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Sleight of hand: BofA moves dodgy Merrill derivatives to bank (U.S. taxpayer on the hook for $55+T?)
The New York Post ^ | 2011-10-21 | Mark Decambre

Posted on 10/22/2011 9:43:11 AM PDT by rabscuttle385

A plan by beleaguered Bank of America to foist trillions of dollars of funky Merrill Lynch derivatives onto its depositors is raising eyebrows on Wall Street.

The rarely used move will likely save the bank millions of dollars in collateral but could put depositors’ cash behind the eight ball.

The move also brought to light fissures between the nation’s top banking regulators, the Federal Deposit Insurance Corp. and the Federal Reserve, in the wake of new regulations meant to curb the free-wheeling habits that fostered the worst crisis in a generation back in 2008.

At issue is BofA’s decision to shift what sources say is some $55 trillion in derivatives at Merrill Lynch to the retail bank unit, which houses trillions in deposits insured by the FDIC.

Critics say the move potentially imperils everyday depositors by placing their money and savings at risk should BofA run into trouble.

(Excerpt) Read more at nypost.com ...


TOPICS: Business/Economy; Crime/Corruption; Front Page News; Government
KEYWORDS: 0; 0bama; bailout; banking; bankofamerica; bho44; biggovernment; bofa; buffett; derivatives; fascism; fdic; federalreserve; financialcrisis; liberalfascism; merrilllynch; obama; obammunism; rapeofliberty; rapeoftaxpayers; socialism; tarp; tyranny
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1 posted on 10/22/2011 9:43:18 AM PDT by rabscuttle385
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To: rabscuttle385

BoA needs to sign up more illegal aliens. Pronto!


2 posted on 10/22/2011 9:50:31 AM PDT by TigersEye (Life is about choices. Your choices. Make good ones.)
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To: TigersEye

Only 20 trillion dollars of ‘breathing room’ worldwide. This is not good.

If they only get 33 percent payback, we’re all screwed.


3 posted on 10/22/2011 9:52:32 AM PDT by BenKenobi (Honkeys for Herman! 10 percent is enough for God; 9 percent is enough for government)
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To: rabscuttle385

So what would prevent depositors from just packing up their cash after seeing this news and moving it to Wells Fargo or the like?


4 posted on 10/22/2011 9:53:58 AM PDT by EGPWS (Trust in God, question everyone else)
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To: rabscuttle385

A congressional independent investigation needs to be done concerning BofA. Needs to be independent. No obamma/Rat influences! I hope Rep. Issa hears this!


5 posted on 10/22/2011 9:54:35 AM PDT by rawhide
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To: BenKenobi

It’s very bad.


6 posted on 10/22/2011 9:56:27 AM PDT by TigersEye (Life is about choices. Your choices. Make good ones.)
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To: EGPWS
So what would prevent depositors from just packing up their cash after seeing this news and moving it to Wells Fargo or the like?

Technically, nothing.

However, if Bank of America's retail bank fails, guess who's on the hook for the losses.

7 posted on 10/22/2011 9:59:14 AM PDT by rabscuttle385 (Live Free or Die)
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Are You A Whining FReeper?

Got A Gripe So You Won't Donate?


Click The Pic

Isn't That Like Setting Fire To Your Own Home?

When FR Is Gone, Where Will You Go Then?

8 posted on 10/22/2011 10:17:17 AM PDT by DJ MacWoW (America! The wolves are here! What will you do?)
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To: rabscuttle385

Here’s the culprit.
http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act


9 posted on 10/22/2011 10:25:54 AM PDT by Walmartian
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To: EGPWS
If they have any money there it would be a damn smart move.
10 posted on 10/22/2011 10:30:44 AM PDT by org.whodat (Just another heartless American, hated by Perry and his fellow demorats.)
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To: rabscuttle385
The discussions about BofA’s move have created some tension between the FDIC and the Fed, with the Fed at one point accusing the deposit insurer of leaking BofA’s moves to the media.

Acting head of FDIC is now Obama's guy, having taken over from Sheila Bair.

