Posted on 10/21/2011 10:00:33 PM PDT by oneolcop
The Federal Reserve and Bank of America Initiate a Coup to Dump Billions of Dollars of Losses on the American Taxpayer
Bloomberg reports that Bank of America is dumping derivatives onto a subsidiary which is insured by the government – i.e. taxpayers.
Yves Smith notes:
If you have any doubt that Bank of America is going down, this development should settle it …. Both [professor of economics and law, and former head S&L prosecutor] Bill Black (who I interviewed just now) and I see this as a desperate move by Bank of America’s management, a de facto admission that they know the bank is in serious trouble.
The short form via Bloomberg:
Bank of America Corp. (BAC), hit by a credit downgrade last month, hasmoved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…
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.
Now you would expect this move to be driven by adverse selection, that it, that BofA would move its WORST derivatives, that is, the ones that were riskiest or otherwise had high collateral posting requirements, to the sub. Bill Black confirmed that even though the details were sketchy, this is precisely what took place.
And remember, as we have indicated, there are some “derivatives” that should be eliminated, period. We’ve written repeatedly about credit default swaps, which have virtually no legitimate economic uses (no one was complaining about the illiquidity of corporate bonds prior to the introduction of CDS; this was not a perceived need among investors). They are an inherently defective product, since there is no way to margin adequately for “jump to default” risk and have the product be viable economically. CDS are systematically underpriced insurance, with insurers guaranteed to go bust periodically, as AIG and the monolines demonstrated. [Background.]
The reason that commentators like Chris Whalen were relatively sanguine about Bank of America likely becoming insolvent as a result of eventual mortgage and other litigation losses is that it would be a holding company bankruptcy. The operating units, most importantly, the banks, would not be affected and could be spun out to a new entity or sold. Shareholders would be wiped out and holding company creditors (most important, bondholders) would take a hit by having their debt haircut and partly converted to equity.
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. [Background.] 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, corrupt Fed will argue that moving the 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 survive undoing this brazen move, 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 this new scheme to loot taxpayers and save a criminally destructive bank.
Professor Black provided a “bottom line” summary in a separate email:
1.The bank holding company (BAC) is moving troubled assets held by an entity not insured by the public (Merrill Lynch) to the Bank of America, which is insured by the public 2. The banking rules are designed to prevent that because they are designed to protect the FDIC insurance fund (which the Treasury guarantees) 3. Any marginally competent regulator would say “No, Hell NO!” 4. The Fed, reportedly, is saying “Sure, no worries” by allowing the sale of an affiliate’s troubled assets to B of A 5. This is a really good “natural experiment” that allows us to test whether the Fed is protects the public or the uninsured and systemically dangerous institutions (the bank holding companies (BHCs)) 6. We are all shocked, shocked [sarcasm] that Bernanke responded to the experiment by choosing to protect the BHC at the expense of the public.
Karl Denninger writes:
So let’s see what we have here.
Bank customer initiates a swap position with Bank. In doing so they intentionallyaccept the credit risk of the institution they trade with.
Later they get antsy about perhaps not getting paid. Bank then shifts that risk to a place where people who deposited their money and had no part of this transaction wind up backstopping it.
This effectively makes the depositor the “guarantor” of the swap ex-post-facto.
That the regulators are allowing this is an outrage.
If you’re a Bank of America customer and continue to be one you deserve whatever you get down the line, whether it comes in the form of higher fees and costs assessed upon you or something worse.
Stand Up to the Coup
Bank of America has repeatedly become insolvent due to fraud and risky bets, and repeatedly been bailed out by the government and American people. The government and banks are engineering an age of permanent bailouts for this insolvent, criminal bank (and the other too big to fails). Remember, this is the same bank that is refusing to let people close their accounts.
This is yet another joint effort by Washington and Wall Street to screw the American people, and totrample on the rule of law.
The American people will be stuck in nightmare of a never-ending depression (yes, we are currently in a depression) and fascism (or socialism, if you prefer that term) unless we stand up to the overly-powerful Fed and the too big to fail banks.
This article has been contributed by SHTF Plan. Visit www.SHTFplan.com for alternative news, commentary and preparedness info.
But, if the dollars are worthless they won't have any trouble paying up.
You’re ignoring that the insurance can fail (or the funds be diverted to those with better connections), or be paid out in nearly worthless print-o-matic FRNs.
I’m thinking local credit unions are the place to put cash savings.
For someone who thinks that “correcting” someone on something they didn’t say, and then YOU do and keep doing it, well,...
what a stodgy grump!!!!!!
Get your head out of the sand before you asphyxiate yourself!
Sure. But if that happens, we have larger problems than insured deposits. Which means even if you get your funds out in time, they’re worthless in your hands. It sure as heck can happen. But if you are looking at a single bank failing, albeit a large one, you don’t lose the bill-paying money in the checking account.
