HOLY BAILOUT - Federal Reserve Now
Backstopping $75 Trillion Of Bank Of America's Derivatives Trades
This story from
Bloomberg just hit the wires this morning. Bank of America is shifting
derivatives in its Merrill investment banking unit to its depository arm, which
has access to the Fed discount window and is protected by the FDIC.
This means that the
investment bank's European derivatives exposure is now backstopped by U.S.
taxpayers. Bank of America didn't get regulatory approval to do this, they just
did it at the request of frightened counterparties. Now the Fed and the FDIC are
fighting as to whether this was sound. The Fed wants to "give relief" to the
bank holding company, which is under heavy pressure.
This is a direct transfer of risk to
the taxpayer done by the bank without approval by regulators and without public
input. You will also read below that JP Morgan is apparently doing the same
thing with $79 trillion of notional derivatives guaranteed by the FDIC and
Federal Reserve.
What
this means for you is that when Europe finally implodes and banks fail, U.S.
taxpayers will hold the bag for trillions in CDS insurance contracts sold by
Bank of America and JP Morgan. 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.
This is a recipe for Armageddon.
Bernanke is absolutely insane. No wonder Geithner has been hopping all over
Europe begging and cajoling leaders to put together a massive bailout of
troubled banks. His worst nightmare is Eurozone bank defaults leading to the
collapse of the large U.S. banks who have been happily selling default insurance
on European banks since the crisis began.
---
Bloomberg
Excerpt:
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.
Three years after taxpayers rescued
some of the biggest U.S. lenders, regulators are grappling with how to protect
FDIC- insured bank accounts from risks generated by investment-banking
operations. Bank of America, which got a $45 billion bailout during the
financial crisis, had $1.04 trillion in deposits as of midyear, ranking it
second among U.S. firms.
“The concern is that there is always an
enormous temptation to dump the losers on the insured institution,” said William
Black, professor of economics and law at the University of Missouri-Kansas City
and a former bank regulator. “We should have fairly tight restrictions on that.”
MOODY’S DOWNGRADE
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.
Keeping such deals
separate from FDIC-insured savings has been a cornerstone of U.S. regulation for
decades, including last year’s Dodd-Frank overhaul of Wall Street regulation.
U.S. Bailouts
Bank of America
benefited from two injections of U.S. bailout funds during the financial crisis.
The first, in 2008, included $15 billion for the bank and $10 billion for
Merrill, which the bank had agreed to buy. The second round of $20 billion came
in January 2009 after Merrill’s losses in its final quarter as an independent
firm surpassed $15 billion, raising doubts about the bank’s stability if the
takeover proceeded. The U.S. also offered to guarantee $118 billion of assets
held by the combined company, mostly at Merrill.
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.
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.
“Congress doesn’t want a bank’s FDIC
insurance and access to the Fed discount window to somehow benefit an affiliate,
so they created a firewall,” Omarova said. The discount window has been open to
banks as the lender of last resort since 1914.
Continue reading at Bloomberg...
http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html
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