He wouldn't act against BOA's interest, now, would he?

11 posted on 10/22/2011 10:31:07 AM PDT by Siena Dreaming
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To: Walmartian
Wrong, the this crap was illegal, until phil gramm slipped gramm leach, into one of those, your have to read it to see what was in it bills, in the middle of the night, committee hearings on bill 0.
12 posted on 10/22/2011 10:34:17 AM PDT by org.whodat (Just another heartless American, hated by Perry and his fellow demorats.)
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To: EGPWS

Exactly what Dick Durbin, Obama’s fellow socialist from Illinois, would like to see happen.


13 posted on 10/22/2011 10:35:04 AM PDT by Siena Dreaming
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To: EGPWS
..So what would prevent depositors from just packing up their cash after seeing this news and moving it to Wells Fargo or the like?...

November 5: Bank Transfer Day

14 posted on 10/22/2011 10:37:51 AM PDT by FReepaholic (Never get out of the boat.)
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To: BenKenobi
Only 20 trillion dollars of ‘breathing room’ worldwide. This is not good.

What makes you think the $55 trillion is a reliable figure?

15 posted on 10/22/2011 10:41:12 AM PDT by Moonman62 (The US has become a government with a country, rather than a country with a government.)
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To: Moonman62

If it is, we are boned.


16 posted on 10/22/2011 10:43:03 AM PDT by BenKenobi (Honkeys for Herman! 10 percent is enough for God; 9 percent is enough for government)
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To: BenKenobi

It isn’t reliable. It’s a notional value, which is good for nothing more than the press stirring up hysteria. Last week there was an article saying it was $75 trillion.


17 posted on 10/22/2011 11:06:17 AM PDT by Moonman62 (The US has become a government with a country, rather than a country with a government.)
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To: TigersEye

The bottom line of every article I read about BoA:

The Bank of America is a criminal enterprise.


18 posted on 10/22/2011 11:09:59 AM PDT by upchuck (Rerun: Think you know hardship? Wait till the dollar is no longer the world's reserve currency.)
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To: upchuck

So is the federal government so I expect we’ll be hearing the word ‘bailout’ again real soon.


19 posted on 10/22/2011 11:15:22 AM PDT by TigersEye (Life is about choices. Your choices. Make good ones.)
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To: rabscuttle385

The average American has no clue what this means, and even the interested and engaged American citizen will never be able to figure out exactly what this means.

Did the FED push them to do this? Why? How deeply involved is US Treasury Dept in this decision? Does it mean more bailouts (or QE) coming for BoA?


20 posted on 10/22/2011 11:50:50 AM PDT by PGR88 (I'm so open-minded my brains fell out)
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To: Walmartian
Repeal of Glass-Steagall was essential to this planned economic destruction. It also is indebted to the Community Reinvestment Act signed by Carter as well as the approval by the Federal Reserve. Remember back in 1988 Greenspan, unilaterally, declared that "Banks" (Wall Street -too big to fail banks) could engage in the buying and selling of derivitives. He decreed, by fiat, that banks could not only be holding companies and lending institutions, but also investing entities (essentiall what Gramm-Leachman did later by statute in 1999). Then the bankers literally 'cooked up' an entirely new investment class called derivitives which allowed them to leverage buy or sell almost anything. This last conconction has become our undoing. When Lehman fell September 16, 2008 it was because there was a run on the money markets (Lehman was the largest money market). Lehman then filed a claim against AIG, its counterparty in trillions of notional derivitive value which became actual demand of payment. Of course AIG did not have that kind of money, so it made claim to its counter party derivitive holders to pay them (AIG) so AIG could pay Lehman. Then all of the counter party entities which AIG made demand on,...they then would make a claim on many others who sold this "insurance" to them..... I do not believe any of us knew how close to a complete global economic meltdown we came to on Sept.16,2008. Bernanke printed 700 billion and stopped the nuclear chain reaction...temporarily. Then of course the rest is the history of TARP, multiple stimulus plans, and multiple quantative easing...none of which did anything but put our children in debt to the level where they can never get out but by one way...a total collapse of the economic system and the restructuring of the system/systems...I believe, as Sarcoze affirmed, the only good thing that will come of this is a unified world currency. That is what is going to happen. The timeline will accellerate, probably at the end of October when the German and French leadership declare how Greece will be dealt with. Unfortunantly all of Europe is linked at the hip with Greece for their economic fidelity, and the USA (US megabanks) are linked at the hip with European banks. I look for war to come as the ulitmate settler of political and economic disagreements. Coersion will be the only tool left to deal with the tumult ahead. It will be the darkest days of nations on earth. And all because someone in congress thought it would be fine to trust bankers and politicians. What a crying shame. I guess it had to come to this. Remember the prophet Jeramiah...."the human heart is deceitful above all things, and desperately wicked, who can know it."
21 posted on 10/22/2011 12:30:48 PM PDT by Texas Songwriter (I ou)
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To: rabscuttle385
"but could put depositors’ cash behind the eight ball"

