolled banks is not a solution if those in power at the state level are also corrupt and bought off by corporate interests. State ownership of anything does not preclude cronyism, graft, and other forms of rigging the system. I would rather see honest federal regulation and all money out of politics.
 
 
+7 # RLF 2011-10-23 07:33
Seems to me that if BOA puts these instruments in a depository then the FDIC should say the bank(where the instruments are put) is no longer insurable. This is also BOA betting that the Republicans will ruin the economy over the next 12 months in order to get elected. This will cause exponential growth in foreclosures and incredible pressure on those shady derivatives that have gotten so famous in the last 4 years. Time to get you money out of BOA before it crashes because the FDIC can't help a whole lot if one that size goes down.
 
 
+1 # jimyoung 2011-10-26 08:15
Seems the same as the corrupted congress not allowing the Pension Benefit Guarantee Corporation (PBGC) to make sound actuarial adjustments its premiums for the junk financial products so many companies used to claim 100% funding of their pension obligations. False projections also allowed many to skim the supposed profits beyond those required for 100% funding, so supposedly solid ones like mine dropped from 110% funding to 84% as they missed their "projections" year after year.

Now people like Perry want to trick younger folks into privatized versions of social security? The steady stream of failed financial schemes should be a lesson. The Garn-St. Germain Depository Institutions Act of 1982 enticed investors like my father-in-law with expanded insurance cover for multiple accounts but I was opposed because it allowed the irresponsibilit y that became the savings and loan fiasco. Remember LTCM, Long Term Capital Management (to avoid taxes)? These schemes should not be "insured." I believe Milton Friedman would roll over in his grave at seeing the massive bailouts that resulted from the real life failures brought on partially by a faith as misplaced as Herbert Hoover's in what he came to call "anarchical capitalists" (not the true champions of innovation he believed most were).
 
 
+1 # jimyoung 2011-10-26 08:17
(cont.) I believe the LTCM fiasco was less painful to the Nobel Prize winning theorists and their associates than it should have been because of the Private Securities Litigation Reform Act of 95 (and follow up gutting legal recourse through state courts). Clinton Appears to have signed the bill (made veto proof by the likes of Joe Lieberman) with the cover of an added provision for a sham of a SEC to sue on behalf of any investors that were “legitimate” victims instead of “frivolous” plaintiffs.
 
 
+1 # jimyoung 2011-10-26 08:17
(cont.) How many times do these guys get to rewrite and gut the post-depression rules and regulations that made all of this so much safer and more stable? Seems only a few people like Elizabeth Warren (who quit the Republican party about the same time I did) can put together the timeline of failures, fraud, and financial foolishness that people like Perry and the secretive American Legislative Exchange Council seem to have armies of people, hundreds, if not thousands, of “model” legislative proposals to keep throwing in the battle to overwhelm any comprehensive view of their overall strategy.
The tricksters have far more financial backing, with the Koch brothers just a sample of the people they don’t tell you about when they cry about Soros. Though I do support free speech and unlimited campaign contributions to Super PACs, I insist on disclosure of who is donating (no hiding of sources through subsidiaries). All think tanks should be required to list history like length of existence, funding sources and bundled amounts disclosing at least the number of verifiable donors. The sham “Americans For Voters Rights”, would be an excellent example, few members and authoritative appearing congressional testimony within weeks of formation.
 
 
0 # Obwon 2011-10-26 10:38
Kudos to you JimYoung... Few are as knowledgeable as you are. People don't read about financial "stuff" until it's a little too late. The "middle class" didn't know what Saint Ronnie was doing to their sheltered wealth when he said "The S&L's are performing poorly". In fact, they never even asked themsevels: "Why do S&L's need to perform any better than they already do?" It was like asking police to make more arrests in a town were there was no crime. Of course the police will be "performing poorly", if arrest stats are used as the metric.

Obwon

Obwon
 
 
0 # Obwon 2011-10-26 10:32
A better solution would be to have ruled that toxic assets are not moveable, except with FDIC approval. After all, they're going to be responsible as stewards of public funds.

Obwon
 
 
+2 # karenvista 2011-10-23 15:49
Quoting mwd870:
State/owned/controlled banks is not a solution if those in power at the state level are also corrupt and bought off by corporate interests. State ownership of anything does not preclude cronyism, graft, and other forms of rigging the system. I would rather see honest federal regulation and all money out of politics.



If we had "honest federal regulation" why not nationalize the banks like Jackson and Lincoln did? Then interest rates could be kept low and all profits could be used to pay for government services instead of going into the pockets of the 1%, never to be seen again.
 
 
+1 # mwd870 2011-10-24 02:58
We don't have honest federal anything right now, but that should be the goal. If you look at states like Ohio and Wisconsin, it is obvious the damage right-wing, money-empowered state governments can do. Some things need to be regulated at the federal level in a transparent and ethical way. This has to be possible, assuming democracy is not already dead in this country.
 
 
0 # Obwon 2011-10-26 10:30
Blame them for what they have done, not for taking the only sane actions that anyone in their position would take. Reasonable or not, fair or not, it's the only thing they can do. They can't go down "without a fight", nor did anyone expect them to. It's like blaming a tiger for eating meat.

If you don't think that "all meat" should be eaten by banks, then you need regulations to place some meat off limits. We had such regulations, but they were undone, leaving "all meat" fair game for these "tigers" to eat, and eat us alive they did.

