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

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

I had heard this had happened last year in the local paper but had let it slip my mind.  Someone may have already posted it and I missed it, but I thought it was important enough to put on here again.

http://seekingalpha.com/article/301260-bank-of-america-dumps-75-trillion...

Cheers,

Ernest

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ewilkerson
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goes211
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Some clairification

Just an FYI.  The FDIC is NOT ON THE HOOK for the $75 trillion if there is a problem with BAC.  The FDIC only covers actual deposts up to $250K.  What it sounds like is happening is that by moving the $75 trillion worth of derivatives out of the bank holding company into the bank itself, the derivatives holders will have access to more funds to cover derivatives losses. 

You can either look at this a few different ways.  If you are not conspiracy minded, you could argue this is an attempt to cushion the derivatives book so that the holding company does not get impaired quickly due to short term funding.  If you are a bit more cynical you might see this as doubling down on a losing position in hopes that buying additional time will make the problem go away.  If you are a full conspiracy theorist, you can see this as a first step to a MF Global like looting of the customer funds to cover loses from proprietary bets.

Anyway you slice it, the probabilty of FDIC having to step in and try and make BAC customers whole has been greatly increased.  Even more troubling is that fact that the FDIC is massively underfunded to cover loses of this magnitude and therefore would require a congressional or FED bailout if this did occur.

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ewilkerson
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goes211, I agree that from

goes211,

I agree that from my understanding the FDIC they should not be responsible for them.  However, after starting with Peak Oil and educating myself on subjects my traditional education would have kept me away from,  I'll have to go with the third choice.  The derivatives were moved there under less than honorable circumstances.  The derivatives would be paid before anyone's deposits.  I askd Bank America this and found out that under the Bankruptcy Law passed under Bush derivatives are paid first.  I closed my accounts.

This is still my understanding of the FDIC, so I could be incorrect.  Once the fund from which the banks pay their premium is depleted, they have to go to the Treasury and ask for money.  I don't believe they have to say yes.  The problem is the bank deposits will be gone and there may not be enough money.

NOW, it seems from the MF Global debacle, no law has to be enforced any longer.

Cheers,

Ernest

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ewilkerson
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Fed Approves Putting Depoitor's money at Risk

OH HOW THE RULES KEEP CHANGING:

 

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 pay off deposithas signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to 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 U.S. 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 U.S. firms.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

Moody’s Investors Service downgraded Bank of America’s long-term credit ratings Sept. 21, cutting both the holding company and the retail bank two notches apiece. The holding company fell to Baa1, the third-lowest investment-grade rank, from A2, while the retail bank declined to A2 from Aa3.

The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody’s decision, said a person familiar with the matter.

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.

Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.

The Fed’s approval to move derivatives from Bank of America’s holding company to the depository unit directly puts the U.S. taxpayers on the hook.   The FDIC cannot handle any large banking failure with its depleted Deposit Insurance Fund and would have to immediately tap its line of credit with the U.S. Treasury.

The Dodd-Frank attempt to end “To Big To Fail” by giving the FDIC resolution authority has been a failure.  In another crisis, the FDIC does not have the resources to absorb potentially huge losses from Bank of America’s derivative bets.  Furthermore, without massive government guarantees, there would be no buyer for a failed Bank of America given the open ended risks involved.  To prevent complete panic by the public from a looming failure of Bank of America, the Fed, FDIC and US Treasury would again have to provide virtually unlimited financial support, courtesy of the U.S. taxpayer.

 

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