Anyone who still has their cash in BofA should know better by now and gets what they deserve.

22 posted on 10/22/2011 12:59:46 PM PDT by mikey_hates_everything
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To: Texas Songwriter
in 1988 Greenspan, unilaterally, declared that "Banks" (Wall Street -too big to fail banks) could engage in the buying and selling of derivitives.

Futures and options contracts are derivatives.

Lehman then filed a claim against AIG, its counterparty in trillions of notional derivitive value which became actual demand of payment.

That would only make sense if Lehman was betting against themselves.

23 posted on 10/22/2011 1:02:11 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Toddsterpatriot
Futures and Options contracts are not "over the counter derivitives". They are an unregulated private contract between two parties and even Greenspan has said he does not know how to regulate them. The are an etherial, self-delusional agreement between 2 parties which 'gives the appearance' of a no-lose investment. Bank of International Settlement puts the notional value of current derivitive contracts at about 1.5 Quadrillion dollars. The earth and all that is in it does not come close to the current dollar valuation of 1.5 Quadrillion. That is a number which is large, even to astronomers. As long as their value remains notional everything is fine, but when counterparty claims are made, it will be next to impossible to stop the carnage. Bernanke did stop it with the bailouts to AIG and the "to big to fail" banks. The next time, I fear, we will not be so lucky. Right now, the dollar is leveraged 20:1. That is how much debt that is out there. It cannot be fixed in a year, or 10 years or 50 years. It can only continue as long as the public remains ignorant about about these matters....and even then when the public realizes what politicians and the big banks have done only civic upheaval will come...but that will repair nothing.

Options and Futures are leveredged products, but they are highly regulated. They are not the problem. They have margin calls to right a failing position, or in the case of options, the options expire worthless, and the seller derives the benefit. Not so for over the counter derivitives.

24 posted on 10/22/2011 1:33:33 PM PDT by Texas Songwriter (I ou)
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To: Toddsterpatriot
That would only make sense if Lehman was betting against themselves.

Lehman was basically filing a claim on the "derivitive insurance agreement" so Lehman could collect enough money to pay its demand requirements. It was the law of the jungle of Sept 16 and Lehmans was only concerned with Lehmans. What is Insurance if it is not a contract to protect against an adverse outcome of yourself. Homeowners,collision, life insuance....all are cased when something bad happens to you.

25 posted on 10/22/2011 1:39:04 PM PDT by Texas Songwriter (I ou)
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To: Texas Songwriter
Futures and Options contracts are not "over the counter derivitives".

Correct. They are exchange traded derivatives.

The are an etherial, self-delusional agreement between 2 parties which 'gives the appearance' of a no-lose investment.

Really? Neither side can lose? That must mean that neither side can win.

Bank of International Settlement puts the notional value of current derivitive contracts at about 1.5 Quadrillion dollars. The earth and all that is in it does not come close to the current dollar valuation of 1.5 Quadrillion.

So what? Notional value tells you almost nothing about the amount at risk.

