BofA Deathwatch: Moves Risky Derivatives from Holding Company to Taxpayer-Backstopped Depositors

[Ian David]

Bank of America Deathwatch: Moves Risky Derivatives from Holding Company to Taxpayer-Backstopped Depositors


If you have any doubt that Bank of America is in trouble, this development should settle it. I’m late to this important story broken this morning by Bob Ivry of Bloomberg, but both Bill Black (who I interviewed just now) and I see this as a desperate (or at the very best, remarkably inept) move by Bank of America’s management.

<snip>

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.

<snip>

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. 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.

More:
http://www.nakedcapitalism.com/2011/10/bank-of-america-deathwatch-moves-risky-derivatives-from-holding-company-to-taxpayer-backstopped-depositors.html

[lovuian]

1. derivitives is at the heart of this whole crisis

and they want the World to Bail them out as they walk out with trillions and no Jail time

they also take over our democracy and make us slaves

[StarsInHerHair]

10. derived from what? this basic question, pardon my ignorance, needs an answer

[Ilsa]

12. Here you go:

I got this from a survivalist blog: http://www.survivalblog.com/derivatives.html

"What are derivatives? The Derivatives Primer sums it up nicely in one sentence: "Derivatives are financial contracts designed to create pure price exposure to an underlying commodity, asset, rate, index or event." Another way of putting is it is that a derivative contract is a secondary or "derived" wager on the future price of an investment in an underlying market. It is much like the futures markets for stocks, bonds, and commodities. But a derivative can be something even more speculative. A derivative can be a bet on a incremental market change in yet another bet on an incremental change--in effect a hedge on a hedge, or bet on a bet. Derivatives are traded globally, and are less regulated than other financial markets. All traders like to hedge their bets. And these days they typically use exotic derivative contracts to do so."


http://www.financialpolicy.org/dscprimer.htm

[StarsInHerHair]

18. ah, spinning money out of air

[soryang]

19. The relevant derivatives in this case are credit default swaps...

...which are unregulated insurance policies insuring poorly priced debt abroad. They have no legally required reserves and before or after they go bad, they are moved to off balance sheet entities to keep them from affecting stock values or credit ratings of the insurer.

They are a time bomb created by unethical executives to make a quick profit, without consideration of future results. "Apres moi, le deluge."

This is why American financiers, like Geithner and his entourage of too big to fail banks are always telling Europes financiers what to do, American bank issuers of CDS crap contracts don't want to pay off because they can't, better to force Europeans into austerity and penury. But if all else fails, which most predict it will, just get the sucker American worker to pick up the tab.

[Puregonzo1188]

20. I believe they're largely based on currency speculation???

[leveymg]

2. Is it possible to identify the derivatives holders and do SEC action against them to stop them from

exercising their first option to grab these accounts under the 2005 bankruptcy law? In other words, a preemptive freeze of the status of troubled institutions and their counterparties as recognized, licensed financial industry entities? Does the SEC or Fed have that power to strip a bank of its ability to make its depositors accounts vulnerable to its own creditors, and to force healthier institutions to take receivership instead?

[riderinthestorm]

3. You'd need an Elizabeth Warren in there to ensure that happens. Geithner and Co. have

made sure nobody's watching the store to sound that alarm.

My bet? B of A walks away from this unscathed and untouched (and unmentioned except here on DU).

A stinking K and R for more exposure of criminal activity. Keith or Rachel or Tom Hartmann, you paying attention here??

[truedelphi]

14. Rachel promised to be well behaved ever since the President asked her to the WH

For dinner. She is told (I can only imagine) that should Republicans win, all the rights that the LGBT folks have gained will be taken away. Meanwhile, most Americans know in their hearts that the "Two Party System" is mere kabuki theater.

So she sure doesn''t say much of use about the real economic travesties that go on. Let Ron Paul mention we built a one billion dollar mausoleum to our American empire over in Iraq, and she quickly denounces Ron Paul - that embassy only cost a bit over 735 million!?!

But the real travesties regarding our nation don't seem to come under her purview.

[dd2003]

7. THE SEC works for them

not for us

[sarcasmo]

4. The Greedy parasite known as BOA can't die fast enough.

[Gin]

6. if they move the bad assets and we bail them out AGAIN

why would BOA be dead? won't that make their balance sheet good?

[AikidoSoul]

22. Hmmm. BOA. Like BOA Constrictor. Constrictor of our lives, our future,

our children's future.


:grr:

[benld74]

5. HOW is this even allowed?

[dd2003]

8. I hope everyone realizes as well what this means

If B of A were to go BK....People wouldnt have their money insured as there would not be enough money to pay them.... And if BAC goes bk, there will be other banks going with it... This could destroy so many lives and its very possible in the next 6 months when Europe implodes

[Aerows]

13. The Fed would have to print money to cover it

The inflation would make the crash of 2008 look like a vacation in the Hamptons.

Get ready for the hand-waving, and the economists lamenting "But no one could have seen this coming!". I'm not even an economist and I see exactly where this is headed. This is a purposeful attempt to destroy the economy altogether.

[Safetykitten]

9. Yes kids, this is what happens when you save the bank, they turn on you and eat you alive.

[L0oniX]

11. I hope Nov 5th drives a dagger into their soul.

[BOG PERSON]

16. your flower power is no match for their glower power

[bulloney]

15. Privatize the gain, socialize the loss. How many of these Wall Street bastards

really believe their 'free market' rhetoric.

[sarcasmo]

17. Back to the top , for the quick death of BOA.

[Quantess]

21. Interesting thread.

I'll have to read this one later.

[Major Hogwash]

23. This is going to be the straw that broke the camel's back!!

Especially if it occurs while there are already protestors in place!!

[MilesColtrane]

24. Deathwatch?

Impossible!

Someone here insisted, just the other day, that Bank of America is in fine shape because Warren Buffett invested a couple of billion he found in his couch cushions into the company.

My take was that the bank was a zombie and had been dead since it purchased Countrywide.