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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.
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.
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.
Jerry Dubrowski, a spokesman for Charlotte, North Carolina- based Bank of America, declined to comment on the transfers or the firm’s discussions with regulators. The company “continues to accommodate the needs of our clients through each of our multiple trading entities, including Bank of America NA,” he said in an e-mailed statement, referring to the company’s deposit-taking unit.
Barbara Hagenbaugh, a Fed spokeswoman, said she couldn’t discuss supervision of specific institutions. Greg Hernandez, an FDIC spokesman, declined to comment.
The catalyst: the Moody's downgrade of the bank to a rating far more indicative of BAC's insolvent (aka D) status:
Moody’s Investors Service downgraded Bank of America’s long-term credit ratings Sept. 21, cutting both the holding company and the retail bank two notches apiece. The holding company fell to Baa1, the third-lowest investment-grade rank, from A2, while the retail bank declined to A2 from Aa3.
The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody’s decision, said a person familiar with the matter.
"All perfectly normal"
The moves by Bank of America are part of “the normal course of dealings that we’ve had with counterparties since Merrill Lynch and BofA came together,” Thompson said today.
Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.
With the Fed's blessing:
Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.
In 2009, the Fed granted Section 23A exemptions to the banking arms of Ally Financial Inc., HSBC Holdings Plc, Fifth Third Bancorp, ING Groep NV, General Electric Co., Northern Trust Corp., CIT Group Inc., Morgan Stanley and Goldman Sachs Group Inc., among others, according to letters posted on the Fed’s website.
The central bank terminated exemptions last year for retail-banking units of JPMorgan, Citigroup, Barclays Plc, Royal Bank of Scotland Plc and Deutsche Bank AG. The Fed also ended an exemption for Bank of America in March 2010 and in September of that year approved a new one.
Section 23A “is among the most important tools that U.S. bank regulators have to protect the safety and soundness of U.S. banks,” Scott Alvarez, the Fed’s general counsel, told Congress in March 2008.
In other words, while previously there had been a firewall between the bank's depository entity and the one that gambles, on either a flow or prop basis, with the abovementioned multi-trillion number, that firewall is now gone and all the money has been comminlged, explaining the FDIC's fear. And of course, in order to thank depositors for being explicit guarantors of the bank's derivative business, it is now forcing them to pay a $5/month fee.
Somehow we really doubt the 12/31 update will show a "total deposits" number over $1 trillion. Or anywhere remotely close.
Laslty, nobody should make the mistake that BofA is alone in this move: every other bank that has major derivative exposure and has a depository base has certainly been forced to do precisely the same by its bigger accounts, who have no desire of being exposed to surging counterparty risk and would much rather split it with America's depositors.
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the 'white rabbit' has come home to roost
jeff... airp...
So a depositor receives $53 of derivative exposure for each $1 on deposit along with annual interest of 0.01%? Sounds much better than the old days when a depositor received 5.0% interest and a new toaster.
BANK RUN TIME!
My mattress never looked so good, well, at least for cash.
Go back to paying in cash folks, trash your TBTF bank and quit using the Debit/Credit card indentured servitude database dollars.
Bleed the system dry to force a debt jubilee; hell, the banks and government already had theirs, our turn.
Unilateral risk transfer, i.e. laying your risk off on others without compensating them for it, is no different whatsoever than outright theft. The sad fact is, this basically describes about 75% of Wall Street’s contemporary business model.
Even if I knew how much depositor funds BoA has I would still be terrified to try to calculate the leverage inherent in this piece of insanity.
Some of these depositors are being refused the ability to close their account so they’re captive to the suicide banksters.
We can keep playing the imperial game under British rules....or we can get back to being America. How?
Glass-Steagall
I wish someone would pinch a loaf in the BAC lobby.
I will pay 100 dollars and give you a nice trophy if you do.
$100? C'mon gotta cover bail and fine at least. Unless trophy is gold. : )
If you show me a photo of said turd and either a copy of the arrest or a write up in a local newspaper i will raise to $200 and take up a collection on ZH.
But you wont be caught. Cant you, like snap a loaf in ten seconds flat?
10 seconds is doable if you eat Kellogs Bran Buds for breakfast. A guaranteed clean pinch everytime. Nice solid evacuation, one wipe is all you need, if that.
i'll call stan via cartman to set up a payment schedule
Its Perfectly Normal as are the distribution of outcomes. Normal is perfect and pefect is normal.