As long as their value remains notional everything is fine, but when counterparty claims are made, it will be next to impossible to stop the carnage.

That's a silly claim. Notional value remains notional, no matter what.

Right now, the dollar is leveraged 20:1.

Huh? Makes no sense.

That is how much debt that is out there.

Huh?

It can only continue as long as the public remains ignorant about about these matters..

We'll see these silly claims until the public gets educated.

Options and Futures are leveredged products, but they are highly regulated.

But they're derivatives!!

or in the case of options, the options expire worthless, and the seller derives the benefit.

You mean one side gains and the other side loses? Just like in OTC derivatives?

What about interest rate swaps? Are you scared of them too?

26 posted on 10/22/2011 2:04:08 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Texas Songwriter
Lehman was basically filing a claim on the "derivitive insurance agreement"

What Lehman "derivative insurance agreement" do you imagine Lehman owned that would allow them to claim money from AIG? Be specific.

What is Insurance if it is not a contract to protect against an adverse outcome of yourself.

You could buy a contract that pays off when Lehman defaults on their debt. Is that what you think Lehman bought? A contract that pays off when Lehman defaults?

27 posted on 10/22/2011 2:08:13 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Texas Songwriter

I’m printing that for our diner guests to read.


28 posted on 10/22/2011 2:28:32 PM PDT by Walmartian
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To: Toddsterpatriot
What I am "scared of", as you put it, is the ability of one entity to engage in leverage which will put the entire economy at risk. Credit default swaps, derivitives all hold that potential. As I said, as long as notional remains notional value we are hardly aware of their existence. It is only when that notional value is demanded by the counterparty claims that the chain reaction could hold great danger, not only for that bank, but the entire economy. When the freewheeling, wild west, trading agreements, flying under any radar until it crashes the economy is my concern.

I have read many of your posts on many threads. You are a smart guy. But you and I will have to agree to disagree as to the danger which over the counter derivitives hold for our economy.

Thanks for the commentary.

29 posted on 10/22/2011 2:54:07 PM PDT by Texas Songwriter (I ou)
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To: Texas Songwriter
It is only when that notional value is demanded by the counterparty claims

The notional is never demanded.

30 posted on 10/22/2011 3:36:37 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: upchuck; TigersEye

31 posted on 10/22/2011 5:01:53 PM PDT by 4Liberty (88% of Americans are NON-UNION. We value honest, peaceful Free trade-NOT protectionist CARTELS)
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To: 4Liberty

Good graphic and frighteningly true.


32 posted on 10/22/2011 6:08:43 PM PDT by TigersEye (Life is about choices. Your choices. Make good ones.)
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To: rabscuttle385

TRILLION —it’s the new, IMPROVED billion...!!!

/utter disgust


33 posted on 10/22/2011 8:11:54 PM PDT by gaijin
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To: Moonman62; BenKenobi

Greetings Moonman62 & BenKenobi:

The music is about to stop, fight for a chair. From Barnhardt.biz

Um, I think we should all stop paying taxes now.
Posted by Ann Barnhardt - October 18, AD 2011 7:10 PM MST

I think I’m going to withdraw my consent to be taxed by the Federal Government after this. Bank of America, as we have previously discussed, is exposed on Over-The-Counter forward contracts to the tune of $75 TRILLION, which is more than FIVE TIMES the total economic output of the United States in one year.

[Ann links Bloomberg story here.]

They are now moving contracts from a segregated trading division within the Bank Holding Company which operates under the venerable name “Merrill Lynch” to their retail banking division alongside their customer deposits in order to get these contracts under the umbrella of the FDIC.

It is known that Merrill Lynch had OTC exposure of $22 Trillion. So, in shifting these contracts from Merrill to Bank of America, they are making YOU, THE AMERICAN TAXPAYER the de facto guarantor of these contracts. YOU ARE NOW THE “EXCHANGE”. If the counterparties on these OTC contracts default, Bank of America will have recourse to turn to the FDIC to “bail them out”. Where does the FDIC get its money? From the United States Treasury.

