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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, 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:
STAND UP TO THE COUP
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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Too hip for the room.
Not all Mr Zero. They had their own. It looked like a marriage made in heaven.
Like a shotgun weddding. Do it or your both Bankrupt. Duh.
That's like saying Lindz tried to save Paris by smoking crystal in front of her, thus making the other party girls realize they shouldn't mess with the stuff.
The larger they come.....
Trouble is that nobody will accept Benjamins for anything when this shit gets real. If you're half as smart as my boxer, you would convert paper to precious as long as you still can. This isn't going to end well. He who holds most paper will get screwed.
Time to "cash out"!
The G-20 gave Europe until next weekend to "fix" their debt problems while CDS rates exploded overnight in a vote of no confidence.
"No confidence" as in ... can't be fixed on a global basis. So here we are again with Euro weakness and Dollar strength coupled with paper Gold futures being dumped to bash the "percepted" price. We have seen this many times before and if you think back with 20/20 hindsight you'll realize that many times this was done with precise timing as macro events were collapsing behind the scenes.
In other words, just as the real reasons to own Gold were increasing and intensifying, the price was artificially pressed down to mask reality.
This is exactly where we are today, the system is about to disintegrate so Gold must be smashed in a show of "all is well". It is most certainly not.
You must watch the credit markets and not the equity markets.
Greek short term paper is trading at over 150% while French and Belgian bond yields are at multi year highs. CDS rates are also blowing out. The credit markets are telling the real story here... RISK.
Actually "risk" is not the word, the real word is "probability". Probability as in PROBABILITY of default! In the case of Greece, the credit market is rating default probability damn close to 100% unless they can dig up some 3,000 year old shrine and find $100+ Billion bullion stash.
But back to Gold: we will very soon have a watershed day to the upside where the paper shorts are broken, physical calls be made and sentiment changes 180 degrees.
This day will probably involve an overnight gap of $50-100 that is not contained. This one will not "look back" and those waiting for a pullback will not get it. Anyone "trading" will be left out of the game and not "mentally" allowed back on the train. We are now so very close to reality overtaking planned perceptions it is scary.
Do not expect in any fashion for governments anywhere to say "OK, we screwed up", no, instead the markets will do it for them and the "insiders" (those who have pulled the strings and our chains for so long) will be the ones who start the panic.
This panic will be absolutely massive selling of all credits no matter from where and inflow into Gold and Silver.
Think about it, Gold HAS to be the last man standing because it "owes" no one.
All of the rocket scientist CDS traders can "make" or "lose" $ Trillions, it does not matter because unless they "cash out" they all lose! The losers obviously lose, the winners who get defaulted on by the losers lose AND the winners who actually get paid (unlikely scenario) lose because they didn't "cash out" at the casino window.
How so you ask? OK, so you are one of the few "winners" who "settle" their trades and have a $ Gazillion gain, unless and until you change your "chips" into real money...guess what...YOU LOSE!
Lose? Yessir, you lose.
You lose because you forgot that in order to REALLY "cash out" you must settle.
In order to settle you must "change" your winnings into something real. If you forget this "small detail" then you will in the very end have exactly the same wealth as the Hobo pushing a grocery cart down the road. If you win and "sit" in Dollars, Euros or whatever you are still a part of and OWED by the current and not everlasting debt system. The only true winners will be those who cash out and into "money" that is not "credit money".
In other words, unless you COMPLETELY exit the credit system...you lose. Which leads us back to where?
THE REASON that capital of unimaginable amounts will stampede into Gold, Silver and companies that produce these!
Investors will figure out, that unless they cash out...they lose...PERIOD, end of story!
This is a mathematical certainty.
Ponzi schemes by definition cannot continue forever... must end. When it ends, if you have not already "cashed out", you lose.
In order to cash out...you must park your capital in something real. When it comes to "money", the only real money for 5,000+ years has been Gold and Silver.
Dots connected?
www.lemetropolecafe.com
You may be correct; however, the crooks have created a Party On monetary situation that enriches the few at the expense of the many. This will continue, IMHO indefinitely, until morale improves.
hahahahahahahah....good one.
