Bank Of America Used Government-Backed Funds For "Reckless, Extremely Levered" Tax Avoiding Trades

Tyler Durden's picture

When we recently described in detail the reason, or rather 70.3 trillion reasons, why Citigroup scrambled to make sure the swap push-out provision language remained in the Cronybus government funding bill, we made it clear that that primary reason why at least one (and certainly two) TBTF bank is desperate to keep taxpayers on the hook for its derivatives is that between JPM and Citi, there were over $135 trillion in total notional derivatives outstanding as of Q3.


Today we find why yet another bank, Bank of America, has been extremely incentivized to preserve the post Glass-Steagall world in which cash depositing taxpayers are on the hook for a bank's stupidity, and more impotantly, to make the uber-wealthy even uber-wealthier.

Recall that back in 2013, it was JPMorgan's CIO Office, aka the London Whale, which, taking advantage of fungible, taxpayer-insured funding in the form of excess US deposits over loans, proceeded to attempt and corner the IG9 market in what was clearly a directional prop trade and which launched what is now a quarterly tradition of billions of non one-time, recurring legal charges for Jamie Dimon. As everyone knows by now, the London Whale trade (and its employees) blew up spectactularly and it was only a forced intervention by management which prevented impairment to the company's depositors.

Now it is Bank of America's turn to disclose that it, too, was being ridiculously cavalier with taxpayer-insured deposits. Only instead of traying to make money directly by letting its prop traders trade with deposit proceeds (actually, it did that too) BofA decided it would be more lucrative to use its government-backed subsidiary to "finance billions of dollars in controversial trades that helped hedge funds and other clients avoid taxes, according to internal documents and people familiar with the matter."

According to the WSJ which broke the story, BofA had been engaging in a "practice of using funds from its U.S. banking unit to finance transactions by its European investment-banking arm that, among other things" which helped hedge funds avoid taxes on stock dividends, according to the documents and people.

The practice dates back to at least 2011, when senior Bank of America investment-bank officials in London started pushing subordinates to adopt the policy in order to take advantage of the lower funding costs enjoyed by the U.S. unit called Bank of America National Association, according to internal emails and the people familiar with the matter. The goal was to attract more hedge-fund clients to Bank of America’s European investment-banking unit, including clients that were engaged in the so-called dividend-arbitrage tax trades.


Bank of America National Association, or BANA, is home to the company’s vast U.S. retail-banking network, including the majority of its federally insured deposits. BANA pays less to borrow money than business units that engage in riskier investment-banking activities.

Supposed advocates of the non-TBTF man, such as one time FDIC head Sheila Bair, and currently Director of Santander, aka the bank which is currently issuing the largest amount of subprime auto loans in the US, were unhappy to learn that yet again, banks have not learned their lack of lesson, and will gladly put trillions in excess deposits at risk if it means higher year end bonuses for bankers.

"I don’t think it’s an appropriate use,” said Sheila Bair , the former chairman of the Federal Deposit Insurance Corp. “Activities with a substantial reputational risk... should not be done inside a bank. You have explicit government backing inside a bank. There is taxpayer risk there.”

And why do you think Bank of America used this subsidiary? Precisely because of the government backing, which made the funding essentially costless, and allowed the bank to generate massive profits on all such activities. Activities, which, courtesy of Gramm-Leach-Bliley are perfectly legal. And somehow regulators wonder why banks continue to engage in legal, if frowned upon, means to generate profits in a NIRP world in which the legacy NIM trade no longer works.

So just what did BofA use this costless funding for? "Funds from the safeguarded banking entity financed a variety of strategies. At times, billions of dollars in question were earmarked to the dividend-arbitrage strategy, in which banks and brokerage firms help hedge funds and other sophisticated investors avoid or minimize the withholding taxes they pay on stock dividends."

Ironically, according to the WSJ, while one may debate the ethics of using government-backed funds to allow hedge funds avoid taxes, the practice itself is illegal!

Such trades tied to U.S. stock dividends were banned following U.S. government investigations starting in 2007 as well as tax-rule changes. Bank of America paid $63 million in a confidential 2011 settlement related to its past U.S. dividend-arbitrage trading, according to bank documents.