This is fraud, and it is criminal. The only reason it isn't stopped is because our "regulatory" agencies are corrupt at the core, as are our Congressional representatives.
regulatory capture from the FED architecture, through the market manipulation, by Pds, HFs, regulators, all the way to the law courts. One seamless design of regulatory capture, like a MAC PRO book as virtuous iconic example; this one perverse as it shuts out the small guy, from pillar to post. Ponzi market, ponzi legislator, ponzi regulator, ponzi law court. Learn to dance the ponzi twist.
I *wish* they ask me where I am going to move my money to.
I'll say "The Bank of Under My Mattress", as I can withdraw any amount of money I want at any time, with no fees. I'll also get a better interest rate than I do at BOA bank.
At Bank of America, we can SEE OUR CASH, but we JUST CANT TOUCH IT.....it is like having a WOMAN AS JUST A FRIEND.
Vacate Main Street. Instead of just showing up and doing what you are told you simply need to leave. Good for the off-grid crowd.
I want the debt-strike to come. If anything, for the lulz
debt strike. Now isn't that interesting.
You call it tricky, I call it fraud or deception! This bank has no ability what-so-ever to handle 53 Trillion pennies let alone derivative contracts. Get the heck out before it explodes.
$1,041 trillion ?
Must be 1.041 trillion. $1,041 trillion would be over 1 quadrillion.
//which are being requested by counterparties//
Which counterparties are requesting this? I would be curious to know which counterparty has the most BoA exposure and where their influence / positions are in the government and / or regulatory bodies.
The counterparties must be concerned.
//to prevente a few clients//
Maybe a few nominally, but percentage-wise in terms of dolla billz, probably very large if they have the power to sway such a decision.
I'm going leveraged long anger and rage. In this increasingly globalized world, there is a lucrative anger and rage market. Anger and rage will bring down the correlation coefficient of my portfolio ... BITCHEZ!
Get rid of GLB
http://tiny.cc/vjwsl
Nice, this would wipe out the FDIC ...... OWS
Please let the revolution begin now!!!!!
As I suspected back in 2008. The banks can only gamble beacuse they had an implicit guarantee they willl not default based on their deposits. Absent that they were massively undercapitalized and nobody in their right mind would do business with them. Now it seems that guarantee has become explicit.
Fannie & Freddie part 2
As I suspected back in 2008. The banks can only gamble beacuse they had an implicit guarantee they willl not default based on their deposits. Absent that they were massively undercapitalized and nobody in their right mind would do business with them. Now it seems that guarantee has become explicit.
Fannie & Freddie part 2
P.s. Double post 4tl. :(
Are there any regions or sectors PIMCO is particularly interested in at the moment?
From an opportunistic standpoint, the U.S. residential and commercial mortgage markets continue to present opportunities due to their size, regulatory uncertainty and housing weakness. Also, the issues surrounding sovereign debt and financial institution balance sheets in Europe have the potential to create attractive investments for some time.
From a liquid markets standpoint, the continued deleveraging in the global financial sector should produce a steady supply of highly motivated sellers of risk assets for non-economic reasons, creating temporary pricing anomalies from a bottom-up perspective. From a macroeconomic perspective, the distortions created by policymakers globally as they try to curb inflation and control capital flows in the developing world, while trying to address large debt overhangs and spur aggregate demand in the developed world, should create opportunities in the currency and interest rate markets.
http://www.finalternatives.com/node/18441
Europe is worth more to not only the Germans but Americans as well.. in a state of turmoil!
Wake Up!! Sheep!!! Privatization is the NEW NORMAL! that they forgot to tell YOU! about!! LOL!!
http://www.youtube.com/watch?v=t5jdMDiEeco
Uploaded by RussiaToday on Oct 18, 2011
This week Max Keiser and co-host, Stacy Herbert, talk about JP Morgan's bet against itself, a Florida legislator's plans to boost the economy with 'dwarf-tossing' and Tim Geithner flying economy. In the second half of the show, Max Keiser interviews Saifedean Ammous about Mubarak's odious debts and about whether or not Occupy Wall Street is an Arab Spring for the West.