Bank of America just illegally dumped tens of TRILLIONS of dollars of OTC contracts on YOU.

But that isn’t the greatest crime here. The crime is that your evil, corrupt and/or imbecilic and unqualified U.S. government regulators are not only letting this happen, but seem to be encouraging it.

A few years back my brokerage was audited by the regulatory bureaucrats, which is a standard bi-annual occurrence. These people just about had KITTENS over a six dollar interest credit which I had booked, but it was placed in a current account, and the regulators wanted it in a non-current account. Just to repeat, it was SIX DOLLARS. As in a fiver and a single. As in a modest lunch at a drive-thru fast food chain. SIX DOLLARS. This six dollars drug my audit out for WEEKS and cost me I-don’t-know-how-much in CPA billing hours. And these people acted like I was some sort of criminal.

You just got illegally prison raped for $22 TRILLION dollars, America, and the fed regulators are the ones watching the door to the gang showers and videoing the whole thing on their cellphone.

There needs to be a tax strike. And I’m not joking. This has to end.

Cheers,
OLA


34 posted on 10/22/2011 11:30:32 PM PDT by OneLoyalAmerican (In God I trust, all others provide citations.)
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To: rabscuttle385

” if Bank of America’s retail bank fails, guess who’s on the hook for the losses. “

Ahem........


35 posted on 10/23/2011 6:39:45 AM PDT by stephenjohnbanker (God, family, country, mom, apple pie, the girl next door and a Ford F250 to pull my boat.)
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To: Texas Songwriter
You have to dissect the multi-trillion dollar figures thrown around. 80% of this total exposure is in the form of plain vanilla Interest Rate Swaps. In a vanilla Interest Rate Swap, the 2 parties involved in a transaction are only exchanging fixed interest payments for floating interest payments on an agreed-upon notional. It is not the notional itself that is being exchanged or placed at risk. Please place these huge figures into their proper perspective.

For example: 2 parties may engage in a Swap transaction on a $100million notional amount. Bank "A" pays a fixed interest rate to Bank "B" and Bank "B, pays a floating rate (usually the LIBOR rate) to Bank "A". They are not exchanging the entire $100million. They are only exchanging interest payments on that $100 million on a monthly, quarterly, semi-annual or annual basis (whatever they agree to), so the true exposure is nowhere near the $100 million notional amount of the swap. If a bank on one side of the transaction goes under, the other side hasn't lost $100million, or anywhere close to it.

There are also regular bilateral netting and portfolio compression cycles that take place. These are processes by which offsetting trades are effectively "torn up" thereby removing them from the balance sheet of the banks involved in the transactions. Too much to elaborate upon here, but these compression cycles occur regularly and every big bank with derivatives exposure participates. Think of these cycles as maintenance, in which the deadwood and underbrush are removed in order to prevent a potential forest fire from spreading. We just had one of these compression cycles this past Friday in which $8.26 trillion of notional was terminated.

I am no Pollyanna, and I am gravely concerned about the stability of our financial sector, but derivatives have become the 'boogeymen' of world of banking and finance. So few people have any real clue as to how the derivatives market works so it is easy to lull people into the idea that derivatives are these complex and dangerous products with articles such as this one. Most people are not even aware of the various types of derivatives and what the actual risk is. We just see these huge numbers thrown around, hear the term 'derivative' and start calling for intervention to 'ban' these nefarious financial instruments. I only ask that people obtain a basic understanding of derivatives so that they are in a better position to evaluate the true impact of the claims being made in articles such as these.

36 posted on 10/23/2011 8:42:45 AM PDT by American Infidel (Instead of vilifying success, try to emulate it)
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To: American Infidel

Thank you for writing. You give more clarity than my post. I would ask you this. Recently, just last week, it was reported that Bank of America transferred 44 trillion in notional derivitives off of its books....I think to Morgan...but I am not sure of that.....but they did transfer 44 trillion. If the counterparties make demand on those 44 trillion of notional value, what would that translate in terms of actual liability to the counterparties. If it is only 1%, that is an astronomical number. Can you illucidate?


