Federal Reserve and Bank of America Initiate a Coup to Dump Billions of Dollars of Losses on the American Taxpayer

George Washington's picture

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, has moved 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 intentionally accept 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.


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 to trample 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.

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goldinpenguin's picture

Why have the banks been so opposed to exchange trading these exotic instruments?

Germans are reluctant to do more Greek bailing, Euro banks want to be insured against greek soverign losses, BAC probably waited too long to offload their Euro soverign and euro bank risk exposures so they might be locked into terminal losses already. It could be all over in a couple weeks, these things unwind quickly like we saw with bear, Lehman, AIG.

Woodyg's picture

So the 2 banks hold derivities worth 70+ trillon each........

The world economy is only 60 trillon........

My question is: Where the hell did all the money go? Which individuls actually benefitted the most from these derivitive moves?

And if that amount has been siphoned out WHY wouldn't they simply let these banks die? They already stole the money -

And does anyone here think we can unravel 600+ trillion in worldwide derivitives without dire consequences?

Republicae's picture

A derivative is nothing more than a contract obligation that covers an underlying asset. There is not the actual amount of money securitizing the derivative, only the obligation if the contractural agreement, as with a futures contract, the underlying asset increases or decreases in value. Since there is usually a very high leverage associated with such contracts, the actual amount of money placed against the contract is relatively small. So, no money has gone anywhere, at least not in the usual sense of the word, but if the underlying asset takes a dive then the obligation to pay the person or entity holding the contract can be, as we see, substantial. Thus, in the case of Bank of American, and perhaps many other financial institutes, the risk of extreme loss is substaintial.

waterhorse's picture

"Even worse, the total exposure is unknown because Wall Street successfully lobbied during Dodd-Frank passage so that no central exchange would exist keeping track of net derivative exposure."


Is this true?

NvrGivUp's picture

The price says it all.... BAC 6.66...



Bob's picture

I suspect that the banksters have recognized their BAC peer as the weakest kid in the gang and most likely to go down.  That being the case, he's been selected as the first guy to be sent into the battle . . . wired with explosives. 

The leaders of the gang, e.g. GS, are meanwhile milling around pretending to not know him or have any kind of connection whatsoever.  This impression is being reinforced by suddenly distinguishing themselves as the guys who AREN'T making money, as with their recent earnings. 

It looks to me like this shit is going to hit the fan pretty damn soon.  GS management doesn't casually pass up the opportunity to book profits (even if accounting gimmickry required) that are needed to support further personal sacking of the corporate assets, a.k.a., "bonuses." 

the rookie cynic's picture

BAC should be re-tickered BOAB. Bank on America's Back.

waterhorse's picture

BAC - Bastardization of American Capitalism

A_MacLaren's picture

I wrote my Senator who is on the Senate Banking Cmte about this yesterday. 

Likely impact: zero, zip, zilch, null, nada, nothing.  But what is the cost? Essentially nothing but some wasted electrons and a few minutes of my time.

Since this type of detail cannot be put on an #OWS cardboard protest sign, I remain of the opinion that those of us who are knowledgeable must act in appropriate channels to continue the effort to break the WS abuses by acting thru our DC representatives.



krispkritter's picture

If I could sober up for a couple of weeks I'd write 'Buxnet'.  A piece of software that would completely wipe all computers used by banks, traders, and government financial entities and thereby alleviate the 'crisis' due to these f'tards in the world's economic realm using 1's and 0's to create billion and trillions. Really, if the Sun took a dump tomorrow and EMP'd the whole f'ing thing we'd all be back to the bills in our wallets and the gold in our sock drawer, er, safe deposit boxes. How can these retards keep conjuring these insane numbers which no one can truly comprehend and then contrive schemes like the above to try to fix what they made up out of thin air to begin with? Is the absurdity of this reaching through to anyone? I can't imagine the alterered reality that politicians and financial-types must exist in for them to believe that they have any control over this now that Spendora's box is open. Really? I need an f'in drink...must be 5o'clock here...

Lord Welligton's picture

One question worth asking, apart from the obvious, is if they have $75tn and $53tn has been pushed onto Depositors/FDIC/Taxpayer ....

How did they pick and choose what to dump?

Plata con Carne's picture

End the Fed! Donate to Ron Paul's Black THIS Out moneybomb today!  http://www.ronpaul2012.com/

DosZap's picture

As much as I love Ron Paul,voting for him, will guarantee Obama a second term.(then we see NO America.)

Herman Cain, is really the front runner, and Herman ain was also on the Federal Reserve Board (which is common in the 12 District Branches),as they have  major city business men and city officials sitting on all 12.

Problem is, we will likely have a split,and that will give Barry the win.

Mitt/Cain/Paul, splitting the votes will screw the GOP's chances,O wins again.

