Politics

Bank of America & The Great Derivatives Transfer

Submitted by Elaine Magliaro, Guest Blogger

In an article titled Another Weapon for OWS: Pull Your Money Out of BofA, Matt Taibbi wrote that “when it comes to commercial banking, Bank of America is as bad as it gets.” He said he believed the markets seemed to agree as the bank had a credit downgrade recently “to just above junk status.”

He continued: The only reason the bank is not rated even lower than that is that it is Too Big To Fail. The whole world knows that if Bank of America implodes – whether because of the vast number of fraud suits it faces for mortgage securitization practices, or because of the time bomb of toxic assets on its balance sheets – the U.S. government will probably step in to one degree or another and save it.

After the credit downgrade in September, Bloomberg reported that Bank of America “moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits…” Taibbi said the transfer involved trillions of dollars in risky derivatives contracts.

According to 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.

Here’s how Ryan Chittum explained it in the Columbia Review of Journalism: Bank of America moved risky insurance contracts to a taxpayer-insured company, ostensibly to save money. The FDIC, which would now be on the hook for losses if the derivatives collapse, is not happy, and the move raises more questions about the health of Bank of America, which has already seen its market value sliced in half this year.

Kirsten Pittman reported in The Charlotte Observer that more than a dozen Democratic members of Congress are concerned about the reported transfer “of financial instruments from Merrill Lynch into the bank’s deposit-taking arm”—which they say “could put taxpayers on the hook for big losses – three years after the bank received billions in bailouts from the federal government.” The Congressmen wrote to federal regulators to ask why they allowed the movement of derivatives into the retail bank, which has deposits that are insured by the FDIC. In a statement, Rep. Brad Miller of North Carolina said, “This kind of transaction raises many issues of obvious public concern. If the bank subsidiary failed, innocent taxpayers could end up paying off exotic derivatives.”

William Black, a professor of economics and law at the University of Missouri-Kansas City and a former bank regulator, said, “The concern is that there is always an enormous temptation to dump the losers on the insured institution. We should have fairly tight restrictions on that.”

So much for financial reform. Just three years ago, Bank of America received $45 billion in bailout money during the financial crisis. It doesn’t seem that much has changed since 2008, does it?

Edited to Add:

SOURCES

BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit (Bloomberg)

Bloomberg Eyes Bank of America’s Derivatives Move (Columbia Review of Journalism)

Another Weapon for OWS: Pull Your Money Out of BofA (Matt Taibbi)

Bank of America derivatives transfer is criticized by Democrats in Congress (The Charlotte Observer/McClatchy)

106 thoughts on “Bank of America & The Great Derivatives Transfer”

  1. anon nurse,

    Sadly, yes … the security stuff my friend set up on my computer deletes everything the second I close my browser … and then washes & bleaches (7 passes). It’s a good security system but I have to remember to bookmark anything I want to keep … which I forgot to do this time.

    It was an article about the Obama administration, the widespread and deeply embedded bank fraud in every state and the ramifications on the financial markets of a full investigation.

    It was not a pro-Obama piece.

    There were many points raised in that article which I know everyone would find interesting but without the article to source and to refresh my memory, I’m hesitant to write about it.

  2. Blouise,

    Do you delete “history” links? If not, maybe you could still locate it. (I’d like to read it, of course…)

  3. Elaine,

    I”m appealing to your knowledge of articles written on this matter … the other day I read an article (I think it was in the NYTimes) about the bank fraud being so deep throughout all 50 states and almost every foreign country that investigating it would cause a world-wide collapse of all financial markets.

    It was an interesting article and I failed to bookmark it. I have spent the last hour trying to find it … does it ring a bell with you?

  4. It’s not clear to me why the FDIC can’t”just say no” to the transfer of these derivatives to an entity whose deposits it is required to insure. Doesn’t the FDIC have any control over BofA? What consideration did BofA receive for assuming this liabilty? You can’t just transfer liabilities between entities without the recipient receiving fair equivalent value. Something doesn’t sound right here.

  5. Thanks, Blouise. The picture of Black talking to Moyers refreshed my memory. I’ve seen him interviewed on TV before. I’ve heard about his book–but haven’t read it. I think I’ll get a copy of it.

  7. Elaine,

    Sherrod Brown sent out emails to constituents as he was preparing to take this action … he keeps us informed.

    Here’s a video and transcript of an interview Bill Moyers did with William Black, a bank regulator from the 1980’s and author of the book, “The Best Way to Rob a Bank Is to Own One.” He lays it out quite nicely and like with most criminal activity … it’s not all that complicated. Look for the term ” Liars’ Loans” in the transcript.

    Excerpt:

    “BILL MOYERS: How do they (CEO’s) get away with it? I mean, what about their own checks and balances in the company? What about their accounting divisions?