37 posted on 10/23/2011 11:08:43 AM PDT by Texas Songwriter (I ou)
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To: American Infidel

Thank you for writing. You give more clarity than my post. I would ask you this. Recently, just last week, it was reported that Bank of America transferred 44 trillion in notional derivitives off of its books....I think to Morgan...but I am not sure of that.....but they did transfer 44 trillion. If the counterparties make demand on those 44 trillion of notional value, what would that translate in terms of actual liability to the counterparties. If it is only 1%, that is an astronomical number. Can you illucidate?


38 posted on 10/23/2011 11:09:40 AM PDT by Texas Songwriter (I ou)
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To: OneLoyalAmerican
It is known that Merrill Lynch had OTC exposure of $22 Trillion. So, in shifting these contracts from Merrill to Bank of America, they are making YOU, THE AMERICAN TAXPAYER the de facto guarantor of these contracts. YOU ARE NOW THE “EXCHANGE”. If the counterparties on these OTC contracts default, Bank of America will have recourse to turn to the FDIC to “bail them out”.

You're worried that Bank of America is moving profitable derivatives contracts to the banking division? LOL!

I thought the FDIC only bailed out banks going out of business, not banks with trillions in profitable derivatives? Sounds like Ann is a bit confused.

Where does the FDIC get its money? From the United States Treasury.

The FDIC is funded by charging the insured banks.

A few years back my brokerage was audited by the regulatory bureaucrats

Maybe they know how confused you are?

And I’m not joking.

But you are a joke.

39 posted on 10/23/2011 12:15:42 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: TigersEye

LMAO, never gonna let go of that are you? Me neither...

What with raising my banking fees, I’m quite disenchanted with the bank right now. I’m looking around...

I’ve been with them since the mid 1980s. Since then they’ve done about all they can to piss me off.


40 posted on 10/23/2011 1:03:11 PM PDT by DoughtyOne (Obyema 2012 - he has addition deficit disorder... (not my line, but a great one to repeat))
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To: DoughtyOne
I won't let go of Clinton's treasons either. ;-)

My only business with any major bank is to carry their credit card and I pay my bill in full every month so they hate me. I hate them back, it works for me.

41 posted on 10/23/2011 1:17:31 PM PDT by TigersEye (Life is about choices. Your choices. Make good ones.)
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To: Texas Songwriter
Thank you for writing. You give more clarity than my post. I would ask you this. Recently, just last week, it was reported that Bank of America transferred 44 trillion in notional derivatives off of its books....I think to Morgan...but I am not sure of that.....but they did transfer 44 trillion. If the counterparties make demand on those 44 trillion of notional value, what would that translate in terms of actual liability to the counterparties. If it is only 1%, that is an astronomical number. Can you elucidate?

Unfortunately; there is no simplistic or directly quantifiable answer to the liability question because it doesn't exactly work the way your question seems to suggest. I'll try to add some color:

I wasn't aware of the transfer of the $44 trillion in derivative notional value from BOA to Morgan (Morgan Stanley or JPMorgan?). If this is the case; it is not out of the ordinary. Banks and Hedge Funds transfer or 'novate' positions away to other banks all the time after agreeing to a specific settlement based on the present value of the swap being novated.

The counterparties on the other side of those transactions who were facing BOA, but are now facing Morgan will actually be somewhat relieved since their counterparty risk has actually decreased now that they are no longer facing BOA. I would argue that Morgan (either one) is more stable than BOA

Assuming these derivatives are mainly Interest Rate Swaps (80% of the derivatives population), the counterparties can't simply 'demand' the notional value. The swap contracts usually have a tenor of at least 5 years and some go out to 30 years or even more. They are binding contracts. If a counterparty wants to 'early terminate' or 'unwind' an existing swap with another bank (regular occurrence), both sides will have to agree on the Net Present Value on the trade and settle the amount with each other. Naturally; one side will receive and the other will pay depending on what side of the swap they have at the time and the factors that go into the NPV calculation given the present market conditions. The NPV on a swap will likely be nowhere near the notional amount. It could be a simple 5-figure or 6-figure NPV on a swap with a $100millon notional. Obviously there are a lot of other moving parts involved, but this is a pretty accurate representation. The agreed-upon fixed interest rate on one side of the swap will be a main determinant of the NPV. Higher fixed rate (swaps dealt over 2 years ago for example) will likely translate into a higher NPV as will a longer tenor.