Escapeclaws's picture

Vote for who you want and ignore this bad advice.

Mr. Magniloquent's picture

You're clearly confused. Hermain Cain is the lasted FED-shilling, cluless, neocon of the month. How many "front-runners" has the public been spoon fed before Cain? Cain is just the latest "anyone but Dr. Paul" candidate. The GOP would rather lose to Obama by anyone else than win with Dr. Paul. That says everything--about both Obama & every other GOP candidate.

Abiotic Oil's picture

Are you high?  You are saying Herman being a Chairman of the KC Fed is a good thing?  Seriously?

Herman Cain wants to tax the poor and middle class (many of whom are not currently paying federal income taxes due to not making enough $) with his "Nein, Nein, Nein" plan.  This would be a tax in addition to the hidden inflation tax that is causing food prices to soar to the point that we have a peanut butter shortage because that's all people can afford to eat.

Herman supported TARP for god's sake!  He thinks TARP was a good idea.  He doesn't even understand the economic problems we face let alone issues like foreign policy and how our foreign policy influences our economy.

Ron Paul has forgotten more about economics and foreign policy than Herman has ever known.

Ron Paul will destroy Obama in one on one debates.

rcwhalen's picture

Tell em George.  My question as per Yves Smith is why are we making these changes now???  What was wrong with a year ago?? Smells like Lehman in the Morning, to paraphrase Robert Duval in "Apocalypse Now"

EB's picture

What was wrong with a year ago??

Schneiderman was not all over Moynihan's rear.

pendragon's picture

the complicit fed officials should be indicted

Shizzmoney's picture

Speaker FTD is right on point....the thing is so much shit is fucked up, that it maybe too late to focus on just one thing to fix.

But this is obviously one of them.  OWS has been focusing on it, but the movement has gotten off rail thanks to anarchists and lefty who, I agree with, find the only way to retake and fix the system is to hijack it. 



nah's picture

the whole line that the fed is some imparcial entity setting 'interest rates' to manage the economy backed by some regulation authority is a total fraud... seriously end the fed


the federal reserve is just a banking appointed body explicitly backing the banks that is as powerful as the Congress of the United States of America


this is just a magic show where the taxpayer gets endlessly sawed in half


end the fed

Shizzmoney's picture

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)

 LOL at people thinking this is a Socialist state.  last time i checked, they get FREE healthcare in socialist states, and investment banks and commerical banks don't fuck each other at night behind their spouses' (taxpayers) backs.

We live in a quasi-fascist state now.   We are still allowed free speech, but that won't last for long when the big bank led gov't and their business cronies use occupy wall street and civil unrest to cut off our communication balls like twitter and internet message boards.  We'll be "allowed" to keep Facebook, but they'll censor content from users (as long as they play on FarmVille).

Escapeclaws's picture

Free speech is a privilege, not a right. If you abuse the privilege it will be taken away from you. Just like your driving "privilege"

/Sarc off

SheepDog-One's picture

'See, we have to dump trillions of bad debt on the taxpayers, or else the markets might get 'upset'!'

Gee cant have THAT!

iNull's picture

You're correct. But we still need them. In their brains are the answers to what happened, and if we split 'em open now we lose all those delicious answers. Wait till we extract the fucking answers from their brains, then you can grab an axe.

Dude, I'm just fuckin' around. Not serious. Please don't split somebody's head open with an axe in attempt to get at the meaning of life, and then when they are sweating you down at the police station say "well I read it on the internet. This guy called iNull said if we just split this guy's head open the secrets of the universe...." Dude, please don't be that guy. Thank you.

Georgesblog's picture

I loved that scene in "The Longest Yard".  If the public doesn't call a different play on defense in the debt game, it's going out on a stretcher.

If people understood what I'm saying, I wouldn't have to write them.

http://georgesblogforum.wordpr ess.com/2011/10/19/different-worlds/

blueridgeviews's picture

This outrageous act is all tthe proof I need that this administration and their appointments will sell the American public down the road before they will fix what is so blatantly broken.

Denninger is correct when he says this is a depression.  Instead of soup lines we have 50 million Americans on food stamps or whatever nice name they give it now.

America is on a slow death march and nothing will be done till everyone feels the financial pain. Poor people feel it first, rich people feel it last.

MacGruber's picture

Well said, that's why I'm in favor of a black swan. I want the system to faulter to shake people from their debt-serf slumber.

Reality is what we collectively make it, and right now the reality is productive people carry the unproductive (bansters, etc). The formerly productive people (the unemployed and underemployed) are demonized in a way that should be reserved for the banksters and their cronies. 

With a small catalyst I think millions could awake and rightfully riot for being so disenfranchised. The ether sponge just has to be removed from the patient's face.

