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)
Jill,
Did you watch the William Black video? Evidently, the FDIC didn’t give permission for this transfer–it was the FED. It’s been reported that FDIC leaked the story.
That’s great news Elaine. Hope they get an answer. I really wish, in the meantime, someone in the press would go after this story and not drop it until everything is exposed!!!
It’s not Tim’s “worst nightmare”, he’s part of the group instigating it!
All these actions, here and abroad, have something in common. They are a means to transfer ever more wealth to the very top. Tim Geithner is pushing for austerity and bank bail outs in Europe so that GS and all the other big players will be paid out in full for their gambling losses. Bailing out troubled banks will not help the vast majority of people. It will hurt us!
Too much of our newz is simply propaganda. In the BOA story, here is what actual reporting would look like. First, there would be a full and accurate accounting of the situation. We are pretty much getting that. This story is a little large to ignore! Here’s what information were not getting answered.
1. Who specifically “forced” the FDIC to not do it’s job? Was the FDIC really forced, or did they do this willingly because they are part of the “Inside Job”. Has the FDIC been stacked in favor of the banks by “regulatory capture”. Who are the people that made the decision? What are their ties to Wall Street? Why aren’t they making a transparent account of why they acted as they did?
Who specifically at the FED wanted this done? What is his or her name and ties to Wall Street? Is there some reason that person or persons from the FED will not come forward and lay out their “reasoning”? I don’t think this qualifies as a “state secret” and both the FED and FDIC claim it’s not illegal, so why the reluctance to explain the what and why (also who) of their actions?
Inquiring mind want to know!
Casey to Federal Bank Regulators: Must Ensure Risky Behavior by Banks Does Not Threaten Taxpayers
Questions in Light of Bank of America Move of Risky Derivatives to Taxpayer-backed Banking Unit
http://casey.senate.gov/newsroom/press/release/?id=f0126479-ae29-45be-83b8-3e79399f943e
Excerpt:
October 27, 2011
The Honorable Ben S. Bernanke
Chairman
Board of Governors of the Federal Reserve
The Honorable Martin J. Gruenberg
Acting Chairman
Federal Deposit Insurance Corporation
Mr. John G. Walsh
Acting Comptroller of the Currency
Administrator of National Banks
Dear Chairman Bernanke, Acting Chairman Gruenberg, and Acting Comptroller Walsh:
Section 23A of the Federal Reserve Act restricts transactions between banks and their nonbank affiliates, placing limits on the amount of each transaction relative to a bank’s capital and prohibiting purchases of certain “low-quality” assets.[1] The primary purposes of section 23A are protecting federally insured banks from riskier activities conducted by nonbank affiliates and preventing nonbank affiliates from benefitting from the subsidies provided by the federal safety net through the FDIC’s coverage of insured deposits.[2] Congress sought to reinforce these principles in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), by restricting banks and their affiliates from engaging in proprietary trading or investing in private equity and hedge funds, while also requiring banks to move certain derivatives activities to their non-bank affiliates.[3] The Dodd-Frank Act provides the Federal Deposit Insurance Corporation (FDIC) with authority as of July 21, 2012, to unilaterally reject any 23A exemption request from an insured depository institution.[4]
In the depths of the financial crisis, Goldman Sachs and Morgan Stanley converted to bank holding companies, in large part so as to participate in Federal Reserve programs designed to support them, including the Federal Reserve’s discount window. When the Federal Reserve granted a 23A exemption to Goldman Sachs Bank in 2009, Goldman moved its multi-purpose derivatives dealer into its insured bank affiliate. Likewise, Morgan Stanley converted to a bank holding company, and received a 23A exemption for its derivatives business. And JPMorgan Chase Bank, N.A., currently holds 99 percent of the notional derivatives of JPMorgan Chase & Co.[5] These actions signal a troubling policy shift that has weakened limitations on insured banks engaging in risky activities and significantly expanded the federal safety net.[6]
We write today regarding recent reports that Bank of America Corporation, the nation’s largest bank holding company by assets, has elected to transfer a substantial portion of its derivatives business from its broker-dealer affiliate Merrill Lynch & Company, Inc., to Bank of America, N.A. – the nation’s second largest bank by deposits. As of June 30, 2011, the insured bank held $53 trillion in derivatives, an increase of $14.85 trillion – or 39 percent – from its holding prior to the purchase of Merrill Lynch.[7] We are concerned because the reported transactions appear to violate the principles established in Section 23A of the Federal Reserve Act, and reinforced by Sections 619 and 716 of the Dodd-Frank Act, particularly “prevent[ing] the undue diversion of funds into speculative operations.”[8]