    WILLIAM K. BLACK: All of those checks and balances report to the CEO, so if the CEO goes bad, all of the checks and balances are easily overcome.: …”

    http://www.pbs.org/moyers/journal/04032009/watch.html

  8. The FDIC is getting used here and the financial world understands it. If Dodd-Frank does give them the authority to put BOA under receivership, what are they waiting for? Fail the bastards.

  11. Elaine,

    I’m with others–this is a timely, well researched post. Thanks!

    The one thing that irks me about all the reporters is they fail to ask who forced the FDIC to do this. This action contradicts that fiduciary duty of the FDIC. If they were forced to do it, who made them?

  12. why do people glamourize pirates? why do they think they are anything but the creepy crooks that they are?

    they are not nice….

  14. Those poor, poor bankers! Forced to commit fraud to make yacht money for upper management! Oh, the horror!

    Great article, Elaine.

  15. William Black, a professor of economics and law at the University of Missouri-Kansas City and a former bank regulator, said, “The concern is that there is always an enormous temptation to dump the losers on the insured institution. We should have fairly tight restrictions on that.”

    So much for financial reform. Just three years ago, Bank of America received $45 billion in bailout money during the financial crisis. It doesn’t seem that much has changed since 2008, does it?

    Excellent article…..Not much has changed….except the greedy get greedier….

  17. Bank of America Derivatives Transfer Draws Lawmaker Scrutiny
    Bloomberg Businessweek
    November 01, 2011
    http://www.businessweek.com/news/2011-11-01/bank-of-america-derivatives-transfer-draws-lawmaker-scrutiny.html

    Excerpt:
    Eighteen lawmakers signed onto letters from Representative Brad Miller and Senator Sherrod Brown seeking information about whether agencies consulted on the transfer considered the potential impact on the bank’s health and customer accounts.

    “Because of the favored treatment of derivative contracts in receivership, it appears highly likely that losses on derivatives would result in losses to insured deposits ultimately borne by taxpayers,” Miller wrote in his letter, which was signed by eight House Democrats. The transfers were first reported by Bloomberg News on Oct. 18.

    Democratic lawmakers, many of whom sought Dodd-Frank Act amendments to wall off banks’ customer deposits from risky businesses such as derivatives trading, are pressing the Financial Stability Oversight Council for information on its role and oversight of the transaction

  18. Why the FDIC is Upset With Bank of America’s Derivatives Transfer Despite Dodd-Frank
    Daily Kos
    11/2/2011
    http://www.dailykos.com/story/2011/11/02/1032356/-Why-the-FDIC-is-Upset-With-Bank-of-Americas-Derivatives-Transfer-Despite-Dodd-Frank

    Excerpt:
    Also, this diary explains why the FDIC is pissed at The Federal Reserve for allowing Bank of America (BOA or BofA) to transfer into BofA’s banking unit all the junk derivatives BOA acquired when they bought Merrill Lynch . As you may recall, the FDIC insures BOA’s depositors against losses as the result of any potential insolvency of bankruptcy.

    Under the Bankruptcy Reform Act of 2005, Derivatives’ Counter-parties were given a preference over all other creditors and customers of a Financial Institution (including FDIC insured depositors). Bank of America recently moved all of their Merill Lynch Derivatives to their Banking Unit, causing the FDIC to object that this move subjects them to potential risk that they would become insolvent should BofA file for Bankruptcy. Yet supposedly, the provisions in the Bankruptcy Reform Act of 2005 that gave Counter-parties these special priorities over regular depositors was overridden by Dodd-Frank’s financial reforms. Some diarists have argued that the FDIC can step in under Dodd-Frank and place the Bank of America into a receivership outside of the Bankruptcy Court’s jurisdiction, thus protecting American taxpayers from bailing out BOA and its derivatives counter-parties again.

    So what’s FDIC’s beef with what Bank of America did in transferring likely trillions of dollars of junk derivatives from Merill Lynch to their banking unit? Can’t they just ride Dodds-Frank to the rescue of BOA’s depositors (and the FDIC’s own reserves) in the event BOA files for Chapter 11? Well, as with most issues, the devil is in the details, and the details of an FDIC receivership under the rules established by the Dodd-Frank reform legislation are devilish indeed.

    For starters, the FDIC does not have the sole right to prevent BOA or any other Too Big To Fail Bank from using the Bankruptcy Code to prefer payment to derivatives’ counter-parties before making FDIC insured depositors whole.

  20. “The FDIC, which would now be on the hook for losses if the derivatives collapse, is not happy, and the move raises more questions about the health of Bank of America”

    It raises even more questions about the health of the federal government because it has no immunity to the diseases of big banks.

    Little wonder that the people seem psychologically prepared for a military takeover.

Comments are closed.