But what is most interesting is how the WSJ got this information:

A current Bank of America employee has made a number of whistleblower submissions to the U.S. Securities and Exchange Commission about the role played by the U.S. banking subsidiary in financing dividend-arbitrage trades, according to copies of the submissions reviewed by The Wall Street Journal.

Are bankers indeed growing a consciences? If so, the avalanche of dirt that is set to follow will be truly epic.

But while we wait, what is most shocking is that 2 years after the London Whale died with JPM, it has been reincarnated with Bank of America:

The employee’s submissions allege that Bank of America’s London-based Merrill Lynch International unit has extended “extreme levels of BANA leverage” to fund “increasingly aggressive and reckless” tax-avoidance trades. The submissions said the practices risked causing the bank “serious financial and reputational damage.”


The issue of banks putting federally insured funds at risk has been under increased scrutiny by regulators since J.P. Morgan Chase & Co. in 2012 suffered more than $6 billion in losses on bad trades in its Chief Investment Office. Those blunders, led by a trader whose large positions earned him the “London Whale” moniker, resulted in J.P. Morgan paying $1 billion in fines for securities-law violations. The bank has said customer deposits weren’t harmed.

Worse, unlike the JPM fiasco, this time upper management can not deny it knew all about the strategy:

One afternoon in February 2011, bankers, traders and others crowded into a Bank of America auditorium in London for a “town hall” meeting. Executives announced that they were changing the way they loaned money to certain clients, according to people who attended. The money for the loans now would come through BANA rather than Merrill Lynch International.


John Addis, an investment-banking executive, told attendees that increasing the use of lower-cost cash would give Bank of America a new edge over competitors. He and other executives said the funding would allow the bank to extend more loans to more hedge funds, including those with hard-to-sell investments, in turn generating more profits for the bank, according to internal documents and people involved in the discussions.


In 2011 and 2012, executives told employees to shift hedge-fund and trading clients into BANA-originated loans, according to emails.


“Given funding costs in [Merrill Lynch International] can we make sure all new clients, where possible, are loaded right on to bana? Where we can’t I’d like to understand why,” a senior investment-banking executive, Sylvan Chackman, wrote in an email to employees in January 2012.

Therefore, one can argue the BofA trade was even worse than JPM's - at least there the circle of involvement was rather small. BofA's only saving grace: the trade was smaller: "At one point, in May 2012, internal bank documents showed $5.6 billion of outstanding BANA loans to European asset-management clients, with several top recipients involved in dividend-arbitrage trades. Three such clients were earmarked to receive up to $1 billion each in BANA funding, the documents show. People familiar with the financing say the amounts of BANA funding used for dividend-arbitrage trades fluctuated broadly." With JPM the total notional reached into the hundreds of billions.

But the absolute punchline: none other than the Bank's regulator, the Richmond Fed, knew all about it:

As part of an inspection last spring by the Federal Reserve Bank of Richmond, which is one of Bank of America’s main supervisors, regulators raised concerns about how BANA was financing risky parts of the bank, including dividend arbitrage and other trading activities, according to documents and people familiar with the matter. Bank officials are still in talks with the Fed about the issues, the people said.


On June 2, 2014, Fabrizio Gallo, Bank of America’s global head of equities, wrote a letter to the Richmond Fed, according to a copy of the letter reviewed by the Journal. “Our intention,” Mr Gallo wrote, “is to phase out the use of BANA in parts of the business and to transition without delay to a more operationally sound foundation.”

In conclusion: "The practice has ended, according to a bank spokesman."

What happens next? Why nothing of course.

Remember: the banks are now in charge of both the regulators and government. Which means that just for the sake of appearance, BofA may in the worst possible case, be slapped with a +/- $1 billion penalty, as it neither admits nor denies that it broke any law, and the incident will be forgotten. Of course, nobody, anywhere, will go to prison over any of the above: the amounts involved are in the billions - far greater than what is considered a punishable offense under US "law", and courtesy of the hijacking of the US financial system by crony capitalism-cum-low cost socialism, those people have an unlimited "get out of jail" card. At least until the guillotines start falling.

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SethDealer's picture

doesnt suprise me

knukles's picture

Wait wait wait wait a minute.
BoA got special dispensation from the FED when they bought ML to be able to borrow at any FED etc., facility and downstream funds to ANY operating entity.
So, what they've done may look risky, be a screw job on the public, etc., but They Got Formal Approval For Such Way Back When

CH1's picture

LOL... I'm shocked... SHOCKED!