At a time when systemically important banks are increasing their capital relative to their credit risk, these transfers are having the effect of increasing Bank of America, N.A.’s credit risk relative to capital. Section 11 of the Federal Deposit Insurance Act provides derivatives counterparties with the ability to terminate, liquidate, or accelerate their derivatives claims. However, derivatives contracts generally are not subject to enforcement by the receiver.[9] As a result of this provision, the FDIC Deposit Insurance Fund – and ultimately, the U.S. taxpayer – could be required to backstop the insured bank’s derivatives losses in the event that the bank’s capital cushion proves inadequate. These potentially risky, largely over-the-counter, transactions are now being directly backstopped by the FDIC’s Deposit Insurance Fund – and ultimately the United States Treasury. This provides an additional safety net subsidy for one of the biggest derivatives dealers that is contrary to not only the principles, and potentially the strictures, of the Dodd-Frank Act, but also the original intent of the Federal Reserve Act and the Federal Deposit Insurance Act.
With respect to the recent actions by certain Federal banking regulators to waive restrictions or otherwise permit the largest institutions to put depositors and taxpayers at risk for the banks’ derivatives trading losses, we would like the regulators to answer the following questions:
– What supervisory policies of the Federal banking agencies are implicated by the establishment of a large derivatives trading operation within an insured depository institution?
– What was the policy basis for the decision by the Federal Reserve and the institution’s primary Federal banking regulator to allow large firms to put their derivatives trading operations in their insured depository institutions?
– What is your understanding of why insured depository institutions have asked their primary Federal banking regulator to allow their insured depository institutions to house their derivatives trading operations?
What was the justification for allowing the transfer of derivatives trading operations, and what factors did you evaluate in making those decisions?
– What risks arise to the insured depository institution as a result of having the derivatives business principally operated out of it?
– Given the extremely large size of the derivatives trading operations of some banks relative to their other business operations, could losses in a derivatives trading operation threaten the solvency of those insured depository institutions?
– What efforts are being undertaken by the FDIC to ensure that, depositors, the Deposit Insurance Fund, and taxpayers are not put at any additional risk?
– Has the FDIC considered adjusting its risk-adjusted premiums to reflect any additional risk, and if not, why not?
Because taxpayers may be exposed to losses to the Deposit Insurance Fund arising from certain regulatory exemptions for the transfer of Merrill Lynch’s derivatives transactions to Bank of America, N.A., it is also important to know:
– What are the amount, composition, quality, counterparty identity, and credit exposure of the derivative contracts transferred from Merrill Lynch to Bank of America, N.A.?
– Is it your understanding that the reported transfers were requested by Merrill Lynch’s counterparties?
– Do the reported transfers require Bank of America to obtain an exemption from Section 23A?
– Has Bank of America sought an exemption from Section 23A?
– If Bank of America has sought an exemption, what was the proffered rationale? Do you agree with this rationale?
– Have you granted, or do you expect to grant, Bank of America an exemption from Section 23A? If so, why?
– Have regulators accepted the living will submitted by Bank of America, pursuant to Section 165 of the Dodd-Frank Act?
– If a 23A exemption has been granted by the Federal Reserve, please provide any relevant written records, including interagency communications, concerning the granting of the exemption.
Bank holding companies are intended to serve as a source of strength to their subsidiaries.[10] Unfortunately, as former FDIC Chairman Sheila Bair has noted, “[d]uring the crisis, FDIC-insured subsidiary banks became the source of strength both to the holding companies and holding company affiliates.”[11] Congress, regulators, and other interested parties should take all necessary steps to ensure that these events do not repeat themselves.
We look forward to hearing your agencies’ respective views on this issue. Given the sensitive nature of these developments, we would request your responses by November 11th, 2011. Thank you for your prompt attention to this important matter.
