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Bank Of America Forces Depositors To Backstop Its $53 Trillion Derivative Book To Prevent A Few Clients From Departing The Bank

Bank of America, which today reported a big bottom line loss net of one-time beneficial items, did something quite tricky and extremely devious last month: it shifted anywhere up to the total of $53 trillion of the total derivatives it held as of June 30 (as Zero Hedge previously reported) on its books at Q2 from the Holding Company, which was downgraded last by Moody's from A2 to Baa1 (the third-lowest investment grade rating) to its retail bank, which was downgraded to the far more palatable A2 (from Aa3). The reason for the transfer? Bank customers who were uneasy with the fact that suddenly the collateral backstoping the operating entity handling their counterparty risk was downgraded to just above junk, demanded that said counterparty risk be mitigated by the bank's $1 trillon in deposits. In other words, as Bloomberg first reported when it broke this story, anywhere up to the full $53 trillion (we don't know for sure how much so we assume the worst case) is now fully and effectively backstopped explicitly by the bank's $1,041 trillion (as of September 30) deposits. Pardon, we meant the people's deposits: the same deposits which caused the bank's website to be inoperative for several days in a row after it was rumored that there was an electronic run on the bank. Why? Just so Bank of America can appears whatever remaining clients it has so they decide not to take their business to another derivative counterparty. And who is exposed to this latest idiocy? Why you. But that's not all: the FDIC, which is the entity backstopping the deposits in a worst-case scenario, is not happy with this move for obvious reasons. Yet even it is hopeless to override the Fed, which as Bloomberg reports, "has signaled that it favors moving the derivatives to give relief to the bank holding company." And so, once again, we see just how much more important to the Federal Reserve are interests of US taxpayers and savers, over those of the banks that effectively run the Fed.



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European Short Selling Ban Redux - Europe Reaches Deal On Naked CDS Ban As Desperation Sets In

As expected, the last European desperation step is here

  • EU To Prohibit Naked CDS Positions, Unless To Hedge Exposure- Dow Jones
  • EU - Deal Reached On Limits To Short- Selling, CDS- Dow Jones

You know, because it is all the speculator's fault. Just like the financial short selling ban lead to a brief rally only to be followed by an epic collapse, expect precisely the same thing to occur this time around.



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There Is No Bailout Spoon: The Math Behind The €2 Trillion EFSF Reveals A "Pea Shooter" Not A "Bazooka"

The latest and greatest plan to bail out Europe revolves around using the recently expanded and ratified €440 billion EFSF, and converting it into a "first loss" insurance policy (proposed by Pimco parent Allianz which itself may be in some serious need of shorting - the full analysis via Credit Sights shortly) in which the CDO would use its unfunded portion (net of already subscribed commitments) which amount to roughly €310 billion, and use this capital as a 20% "first-loss" off-balance sheet, contingent liability guarantee to co-invest alongside new capital in new Italian and Spanish bond issuance (where the problem is supposedly one of "liquidity" not "solvency"). In the process, the ECB remains as an arm-length entity which satisfies the Germans, as it purportedly means that the possibilty of rampant runaway inflation is eliminated as no actual bad debt would encumber the asset side of the ECB. A 20% first loss piece implies the total notional of the €310 billion in free capital can be leveraged to a total of €1.55 trillion. So far so good: after all, as noted Euro-supporter Willem Buiter points out in a just released piece titled "Can Sovereign Debt Insurance by the EFSF be the "Big Bazooka" that Saves the Euro?" there is only €900 billion in financing needs for the two countries until Q2 2013. As such the EFSF would take care of Europe's issues for at least 2 years, or so the thinking goes. There are two major problems with this math however, and Buiter makes them all too clear....Buiter's unpleasant, for Allianz, Merkel and Sarkozy conclusion is that "that would likely not fund the Spanish and Italian sovereigns until the end of 2012. It would not be a big bazooka but a small pea shooter."



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As Greece Launches Latest 2 Day General Strike, Unions Warn Of Austerity "Death Spiral" - A Primer On Greek Politics

A few days ago we pointed out that Greece has now effectively shut down following a relentless barrage of strikes and occupations which not only have halted the economy, but now prevent the economy from even collecting tax revenues (one wonders if the country has finally borrowed the ink it needs to print tax forms, from Ben Bernanke). It appears the irony of the vicious loop whereby more austerity means more strikes, means less tax revenues, means bigger budget deficits, means more austerity, means even more strikes, has not been lost on the population, and now, according to Reuters, local unions warn that the country "risks sliding into a "death spiral" if the government continues to slash salaries and lay off workers instead of cracking down on tax evasion and raising money from the rich, the head of the biggest public sector union said Tuesday. "This will exacerbate recession, unemployment and state revenues will continue to fall, creating a death spiral. It must not continue," Tsikrikas told Reuters in an interview and urged lawmakers to reject the package when it is voted in parliament Wednesday and Thursday." He is right, and unfortunately for him, as the attached Nomura primer on near-term Greek politics indicates, both parties have no upside in severing monetary ties with Europe and realize all too well that unlike what G-Pap is saying, specifically that the country is being held hostage by strikes and protests, it is Greek strikes and protests that are holding Europe and its taxpayers hostage. However, since productive Europeans have no problem with that, it will continue indefinitely, even as the Greek economy grinds to a halt and nobody does or produces anything, and the entire country becomes a permanent ward of the European state, receiving its bi-monthly IMF bail out funding which in turn is flipped right back and used to pay off European bank interests. Rinse. Repeat.