Skateboarder's picture

I started listening to an audiobook of Stockman's "The Great Deformation" with my commute this morning (thanks to Tim Knight's post last week). Great, concise, refresher on the '08 'crisis' - he was explaining the tale of Paulson and AIG's then-perfectly-okay-asset-sheet. Many years later we are continuing along the same path, and no questions are asked, just as no questions were asked then. Americans have been on autopilot for too long, and now that we haven't asked questions for so long, we don't even know what questions to ask.

Stackers's picture

It's important to note that these "products" are always sold by City of London based divisions. Just like the AIG mortgage CDS's that were sold by a handful of "london traders". There is a reason for this the banksters dont want you to realize.

cossack55's picture

The BIG question is how he was able to interrupt SEC porn fests long enough to file a complaint?

Karlus's picture

>>but They Got Formal Approval For Such Way Back When


Umm yeah....'bout that. We changed our minds. That was inappropriate use of funds. Here is your fine.

bania's picture

Unpossible and misremembered.

Steroid's picture

Jump, you fuckers!

ajax's picture



"so-called dividend-arbitrage tax trades"

Bank of America/Merrill Lynch London


For everyone else there's FATCA

Repeal FATCA

LawsofPhysics's picture

Ya think?  Accountability?  What's that?

No fucking shit sherlock.  Wake us when just one of Tim Geithner's "arsonist" is bankrupt and in prison.

Smuckers's picture

We whaled some folks...

clade7's picture

Big deal..if its not your money, throw it away, wipe your ass, dish out a bonus, buy a Pol, whatever...samey same...

falak pema's picture

when Tax Inversion becomes a bloated whale of a game! 

Bofa is Hoffa!  And Merrill got streeped and then got lynched ! 

carbonmutant's picture

We're not breaking any new ground with this discovery...

City_Of_Champyinz's picture

Godamn, the blatant corruption and general sleaziness of the world's financial systems is getting uber ridiculous....When this falls as it eventually must, everyone better be ready to take cover. Stack Stack Stack, Pb & Ag is damn cheap right now...

FieldingMellish's picture

Best thing to do now is to bail them out with taxpayers funds and pay big bonuses to retain the "best" staff. That would be best.

Billy Sol Estes's picture

Obama or any goverment paid scoundrel coming out to strongly condemn their donors' actions in 3, 2, 1.......

Colonel Klink's picture

All as our WORTHLESS attorney general does nothing.  No bankers have gone to jail.  It's as if he's protecting them from prosecution.  A corrupt government who doesn't enforce the laws equally is an illegitimate government.  People need to withdraw their consent to be governed.

10mm's picture

His biggest regret was gun laws, not banks.

Colonel Klink's picture

You mean virtually every one of the 22,000 unconstitutional gun laws on the books, or new ones?

RaceToTheBottom's picture

We have really gone downhill since 85'.  Then we could put some in jail, now, they all get rich.

America is a shell of herself.

JailBank's picture

I can't wait for the trials on this stuff to start. Wait what? What do you mean there will be no trials?

Sanity Bear's picture

It's only reckless if you try it without a taxpayer backstop.

JBilyj's picture

these guys and most int'l bankers should be lined up and shot...

Ban KKiller's picture

Expect contact from FBI who will have a great plan in mind for you...

Ralph Spoilsport's picture

Mrs. Spoilsport still has accounts for her kids at Santander in Quarryville, PA since it's "local and convenient" for the kids. This branch was formerly a small one story brick house and is located next to an ice cream stand.,-76.172507,3a,60y,160.9h,92.31t/d...!3m4!1e1!3m2!1sR5KdDYRQzCHtRHyLwnk6hg!2e0!6m1!1e1

When I went in yesterday to deposit some cash for her, a loan officer greeted me with "Welcome to San Tan Derrrr..." in a really bad French accent. I said, "Isn't Santander Spanish"? 

El Vaquero's picture

Santander is scum.  I know a guy who went to law school and became a consumer attorney because of how badly Santander tried to fuck him.  He almost wound up in a shootout with a repo guy who was reposessing a vehicle that they didn't have a right to reposess, and that was just one out of many incedents.  The repo guy wound up getting arrested, which tells you something.

