Wednesday, October 19, 2011

The Federal Reserve and Bank of America Initiate a Coup to Dump Billions of Dollars of Losses on the American Taxpayer....


The Federal Reserve and Bank of America Initiate a Coup to Dump Billions of Dollars of Losses on the impoverished American Taxpayer....



Bloomberg reports that Bank of America is dumping derivatives onto a subsidiary which is insured by the government – i.e. taxpayers.

Yves Smith notes:

If you have any doubt that Bank of America is going down, this development should settle it …. Both [professor of economics and law, and former head S&L prosecutor] Bill Black (who I interviewed just now) and I see this as a desperate move by Bank of America’s management, a de facto admission that they know the bank is in serious trouble.

The short form via Bloomberg:

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

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.

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.

And remember, as we have indicated, there are some “derivatives” that should be eliminated, period. We’ve written repeatedly about credit default swaps, which have virtually no legitimate economic uses (no one was complaining about the illiquidity of corporate bonds prior to the introduction of CDS; this was not a perceived need among investors). They are an inherently defective product, since there is no way to margin adequately for “jump to default” risk and have the product be viable economically. CDS are systematically underpriced insurance, with insurers guaranteed to go bust periodically, as AIG and the monolines demonstrated.

The reason that commentators like Chris Whalen were relatively sanguine about Bank of America likely becoming insolvent as a result of eventual mortgage and other litigation losses is that it would be a holding company bankruptcy. The operating units, most importantly, the banks, would not be affected and could be spun out to a new entity or sold. Shareholders would be wiped out and holding company creditors (most important, bondholders) would take a hit by having their debt haircut and partly converted to equity.

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.

The FDIC is understandably ripshit. Again from 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.

Well OF COURSE BofA is gonna try to take the position this is kosher, but the FDIC can and must reject this brazen move. But this is a bit of a fait accompli,and I have NO doubt BofA and the craven, corrupt Fed will argue that moving the derivatives back will upset the markets. Well too bad, maybe it’s time banks learn they can no longer run roughshod over regulators. And if BofA is at that much risk that it can’t survive undoing this brazen move, that would seem to be prima facie evidence that a Dodd Frank resolution is in order.

Bill Black said that the Bloomberg editors toned down his remarks considerably. He said, “Any competent regulator would respond: “No, Hell NO!” It’s time that the public also say no, and loudly, to this new scheme to loot taxpayers and save a criminally destructive bank.

Professor Black provided a “bottom line” summary in a separate email:

1.The bank holding company (BAC) is moving troubled assets held by an entity not insured by the public (Merrill Lynch) to the Bank of America, which is insured by the public
2. The banking rules are designed to prevent that because they are designed to protect the FDIC insurance fund (which the Treasury guarantees)
3. Any marginally competent regulator would say “No, Hell NO!”
4. The Fed, reportedly, is saying “Sure, no worries” by allowing the sale of an affiliate’s troubled assets to B of A
5. This is a really good “natural experiment” that allows us to test whether the Fed is protects the public or the uninsured and systemically dangerous institutions (the bank holding companies (BHCs))
6. We are all shocked, shocked [sarcasm] that Bernanke responded to the experiment by choosing to protect the BHC at the expense of the public.

Karl Denninger writes:

So let’s see what we have here.

Bank customer initiates a swap position with Bank. In doing so they intentionally accept the credit risk of the institution they trade with.

Later they get antsy about perhaps not getting paid. Bank then shifts that risk to a place where people who deposited their money and had no part of this transaction wind up backstopping it.

This effectively makes the depositor the “guarantor” of the swap ex-post-facto.

That the regulators are allowing this is an outrage.

If you’re a Bank of America customer and continue to be one you deserve whatever you get down the line, whether it comes in the form of higher fees and costs assessed upon you or something worse.

Stand Up to the Coup....

Bank of America has repeatedly become insolvent due to fraud and risky bets, and repeatedly been bailed out by the government and American people. The government and banks are engineering an age of permanent bailouts for this insolvent, criminal bank (and the other too big to fails). Remember, this is the same bank that is refusing to let people close their accounts.

This is yet another joint effort by Washington and Wall Street to screw the American people, and to trample on the rule of law.