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Guest Post: Debt-Serfdom Is Now The New American Norm

The typical American household is insolvent: its debts exceed its assets. There is nothing fancy about calculating insolvency: if debts exceed assets, the enterprise is insolvent. By this measure, most American households are insolvent, if their real assets are marked to actual market. The typical American household is thus in service to its debt, not to its assets, and to the holders of that debt. This is debt-serfdom: serfdom in service to the owners of debt, debt that may well always exceed the value of the household's assets. This is debt-serfdom for life. If we look at the American household as an enterprise, then we have to differentiate between unproductive, trapped capital, assets held in a house or retirement account, and productive, free capital which can be moved in and out of productive assets to earn a return which increases free cashflow income in the present....Wealth and income do not flow from servicing debt incurred by trapped assets, it flows from productive free capital. Thus the typical household toils not to increase productive capital that can be deployed to increase household income but to service their crushing debts. How else can we describe this situation other than debt-serfdom?



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S&P Downgrades Over 20 Italian Banks, Says Difficult Climate Is Neither "Transitory" Nor "Easily Reversed"

Another day, another pervasive downgrade action by S&P. "In our opinion, renewed market tensions in the eurozone's periphery, particularly in Italy, and dimming growth prospects have led to further deterioration in the operating environment for Italian banks. We also think the cost of funding for Italian banks will increase noticeably because of higher yields on Italian sovereign debt. Furthermore, we expect the higher funding costs for both banks and corporates to result in tighter credit conditions and weaker economic activity in the short-to-medium term. We do not believe that this difficult operating climate is transitory or that it will be easily reversed. In our view, funding costs for Italian banks and corporates will remain noticeably higher than those in other eurozone countries unless the Italian government implements workable growth-enhancing measures and achieves a faster reduction in the public sector debt burden. Consequently, we envisage a situation where the Italian banks may well be operating with a competitive disadvantage versus their peers in other eurozone countries. At the same time, we think all banking systems across the eurozone, including Italy, may raise their commitment to reinforcing banks' capitalization."



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HFT Quote Churn Surge Mirrors Stock Spike

For every seemingly irrational move in stocks, there is always an explanation. This time we look to Nanex who advises us that concurrent with the latest market surge between 11:35 am and 11:40am, there was a parallel spike in HFT quote churning. Traditionally, this has been associated with market drops in high volume days, although with volume in the past 48 hours nothing to write about, it appears that HFT quote surges tend to translate to market spikes when there is no coordinated high volume activity. Interestingly, this time it is a coincident if somewhat lagging indicator. We will observe how algos will react the next time there is a sharp move either higher or lower in stock to see whether robots are a cause or an effect.



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Egan-Jones Downgrades Goldman From AA To AA-

Just out by the only rating agency that is even remotely credible. "Synopsis: Across the valley - GS recorded $2.96B in investing and lending losses and a $378M decline in IB revenues, totaling a $3.34B decline. Hence, the total loss of merely $393M is respectable. Furthermore, given the political pressure, now is not the time to show robust results. The major issues facing GS is the cost of complying with the Volker rule (look for some changes or exemptions from the proposed rule), changes in senior management (to appease Sen. Levin) and a still weak IB and trading environment. However, with the demise of most of its major competitors, GS benefits from the lack of competition, attractive LT trading opportunities, and various forms of federal government support. Other raters might take neg. actions."



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Obama Speaks Live: Has The Teleprompter Been Found?

Did they find the TOTUS just in time? Anyway, you know the drill: "pass this bill" and "god bless" - 1 shot; "win(ning) the future" - 2 shots; the "99 percent" or the "1 percent" - chug bottle.



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Obama's TOTUS Has Been Stolen

A truck carrying President Obama's Presidential teleprompter, seals, podiums and $200,000 worth of audio equipment has been stolen north of Richmond. Worst (or best) case, this means a premature end to the president's "informational" (and mass alcohol poisoning enabling) tour.



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Prime X or Preparation H?

The drop continues...



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Oops: Fed Extends POMO Closing Time By 15 Minutes

What's wrong Brian Sack, couldn't get the bank syndicate to collude fast enough on the latest criminal OWIC?



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And Now, Robots Playing Ping Pong

Just because we refuse to cover European lies that all shall be well for the next 15 minutes.



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And Once Again, German, French Discord Threatens To Scuttle European Bailout Reports AP

All it took to unwind two weeks of rumors and lies were a few factual articles. Such as this one from the AP: "Disagreement between France and Germany may prevent eurozone leaders from reaching a crucial deal on a second rescue package for Greece this weekend, a person familiar with the negotiations said Tuesday....Investors around the world hope a comprehensive plan to fight the debt crisis, including final details on Greece's second bailout, will keep the debt turmoil from pushing the global economy back into recession. Signs that such a plan is proving slower to clinch caused markets to slide on Tuesday. Germany is pushing for banks to accept cuts of 50 percent to 60 percent in the value of their Greek bonds, while France is insisting that leaders should only make technical revisions to a preliminary agreement reached with private investors in July, the person said. France on the other hand has been reluctant to back bigger losses for banks, since French banks are among the biggest holders of Greek government bonds. Its position is supported by the European Commission, the EU's executive. Commission officials said last week that technical revisions to the July deal with the banks are necessary because changed market conditions had made the deal more expensive for Greece and the rest of the eurozone." And so on. Are we the only ones dazed, confused, and tired beyond comprehension with this endless, ridiculous, pathetic, grovelling Groundhog Day bullshit? Stop risking civil and international war just to satisfy your bureaucratic vanity. THERE IS NO MONEY! YOU KNOW IT, WE KNOW IT, THE PEOPLE KNOW IT. ENOUGH!!!



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