Sincerely,
Sherrod Brown
United States Senator
Carl Levin
United States Senator
Jeff Merkley
United States Senator
Mark Begich
United States Senator
Richard Blumenthal
United States Senator
Tom Harkin
United States Senator
Robert P. Casey, Jr.
United States Senator
Bill Nelson
United States Senator
Sheldon Whitehouse
United States Senator
Maria Cantwell
United States Senator
Cc: The Honorable Timothy Geithner, Secretary, United States Department of the Treasury
HOLY BAILOUT – Federal Reserve Now Backstopping $75 Trillion Of Bank Of America’s Derivatives Trades
http://dailybail.com/home/holy-bailout-federal-reserve-now-backstopping-75-trillion-of.html
Excerpt:
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.
2008 Redux: Taxpayers to help bailout Merrill Lynch and Bank of America
Kenneth Schortgen Jr, Finance Examiner
http://www.examiner.com/finance-examiner-in-national/2008-redux-taxpayers-to-help-bailout-merrill-lynch-and-bank-of-america
Without regulatory permission, Bank of American on October 18th has moved potentially trillions of dollars worth of European derivatives into their depository arm to give it access to the Fed window, and backstopping by the FDIC and US taxpayers.
This move by Bank of America and its investment arm, Merrill Lynch, is an attempt to remain solvent, and hope for a bailout of its failed investments by the Fed and Treasury Department as the banking crisis in Europe threatens their balance sheets.
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. – Daily Bail
Bank of America is not the only financial institution attempting to use the taxpayers as a backstop to protect their potential losses, as according to Bloomberg, JP Morgan is also moving up to $79 Trillion in European backed derivatives to where they will be guarnteed by the FED, and the FDIC.
It appears that the banks are relying on the Too Big To Fail mentality of the Teasury Department, and the legislators in Washington to have little choice but to institute a bailout of massive proportions should these derivatives be called in for Euro failures. Only this time, the cost would be 10 times the amount taxpayers spent bailing out institutions during the 2008 credit crisis.
For the American people, these moves by Bank of America and JP Morgan should be severe warnings to just how bad the global credit crisis is becoming, and the potential for over $100 trillion in derivatives to be thrust on the US taxpayers. It is ironic that Merril Lynch once again is the center of controversy for too big to fail, but this time, there may not be enough dollars in circulation to save the banks should the worst case scenario come to pass.
Blouise,
I’m glad you had an enjoyable day communicating with your granddaughter. I had an enjoyable day too. Julia’s other grandmother joined me for lunch and we had an opportunity to visit with each other for a few hours.
Off screen and in the background I could hear my son-in-law repeating the new mantra … “Now be gentle … no, no, don’t pick kitty up that way …” over and over and over and ….
Elaine,
I tried to watch the Ravens/Steelers game this afternoon and got bored so I talked to my granddaughter via our iPads. She has a new kitten and had to show me every little thing she and kitty do together. It was special.
SwM,
Interesting side note … I talked to a group of original Tea Partyers … they are all Ron Paul supporters and resented like hell the co-opting of their “special” name by the “republican born-agains” (their wording, not mine). They are quite happy to have the fundies out and to get back their “Tea Party”. They aren’t the least bit interested in the abortion discussion or faith-based bullshit. They want to talk taxes and ending the wars.
rafflaw,
I edited my post to add the video.
Blouise & rafflaw,
I returned home from my day of babysitting less than an hour ago. My husband, daughter, and son-in-law went to see the Patriots today. I got to play with my granddaughter–which I’d much rather do than go to a football game.
*****
raff,
Jack behaved himself once I got him back into the house after his great escape.
Elaine,
That video was excellent and scary at the same time.
raff,
If one really believes in it … one has to stand-up for it.
Blouise,
Great work in Ohio!
Elaine,
Kudos … I was going to post the link to Black’s article … thank god I read your postings first … 🙂
Bank of America’s Death Rattle–with William Black
SwM,
Yep … all that work has been worth it … we marched, we beat drums, we did petitions, we went to court … every hurdle the teabaggers put in front of us, we jumped. We might even be able to beat Issues 1 & 3 but 2 is gonna go down big.