I had my accounts at an S & L back in the ‘80’s. I’ve seen it happen. In fact, BoA was the bank that bought out my S & L. My checking account paid my rent and electricity checks. Loans were expected to be paid on time. It was seamless.
You made it personal repeatedly. I just replied in kind.
That’s what I’ve been saying here. Some don’t understand that FDIC “insurance” isn’t just some fund and when its out its out. It is “deposits are backed by the full faith and credit of the United States Government” so if it fails, the US government has gone into default and at that point your dollars are screwed whether they’re in a bank, a credit union or under the mattress.
Sir, you sling it around, but you can not admit to doing assumptions of others yourself.
Go get a brain. Endless drivel of false assumptions and then complaints are the providence of cowards.
And YOU posted to me first, idiot.
“So how is it people with normal checking/savings accounts will lose their money if BofA dies?” from post #9
And you just didn’t like my answers. Deal with it.
The accounts are insured by the FDIC. The FDIC is essentially insolvent. Congress can and maybe will, put some money into the FDIC. But it’s tax dollars, not bank contributions that will have to bail out account holders. And then, there will likely be a delay before accounts are settled because the FDIC won’t be able to force another bank to buy BofA’s liabilities. No bank is big enough to cover the losses.
http://seekingalpha.com/article/95129-fdic-insurance-fund-it-doesn-t-actually-exist
Don’t let me interrupt your la-la land...
What la la land?
You are NOW agreeing with me.
your post “If FDIC doesn’t pay its stated obligations the US government is in default.”
A quote from your link:
“As a former FDIC chairman, Bill Isaac, points out here, the FDIC Insurance Fund is an accounting fiction. It takes in premiums from banks, then turns those premiums over to the Treasury, which adds the money to the government’s general coffers for “spending . . . on missiles, school lunches, water projects, and the like.”
So,
THANK YOU FOR SAYING WHAT I HAVE BEEN SAYING ALL ALONG.
That wasn’t hard, now was it?
This entire country is on the edge of default, banks and the whole shebang included. I have not posted anything different. I can only conclude that your own bias was preventing you from understanding my posts.
Wow you are dense.
There is no FDIC fund, never was.
Peoples “FDIC” insured deposits are in fact “backed by the full faith and credit of the United States Government” which simply means when and if peoples deposits are not made whole again after a bank failure the Unit States Government has defaulted - my point all along. And if the government defaults, your money isn’t safe anywhere, the money system as we know it is over.
You said: “And all you Freepers who think your save because you could still access your BofA accounts, wake up!!!!!”
And I asked: “So how is it people with normal checking/savings accounts will lose their money if BofA dies?”
You said: “What makes you think the FDIC has any money?
All those banks they have been closing? Since 2008?
The government would have to back up the FDIC.
That is why the FDIC was against it. The derivatives are bigger than the FDIC.
The FED’s won, and they want their bailout. One way or another.”
Which didn’t answer my question how normal customers where going to lose their money. The fact is “The govenment” is FDIC, you fundamentally misunderstand what FDIC is and my question/statement was regarding normal checking/savings accounts not derivatives, etc. BofA investors may well lose their shirts, but not the normal customers with checking and savings accounts, something you implied to be otherwise. Then you go off the rails making things personal about “fantasies” and “needing more independent thought”, etc. when what I said was factually correct and what you said was not.
There is no FDIC fund. Never was.
FDIC collections are just a tax collected from banks (customers).
FDIC payouts come from the treasury - tax/debt money.
FDIC “insurance” is setup as “deposits are backed by the full faith and credit of the United States Government”, their own language from the 30’s. So when normal depositors lose their money from a bank failure, the United States Government has gone into default. At that point everyone has lost their money, dollars will be worthless.
Now I’m not saying none of that won’t happen. I’m just saying if it starts with BofA it ends with everyone.
“Full Faith and Credit”
In light of apparent systemic risks facing the banking system, the adequacy of FDIC’s financial backing has come into question. Beyond the funds in the Deposit Insurance Fund above and the FDIC’s power to charge insurance premia, FDIC insurance is additionally assured by the Federal government. According to the FDIC.gov website (as of January 2009), “FDIC deposit insurance is backed by the full faith and credit of the United States government”. This means that the resources of the United States government stand behind FDIC-insured depositors.”[35] The statutory basis for this claim is less than clear. Congress, in 1987, passed a non-binding “Sense of Congress” to that effect,[36] but there appear to be no laws strictly binding the government to make good on any insurance liabilities unmet by the FDIC.
We all know what will follow if they don’t.
No bank will be left standing.
no bank: no dollar: no economy...
Pretty much.
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