Ban KKiller's picture

Santander is super horny for high yield so car paper is what they really like. Subprime by the truck load. Only problem is they loaned the money for the truck to a guy who lives on the REZ. That is fucking funny. Ever see a street sign on the REZ? If you did you weren't on it. Santander is chasing cars in every ghost independant neighborhood looking for collateral that is only going to be found dead on the road with 300k miles on it. 

Repo a car from the REZ? On the other hand, thanks for the free cars Santander! 

TeethVillage88s's picture

You gave me a thought. I like to wonder about future insurrections or secessions in the USA. I mean why would millions of Latinos looking for civil rights and worker rights not leave the USA if the time comes when they are the majority and the USA no longer recognizes worker rights or individual rights??

So then we have these Indian Reservations also as patch work of different states. Why would they not want self rule or libertarian rule by their tribes.

Did you see President Obama just gave huge land title to the Navajos of NM, CO, AZ, NV?? Yeah it was on the BIA website, 2014.

DontFollowMyAdviceImaDummy's picture

knock me over with a feather, you mean to tell me I'm never winning the coin toss when it's HEAD YOU WIN and TAILS I LOSE?!  where's my nail gun...

sandlapper's picture

The "implied" guarantee became an explicit guarantee with TARP.  Moral Hazard is the business model.  In other news, water was found to be wet.

Downtoolong's picture

Don't worry, I'm sure all these risky trades were insured by AIG. 

bugs_'s picture

hello you've reached the bank of america recklessness department
your taxpayer backing and your call are important to us
please stay on the line and our next available recklessness consultant will be with you shortly

Ban KKiller's picture

Truth serum in the water there?

Mike Honcho's picture

be slapped with a +/- $1 billion penalty .... I will take the under on that.

dumbStruck's picture

Tax payer funded income tax evasion for bank profits made from mal-investing tax payer funds given to banks to cover their previous mal-investments or something like that ?

Catullus's picture

So their clients were getting dividend proceeds and they sold swaps to the retail banking arm?

So why didn't I get higher interest rates on my savings and money market accounts? Oh yeah. Because this is bullshit.

22winmag's picture

That's a scream. The SEC is about as trustworthy as BOA.


I bet the SEC will raid them and take all their porn.

Batman11's picture

Banks have one product debts/loans.

The banks product is more popular than even the iPhone.

The banks product takes money from for the future for people to spend today.

The money is spent and the future is coming.


Batman11's picture

Usury was illegal in ancient times and with good reason.

TeethVillage88s's picture

Sheila Blair said this kind of activity should not take place in a Bank... What does she call the other TBTF Banks on Wall Street? I guess she calls them hedge funds or Financial Institutions? I need to read up on more of the article in the WSJ...

The Gramm–Leach–Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999 and commonly pronounced ?glibba?,

Sen. Phil Gramm (R, Texas), (Now works in a Bank, UBS as Vice President, Chairman of the Senate Committee on Banking, Housing and Urban Affairs)
Rep. Jim Leach (R, Iowa), (Left in 2007, Chairman National Endowment of Humanities, Century Foundation, Kettering Foundatio)
Rep. Thomas J. Bliley, Jr. (R, Virginia), (Replaced by Eric Cantor in 2001, he was a principal author of several important laws including the Telecommunications Act of 1996, the Food and Drug Administration Modernization Act of 1997, the Private Securities Litigation Reform Act and the Financial Modernization Act of 1999)


"...under a house of brands that included Citibank, Smith Barney, Primerica, and Travelers. Because this merger was a violation of the Glass–Steagall Act and the Bank Holding Company Act of 1956, the Federal Reserve gave Citigroup a temporary waiver in September 1998.[2]"

- The Federal Reserve had this power??? Really??
- Hey is that like DOJ Giving up the State of Justice for the 2008 Global Financial Crisis??
- Is this the official End of the State of Justice required for a possible Democracy in the USA?
- So Mark that Date, September 1998

Batman11's picture

The markets are always slow to react to the oncoming storm:

1926 - house prices softened

1927 - car sales dropped

1928 - construction leveled off

But in wall street the music still played until 1929.

Joebloinvestor's picture

You have to make up for those Countrywide fines somehow.