The polling shows if Ohio voters could do it over again they’d reelect Ted Strickland by a 55-37 margin over Kasich. Teabaggers are very unpopular and not admitting to Tea Party association … they want to be called republicans now … 😉
Good news Swarthmore!
Not with a Bang, but a Whimper: Bank of America’s Death Rattle
By William K. Black
http://neweconomicperspectives.blogspot.com/2011/10/not-with-bang-but-whimper-bank-of.html
Excerpt:
Ken Lewis’ “Scorched Earth” Campaign against B of A’s Shareholders
Acquiring Countrywide: the High Cost of CEO Adolescence
During this crisis, Ken Lewis went on a buying spree designed to allow him to brag that his was not simply bigger, but the biggest. Bank of America’s holding company – BAC – became the acquirer of last resort. Lewis began his war on BAC’s shareholders by ordering an artillery salvo on BAC’s own position. What better way was there to destroy shareholder value than purchasing the most notorious lender in the world – Countrywide. Countrywide was in the midst of a death spiral. The FDIC would soon have been forced to pay an acquirer tens of billions of dollars to induce it to take on Countrywide’s nearly limitless contingent liabilities and toxic assets. Even an FDIC-assisted acquisition would have been a grave mistake. Acquiring thousands of Countrywide employees whose primary mission was to make fraudulent and toxic loans was an inelegant form of financial suicide. It also revealed the negligible value Lewis placed on ethics and reputation.
But Lewis did not wait to acquire Countrywide with FDIC assistance. He feared that a rival would acquire it first and win the CEO bragging contest about who had the biggest, baddest bank. His acquisition of Countrywide destroyed hundreds of billions of dollars of shareholder value and led to massive foreclosure fraud by what were now B of A employees.
But there are two truly scary parts of the story of B of A’s acquisition of Countrywide that have received far too little attention. B of A claims that it conducted extensive due diligence before acquiring Countrywide and discovered only minor problems. If that claim is true, then B of A has been doomed for years regardless of whether it acquired Countrywide. The proposed acquisition of Countrywide was huge and exceptionally controversial even within B of A. Countrywide was notorious for its fraudulent loans. There were numerous lawsuits and former employees explaining how these frauds worked.
B of A is really “Nations Bank” (formerly named NCNB). When Nations Bank acquired B of A (the San Francisco based bank), the North Carolina management took complete control. The North Carolina management decided that “Bank of America” was the better brand name, so it adopted that name. The key point to understand is that Nations/NCNB was created through a large series of aggressive mergers, so the bank had exceptional experience in conducting due diligence of targets for acquisition and it would have sent its top team to investigate Countrywide given its size and notoriety. The acquisition of Countrywide did not have to be consummated exceptionally quickly. Indeed, the deal had an “out” that allowed B of A to back out of the deal if conditions changed in an adverse manner (which they obviously did). If B of A employees conducted extensive due diligence of Countrywide and could not discover its obvious, endemic frauds, abuses, and subverted systems then they are incompetent. Indeed, that word is too bloodless a term to describe how worthless the due diligence team would have had to have been. Given the many acquisitions the due diligence team vetted, B of A would have been doomed because it would have routinely been taken to the cleaners in those earlier deals.
That scenario, the one B of A presents, is not credible. It is far more likely that B of A’s senior management made it clear to the head of the due diligence review that the deal was going to be done and that his or her report should support that conclusion. This alternative explanation fits well with B of A’s actual decision-making. Countrywide’s (and B of A’s) reported financial condition fell sharply after the deal was signed. Lewis certainly knew that B of A’s actual financial condition was much worse than its reported financial condition and had every reason to believe that this difference would be even worse at Countrywide given its reputation for making fraudulent loans. B of A could have exercised its option to withdraw from the deal and saved vast amounts of money. Lewis, however, refused to do so. CEOs do not care only about money. Ego is a powerful driver of conduct, and CEOs can be obsessed with status, hierarchy, and power. Of course, Lewis knew he could walk away wealthy after becoming a engine of mass destruction of B of A shareholder value, so he could indulge his ego in a manner common to adolescent males.