On top of that, you have the regular compression cycles and bilateral netting I mentioned in my last post in addition to the fact that hedging with interest rate futures and bonds is constant in the world of derivatives trading as is taking opposite sides of the same swap with two different counterparties with slight pricing variances in an effort to lock in a little bit of a profit while hedging your risk.

Also; just to give you an idea of types of payments being exchanged on the agreed-upon payment dates for a basic Interest Rate Swap with a $100million notional:

You and I agree to a Swap. We will exchange fixed for floating payments on the USD 6M LIBOR rate on a semiannual basis on a notional of $100million for 5 years. I will pay you a fixed amount every 6 months. The current 6M LIBOR rate is about .6%

The fixed side payments will always be 100mio x [180(days)/360Days] x.006 = $300,000
Let's say the 6M LIBOR is.55% on our next settlement date. I will pay you $300K and I will receive 100mio x [180(days)/360Days] x.0055 = $275,000 from you since you agreed to pay the floating rate, or whatever LIBOR is on the day we settle each payment (actually 2 days prior but not relevant right now). We will net these payments and I owe you $25,000. This is a far cry from $100million. This exchange will go on every 6 months for the next 5 years. The change in the 6M LIBOR rate will be what determines how the payment amounts fluctuate. As interest rates rise, it is likely the floating-side payer will have the greater liability. This shouldn't matter though, because even a rookie derivatives trader would have hedged this exposure with futures, bonds, or another swap.

Sorry to be so wordy but I just wanted to try to paint a clear picture. The concerns about derivatives are legitimate to a point, but we need to have a sense of perspective. $55 trillion in notional amount is not actually a true $55 trillion risk even in the worst case scenario. How much of that $55trillion is offsetting? Perhaps the 1% figure you cited is a possible worst case scenario number, but it can't really be quantified that simply.

42 posted on 10/23/2011 2:56:19 PM PDT by American Infidel (Instead of vilifying success, try to emulate it)
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To: American Infidel

Thank you again for your writing to me on this subject. In your example of the $100 million notional value resulting in payment of $275,000. Now if that $100 million is $100 Billion the payment is arithmetic....that is to say $275,000,000....Yes,NO? If that $275,000,000 is payment for $100 billion then if the $100,000,000 was actually $10 trillion, then the payout would be raised by a factor of 100 or $27,500,000,000.....yes,NO??? Now if it was raised in this case to $44 trillion that number is approximately 4 times the $10 trillion dollar notional value or approximately $110,000,000,000....Yes/No???? I think I did the relational arithmatic correctly....and if that is how it works then the counterpart, in a worse case scenario would have to come up with about $110 billion dollars.....That would be a lot of money for JPMorgan or Bank of America to produce. That is the point I am trying to make should the system collapse. Am I misrepresenting the outfall of a worsecase situation or am I still off course?


43 posted on 10/23/2011 4:30:37 PM PDT by Texas Songwriter (I ouTha)
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To: American Infidel

Thank you again for your writing to me on this subject. In your example of the $100 million notional value resulting in payment of $275,000. Now if that $100 million is $100 Billion the payment is arithmetic....that is to say $275,000,000....Yes,NO? If that $275,000,000 is payment for $100 billion then if the $100,000,000 was actually $10 trillion, then the payout would be raised by a factor of 100 or $27,500,000,000.....yes,NO??? Now if it was raised in this case to $44 trillion that number is approximately 4 times the $10 trillion dollar notional value or approximately $110,000,000,000....Yes/No???? I think I did the relational arithmatic correctly....and if that is how it works then the counterpart, in a worse case scenario would have to come up with about $110 billion dollars.....That would be a lot of money for JPMorgan or Bank of America to produce. That is the point I am trying to make should the system collapse. Am I misrepresenting the outfall of a worsecase situation or am I still off course?