Obwon
 
 
+15 # pernsey 2011-10-22 20:46
I hate this manuplative shady crap. Why are they above the law? I guess the rich dont have to follow the law, thats only for people without money? Two different sets of rules, if we break the law they throw our butts in jail. If they break the law they get more money and rewarded for it...how is that fair?? I guess they are to big to go to jail?
 
 
+22 # Michael_K 2011-10-22 22:41
The Law is written to accommodate them. That's the whole point of the lobbying industry and the corrupt campaign finance system. Of course even the US Supreme Court promotes this corruption.

There is no "legal" remedy to this, nor can you expect elected officials to turn against those who finance them... We need a new Revolutionary War.
 
 
+10 # balancingact 2011-10-23 02:30
Corporate insults thrive on reinforced conformity. After decades of manipulative advertising, particular systems of power and wealth have been entrenched. What maintains vast conformity is disempowerment. Occupy Wall Street, et al., is about empowerment. It's time to recover power from these corrupt and injurious systems of business. Many corporations, no doubt, use their money to persuade politicians to allow the citizenry and future generations to endure the devastating consequences that follow destructive business practices.

Ecosystems are collapsing, species are said to be going extinct- or are threatened or endangered- at alarming rates, poverty and inequality are widespread and increasing, soil and water are being degraded, the atmosphere is being heated.

It's time to expose the folly of these systems of power and claim our right to choose a different path. No more indebtedness to banks. No more GMO agriculture and patented seeds. No more government subsidies to oil and a refusal to address climate change. No more buying into this advertise-drive n consumerism. No more wishing for sufficient access to health care.

It's time for changing how elections are financed. Time for reflection and contemplation.
 
 
+5 # fredboy 2011-10-23 09:30
Just visited NC where they are calling BOA the "black hole of Charlotte."
 
 
+1 # Enoch 2011-10-23 09:34
I have nearly ninety thousand dollars in a savings and checking account with BOA. Does anyone have suggestions about what I should do? Should I withdraw the money and depoisit it in Wells Fargo, where I already have about 100k on deposit or put it in an active assets account with Morgan Stanley, where I have my pension and Social Security checks deposited. Or, should I just sit tight and grit my teeth?
Enoch
 
 
+2 # Buddha 2011-10-23 12:52
Enoch,

FDIC insures checking and savings accounts in a bank up to $100K (combined). Keep in mind, that is PER BANK. So be careful if you put your accounts in two different "banks" but are owned by one big conglomerate. If you have
 
 
+2 # karenvista 2011-10-23 16:12
Quoting Buddha:
Enoch,

FDIC insures checking and savings accounts in a bank up to $100K (combined). Keep in mind, that is PER BANK. So be careful if you put your accounts in two different "banks" but are owned by one big conglomerate. If you have


It was raised to $250K during the last crash.
 
 
+1 # jimyoung 2011-10-26 08:40
I believe they also allowed it for multiple accounts in the same bank (from a friend with more than $250k insured in Indymac accounts). They did it without any consideration of what "insurance" premiums were paid, as the congress often does, then complains about the "underfunded," GSEs, etc, like the Pension Benefit Guarantee Corporation, Fannie Freddie, United States Postal Service, Social Security, and Sallie Mae, for example. They seem to use the "Leninist" tactics suggested years ago by the Cato Institute, basically to bad mouth while undercutting through legislation to guarantee failure, while extolling "fixes" (ones that have been tried and failed miserably in the past, in my humble opinion). A common trend has been to "privatize" the GSEs like Sallie Mae to get private investors to support publicly beneficial projects. Not a bad idea if the investors are like the old investors in public utilities were, interested more in a steady reasonable rate of return than in the high-yield foolishness that they morphed into, becoming more of a cash cow for bonus and commission driven "salesmen," as well as too many investors wanting pie-in-the-sky long term income streams.

My guess is that the same will happen to the Infrastructure Bank. I do support such a funding mechanism, by the way, but we have to keep the "rewards" from corrupting the good it can do.
 
 
+3 # Rixar13 2011-10-23 10:16
"Breakup? No, how about they get put where they belong, in jail!"
Remove the weed smokers and replace with Wall Street and Bankers....
 
 
+5 # Lolanne 2011-10-23 11:17
If I had any money at all with BOA, or even a credit card, I would get money out and put it somewhere else (NOT another of the big banks!) and close the credit card acct. I've had an uneasy feeling about what I've been seeing about BOA for months now, and this is just adding to it. Every time I think I've seen the worst the big banks have to offer, something else slithers out from under a rock, slimier than ever.
 
 
+6 # Buddha 2011-10-23 12:59
I already shifted 3/4 of my BoA account money to a local credit union. I make sure to keep the remaining BoA accounts fee-less, they aren't taking one extra dime of my money to pay for their CEO bonuses, etc. But I think on Nov 5th, "Bank Transfer Day", I will move just about everything left to my credit union account to even further signal my displeasure at BoA for its machinations, and it leading the robo-signing foreclosure process.
 
 
+3 # imsewvain 2011-10-23 22:16
It will be bailed out or absorbed at taxpayer expense in either case. Keynsian economics and the fed have to go or it will be us going to the glue factory,and I wonder how many gallons we will melt into?
 

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