The American people will be stuck in nightmare of a never-ending depression (yes, we are currently in a depression) and fascism (or socialism, if you prefer that term) unless we stand up to the overly-powerful Fed and the too big to fail banks.....

American Protest Demands Don’t Need to Be More Specific Than Egyptian Protesters’ Demands.....

The Main Demand of the Egyptian Protesters … Throw the Bums Out

The main demand of the Egyptian protesters was that Hosni Mubarak and his cronies leave power.

Why should the demands of the American protesters be held to a higher standard?

As former IMF chief economist Simon Johnson notes, the American finance industry has effectively captured our government in a “quiet coup”, a state of affairs that is at the center of many emerging-market crises, and that recovery will fail unless we break the financial oligarchy that is blocking essential reform.

Inequality in America is worse than in Egypt (or Tunisia, Yemen or most Latin American banana republics).

The U.S. has become a kleptocracy, an oligarchy, a banana republic, a socialist or fascist state … which acts without the consent of the governed. There is a malignant symbiotic relationship between the governmental leaders and their cronies, which makes a handful rich on at the public trough (in the same way that the Mubarak family raked in between U.S. $40 and $70 billion dollars through bribes and cronyism).

Remember, Mubarak pretended that he was going to offer concessions or negotiate several times. But the protesters would have none of it. They demanded Mubarak leave.

The same government despots (Bernanke and the rest of the knuckleheads at the Fed, Geithner, and various other Goldman alums and proteges of Robert Rubin) and the same Wall Street manipulators (Blankfein, Dimon, etc.) are still on their thrones causing mischief. Nothing will change while these guys are still in charge.

Why can’t Americans – like the Egyptians – demand that the bums be thrown out?

While America’s protesters don’t need to give any list of official demands breaking up the unholy alliance which is destroying our country and removing vampires from both government and Wall Street who are most responsible for blocking reform is a perfectly good demand all by itself. As Gordon Duff – senior editor at Veterans Today – says, it’s “time for regime change” in the U.S.

The Egyptian Protesters’ Other Demands

The Atlantic provided a translation of the Egyptian protester’s demands in January:

Page%202 rev2 thumb 600x424 41209 American Protest Demands Dont Need to Be More Specific Than Egyptian Protesters Demands
The second demand of the Egyptians was for the cessation of emergency law. This is – believe it or not – applicable to America. We have been in a constant state of national emergency – and perhaps a suspension of the Constitution through “continuity of government” operations – since 9/11.

The third demand was for freedom. Given that Obama is trying to expand spying well beyond the Bush administration’s programs (indeed, the Obama administration is arguing that citizens should never be able to sue the government for illegal spying) and that the U.S. government uses anti-terrorism laws to crush dissent, tortures people it doesn’t like – sometimes even U.S. citizens (see this and this) – and also assassinates people it doesn’t like … even U.S. citizens (update) … we’re not very free.

Justice was the fourth demand. If you think we have justice in modern America, ....

The fifth is for a non-military government, which serves the needs of the people. We want the same in America. Americans want our troops brought home, but Obama has implemented plans for war throughout the Middle East crafted by the Neoconservatives a decade (or more) ago, and gotten us into 7 (oops …8) wars. The U.S. itself has also become highly militarized.

The sixth demand was for the constructive administration of all of the country’s resources. In fact, America’s resources are being raped by and for the handful of looters, just like Egypt’s were.

These demands – throwing the bums in Washington and Wall Street who caused this mess, ending emergency law, restoring our freedom, justice for all and the enforcement of the rule of law (throw all of the guys who caused this crisis into “pound-me-in-the-ass prison”), a non-militarized government, and the use of the nation’s resources in a way which most benefits the American people – are pretty good for America, as well as Egypt.

Postscript: The Egyptians are currently struggling against a brutal military who is refusing to hand over power to the civilian leadership. The situation is currently serious, and is not getting much press in the U.S.

Some argue that the military crackdown moots the successful revolution against Mubarak and shows that it didn’t do anything constructive. Others argue that the revolution against Mubarak was successful, and must be judged on its own merits, and that a second revolution is now needed against the Egyptian military.

The fifth demand – formation of a non-military government – has not yet occurred. So in reality, the original revolution is still continuing.....

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