44 posted on 10/23/2011 4:30:37 PM PDT by Texas Songwriter (I ouTha)
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To: Texas Songwriter; American Infidel
In your example of the $100 million notional value resulting in payment of $275,000.

Allow me to jump in. Actually, $25,000

Now if it was raised in this case to $44 trillion that number is approximately 4 times the $10 trillion dollar notional value or approximately $110,000,000,000....Yes/No????

You did the math correctly, after your initial error. It would actually be $10 billion. Now you have to understand that the banks involved have positions on both sides of that trade. In some they'd receive the $25,000 from the original example, in some they'd pay the $25,000. The net payments are much, much (much, much, much, much etc)less than $10,000,000,000 per month.

Am I misrepresenting the outfall of a worsecase situation or am I still off course?

Still a bit off course.

45 posted on 10/23/2011 4:56:19 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Toddsterpatriot

Greetings Toddsterpatriot:

Guess I’m just not very smart. So please, explain why this situation is a LOL matter.

Insurance for high risk investments was a cornerstone of the AIG business model. Now these high risk derivative products are insured by FDIC?

You assert the FDIC charged it’s member banks so much in insurance deposit fees, the FDIC can absorb a 20x the US GDP bank failure? If that is the case, kindly provide a source indicating how much in cash reserves the FDIC does have on hand. After the FDIC covering five years of bank failures.

Recently we purchased a $14K used truck which a credit union held title. The credit union, located in a major financial center, would not accept anything but hard cash for the title.

The major bank brand which our money was deposited did not have enough cash on hand at the main downtown headquarters to cover a $14K cash withdrawal. On a Monday afternoon. After the manager failed to convince the credit union manager to accept anything but cash; the manager directed me to various supermarkets and smaller branches where we could pick up cash, $2-4K at a time.

Again, a major bank brand, in a major financial sector city, on a Monday afternoon. A genuine laughing matter?

Cheers,
OLA


46 posted on 10/23/2011 10:21:59 PM PDT by OneLoyalAmerican (In God I trust, all others provide citations.)
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To: OneLoyalAmerican
Insurance for high risk investments was a cornerstone of the AIG business model. Now these high risk derivative products are insured by FDIC?

I didn't see anything in your link about "high risk".

You assert the FDIC charged it’s member banks so much in insurance deposit fees, the FDIC can absorb a 20x the US GDP bank failure?

20x US GDP is about $280 trillion. What bank failure would cost $280 trillion? Household net worth is much, much less than that. It's a ridiculous claim.

Again, a major bank brand, in a major financial sector city, on a Monday afternoon. A genuine laughing matter?

Yes, the confusion of your source is a laughing matter.

47 posted on 10/24/2011 5:14:27 AM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: TigersEye

Wish I could say the same. I am headed in that direction though. A major part of the problem is the federal government that allows banks to charge 30% plus interest rates. Talk about a cash cow slave society...


48 posted on 10/24/2011 10:18:29 AM PDT by DoughtyOne (Obyema 2012 - he has addition deficit disorder... (not my line, but a great one to repeat))
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To: DoughtyOne

I have always thought that even 17% is usurious but it is a choice to borrow money from a bank.


49 posted on 10/24/2011 10:21:34 AM PDT by TigersEye (Life is about choices. Your choices. Make good ones.)
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To: TigersEye

I was addressing BofA’s acceptance of Consulate initiated I.D.s for illegals to set up accounts. That really P.O.’d me, but I’ll bet other banks are doing it too. You can’t win.

This has been festering in my mind for years...


50 posted on 10/24/2011 10:21:37 AM PDT by DoughtyOne (Obyema 2012 - he has addition deficit disorder... (not my line, but a great one to repeat))
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