"The Fed will print what is needed, then default on itself - causing no harm at all."
Zimbabwe tried that. No harm at all my fucking ass.
Change your name from ZerOhenge to FUCKING BERNANKE MORON.
TBTF = 2corrupt2fail, 2big2b saved. the nominal sum is much higher than the gdp of the world; does anyone know how to come up with the actual loss these derivative products have incurred?
Whatever the losses are, they are probably recognised, if only because of the collateral calls/movements they have caused.
However, in my opinion (see below), one should think about what has happened to the assets the derivatives were held against.
For example, suppose the cash asset is a fixed rate (prime) mortgage. Because prime, retained on BAC's books. And, if primex is any guide, what has happened to the price?
And if the derivative disappears, book becomes unmatched, so cash asset has to be sold to restore matching, and at that point any overvaluations in the cash asset portfolio are realised in a hurry...
Watson
>>>>>>
Hello,
Below is a repost from ZH yesterday (10/18/2011 - 13:11).
People may want to think very hard about the third paragraph...
Watson
>>>
Tyler,
You might want to probe the report that BAC, at the request of its counterparties, has moved OTC derivative contracts to the FDIC-backed entity.
Forget for a moment the issue of BAC trying to implictly use deposit insurance (intended to protect J6P's checking account) to backstop BAC's own bets in the securities markets.
(Though it is encouraging that the FDIC seems to have noticed, and raised objections...the Fed won't be pleased).
Focus instead on *why* this might have happened.
Most OTC derivatives have a provision that on downgrades the collateral demand goes up, and this has been suggested as BAC's motive.
I suggest another:
Most OTC's also have a provision that on a sufficient downgrade (and BAC is pretty rubbish now for long-term deals), the in-the-money counterparty can force early termination (at third-party mark-to-market prices).
Now think about how much might be involved, and how it might be unfortunate if those losing contracts are, in BAC's books, netted against cash positions that (entirely legally, but very foolishly) BAC might not have marked-to-market.
Watson
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If they were a groom they'd fuck the stripper while but dialing their bride.
Fucking lowlife morons.
BULLISH!
Krugman
boa holds the fed hostage; stock markets corner their respective government into another round of bailout
Yes, BOA has rigged a nuclear dead man switch. And is sitting on a very large pile of hydrogen bombs.
OK. Somebody has to have thought of this further down in the thread.....
Think about JPM going short-side CDS on themself when the market bid up their yields. Right? They can do that, it's not financial terrorism. Right?
Now think of BHC BoA moving trillions in derivatives from ML with dick for reserves and uninsured, to BoA retail with a trillion+ deposits and insured.
It depends who you want to be left fat, dumb, and happy with the depositors' money.. BHC BoA, ML, or BoA. You could set up a big wad of derivatives accordingly, for the transfer.
It could be the first Bankruptcy, where an entity made a huge profit by filing.
The losers would be the depositors, while the FDIC has to go find the money for them.
Which fairly quickly would result in another round of sodomy for us sore-assed bastards.
Go ahead, tell me they would never get away with something like that.
There was no spoon 3 years ago, why the fuck would you think there is one now. ;)
Thing is that Alan Greenspan urged Congress not to regulate the OTC derivatives market, and of course they did not. However, IMO, the deviants involved in derivatives manufacture have all along been channel stuffing legislation (such as the afore-mentioned 2005 bancrucpy law which places derivatives counter parties first in line to collect) in their favor. End game.
A derivitive market that is Well Over 10 years of World Growth.
So these bastards have Already stolen the next 10 years of world growth -
And lets use correct language for once - dumping toxic debt on the taxpayer after profiting from the risk is commonly called socialized losses.
I say it more accurately called FASCISM.
And to those who say we have a Democracy - supposedly Shrub Bush and The oilybomber are from 2 different political parties and ideological beliefs - but in the end it's the Same Ole Same Ole.
2 sides to the same crooked coin.