Occupy Boston: Dozens Arrested @ Bank of America Protest
http://www.youtube.com/watch?v=2TRRpiyBER8
Occupy Santa Cruz: Bank of America Refuses to Let Customers Close Accounts
http://www.youtube.com/watch?v=dOU9GFtRBP8
Occupy St. Louis: "I Don't Believe They Got Legal Right To Keep Me From Getting My Money"
http://www.youtube.com/watch?v=v5rvdrlwK7Y
Occupy St. Louis: Bank of America Refuses to Let Customers Close Accounts
http://www.youtube.com/watch?v=IpEr2H8GCkE
http://www.bloomberg.com/video/76025060/
(Bloomberg) -- Bloomberg News reporter James Sterngold talks about a lawsuit filed by Dallas County, Texas, District Attorney Craig Watkins against Mortgage Electronic Registration Systems Inc. and Bank of America Corp. involving a system used for more than a decade to register mortgages. Bank of America is among a group of lenders that may face a wave of new lawsuits claiming cash-strapped counties were cheated out of millions of dollars in filing fees. Sterngold talks with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)
*** Bank of America is the First to be sued for not paying the assignment fees.. everyone else is on the list.. B of A just gets to go (down) first, as a warning to the public against persuing the banks for any reason?
have you closed your account yet? ***
in my book this is the largest nastional nerws story of the day!! it also deserves to be sent to ron paul and all the other candidates. it's so disgusting,n it wants to make me puke.
largest national news story in a while I would say
Been waiting for this rabid derivatives bunny to pop out of the hat for many years. It's a monster story.
Well, I'm a bit puzzled as to why any "clients" or counterparties or whoever think this changes anything.
Bank depositors are SENIOR to all other claims in the event of bank failures. A trillion in deposits means *nothing* in terms of what counterparties can pull out of the smoking crater that is the future of BOA.
Even if it were a hundred trillion, the depositors are "legally" (heh) obligated to get their money FIRST.
dog me thinks you blunder.
The derivitives are at the front of any line and must be paid first.
The FDIC/us would have to make good on all of those and the deposits of the serfs.
That is why the countrparty wants them moved or they are going to bring down hell on BOFA holding who would be bust if hell was loosed.
Simply with the downgrades and nature of BOFA the other side of the holders are saying they want more backstopping than BOFA is wanting to toss into the holdco blackhole.
taxpayer beware bitchezz.
Blood, turnips, etc. It's done. There aren't enough *wages* to pay the debts, and you talk about the piddling TINY amount of money the Feds can collect in taxes?
Nothing can hurt the 65% of the population that's already broke.
BOA is already dead. The deriatives are over. Already happened.
We just have a few years (or decades) of repercussions.
With each scoop of dirt, the hole gets deeper. It's deep enough now they can't get out. Yet they dig on, as if having a purpose.
This is starting to sound and look alot like Lehman Brothers when counter parties began to walk away due to credit concerns. Moving the derivative exposure within the banking structure changes next to nothing and I will be watching this one closely. Not 2008 .. yeah right.
Can anyone explain to me why just holding cash in a secure location (insured if it’s a very large amount) isn’t a better option at this point?
That is whatever cash isn’t already converted to precious metals. After all there will be a phase in which cash will be king right up and until its not. At which point cash will be plentifully but will buy less and less stuff.
In my mind the whole system is rigged for collapse at this point, its just waiting for the black swan moment which I predict will be hot war in the Middle East that shuts down oil production. It might take less but it certainly won’t take more either.
Good luck getting someone to insure your pile'o'cash. Heh.
LOL! That is awesome! ZOW
Oh so that's why the cops jail you if you pull your money out. You are transfering risk away from yourself and that's illegal.
They are one of THE WORST. It is ironic how they hide behind a well chosen name. Had they had any other name- they would be failed. Smart marketing. It's like calling a poodle- Killer. Stockspeare Rule #10- avoid any company that puts uses patriotic names.
Anybody anywhere else pull that same stunt and it's off to jail, do not pass GO, do not collect $200 million dollars....
HOLY BAILOUT - Federal Reserve Now Backstopping $75 Trillion Of Bank Of America's Derivatives Trades, 18 October 2011, (Daily Bail) http://dailybail.com/home/holy-bailout-federal-reserve-now-backstopping-75-trillion-of.html
Bank Transfer Day is November 5th, 18 October 2011, by Richard Henley Davis (The Economic Voice) http://www.economicvoice.com/bank-transfer-day-is-coming/50024760
BofA loses rank as nation's biggest bank
http://www.latimes.com/business/la-fi-bank-america-earnings-20111019,0,225382.story
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
<<<
Nice job BoA. You've managed to make people HATE the financial industry that much more. Amazing how the elite think the poor/middle class exist only to absorb the pathetic failures of the rich.
Finally, Armageddon.
I wanted to close my overseas account there, but my mom wouldn't let me =(
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