UGrev's picture

in 1930, they jumped.. in 2011 they get pushed.. 

Republicae's picture

Yeah, at the end of a bayonet!

FEDbuster's picture

Well there have been calls for them to jump, "Jump You Fuckers":


If you like that, you may enjoy seeing the singer/songwriter, Gene Burnett, recently singing this in front of his local JP Morgan Chase bank:


Fuck these fuckers.  I'll take Kyle Bass's advice and keep buying guns and gold (plus lots of food and seeds) with any investment funds.

Close your accounts with these assholes while you still can.  Don't bring a sign, because you can't be a protester and customer at the same time (according to BofA management).

LawsofPhysics's picture

We can only hope.  I don't know about the American dream, but the dollar died in 1971.

Republicae's picture

It did indeed die in 1971, but it was infected with the carcinogen called the Federal Reserve back in 1913!

NuYawkFrankie's picture



A bathroom-attendant named TOTUS

Was employed to retrieve Wall St floaters,

He let them mature

'til they smelled like manure,

Then he sprayed all that sh!t on the voters

stacking12321's picture

that's very poetic.

i am a free man.

but you are NUMBER TWO!

NuYawkFrankie's picture

Nope - I am No. 6

Who is Number One?

moonman's picture

I am not a number. I am a free man.

Oh wait, no I am not


Taint Boil's picture

Are you this guy from patrick.net:  Vicente

stacking12321's picture


yes officer that's him!

that's the man i saw saying frightening things, talking about getting off the island.

saying strange, terrifying things, UNMUTUAL things!


honestann's picture

Hang the banksters, all of them.  Start at the federal reserve, then continue with all the "too big to fail", then probably one or two levels below, then all other large financial corporations who have manipulated the government into covering their ass and shifting their losses to others.  Hang them all, and leave their skeletons hanging everywhere to remind future predators what should and hopefully will happen to them.

dalkrin's picture

Bank of Countrywide Lynch

Republicae's picture

Ah, there has beenmore than little manipulation of our government, our government is in on the corruption, the crime and think nothing of the American People! So, you best save some rope for those in the government as well. The regulations proposed and passed by Congress has made all of this croney capitalism possible with privatized profits and socialised risks.

honestann's picture

Yup.  Hang everyone at high levels of government too.  We might need to make an exception for Ron Paul.  Otherwise, hang them all: administration, congress, courts, and probably the top several levels of every department of the federal government... at least.  I'm not sure how far down the hierarchy the "oath to protect the constitution" is applied, but perhaps all who have taken the oath should be hung.  They certainly deserve to be hung for treason and crimes against humanity.

bernorange's picture

Don't worry.  I'm sure our esteemed attorney general will enforce the rule of law and look after the interests of the American people.

Yeah - I'm "laughing" too.


HD's picture

You know Ken Lewis is sitting on a beach somewhere getting blown by $2000 a hour call girls laughing his ass off...

AldousHuxley's picture

Fed > Goldman > Bank of America


I think Ken Lewis is being used as a scapegoat to some degree given power structure above, but he definitely is not sitting with a call girl....he is sitting with a $2000 an hour team of lawyers.


The Schwab S&P 500 Index investment fund filed a multibillion-dollar lawsuit against Bank of America and its former CEO Ken Lewis this week


This lawsuit, brought by Bank of America shareholders, claims that Bank of America and its executives, including its former chief executive, Kenneth D. Lewis, failed to disclose what would be a $15.31 billion loss at Merrill in the days before and after Bank of America's acquisition.



HD's picture

 Good post.

  It does give me a warm feeling to know that at least there is someone that can feast on the bones of bankers - lawyers.

AldousHuxley's picture

greed vs. greed...keeps greed in check.


now when this kind of "clawback" is possible, why are attorney generals not pursuing bankster bonuses the same way?


Oh that's right, they character assassinated Eliot Spitzer off, before shit hit the fan as if he is the only one on wall st.




the part owner of a Major League Baseball team who "loves Kelsey"

the CEO of one of the country's largest private equity firms who met "Cameron" at the Peninsula Hotel

a major New York real estate developer who, according to the list, "will come to the door wearing women's panties," and who spent nearly $100,000

a partner at the Wall Street law firm Cravath Swaine Moore "looking for a party girl to come fully equipped" and spent a total of $20,000

an investment banker from Lehman Brothers who saw "Kelsey and Keely together" and later saw "Aria and Skyler at the same time"

an investment banker at JP Morgan Securities who "loves Brooke" and spent $41,600

an investment banker at Goldman Sachs who "only wanted all-American girls" and spent $27,000

a managing director from Merrill Lynch who saw "Lana" using the name "Nataly"

a managing director from Deutsche Bank "who called about seeing Nataly again"

Everybodys All American's picture

This will definately cause a bank run.