{"id":185077,"date":"2011-10-18T20:36:00","date_gmt":"2011-10-19T01:36:00","guid":{"rendered":"https:\/\/www.panix.com\/~msaroff\/40years\/2011\/10\/18\/ok-this-aint-good\/"},"modified":"2011-10-18T20:36:00","modified_gmt":"2011-10-19T01:36:00","slug":"ok-this-aint-good","status":"publish","type":"post","link":"https:\/\/www.panix.com\/~msaroff\/40years\/2011\/10\/18\/ok-this-aint-good\/","title":{"rendered":"OK, This Ain’t Good\u2026\u2026\u2026\u2026"},"content":{"rendered":"

Bank of America is trying to take its Merrill Lynch’s dodgy derivatives division and move it to the FDIC insured bank<\/a>.<\/p>\n

Interestingly enough, this has created a conflict between the Federal Reserve (who want to green light this) and the FDIC (who oppose the move):<\/p>\n

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.<\/p>\n

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\u2019t 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\u2019t believe regulatory approval is needed, said people with knowledge of its position.<\/p>\n

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.<\/p>\n

\u201cThe concern is that there is always an enormous temptation to dump the losers on the insured institution,\u201d said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. \u201cWe should have fairly tight restrictions on that<\/b>.\u201d <\/p><\/blockquote>\n

(Emphasis mine<\/i>)<\/p>\n

Gee, you think? Keeping banks from moving risky investments to federally insured divisions is a bad thing?<\/p>\n

Moody\u2019s Investors Service downgraded Bank of America\u2019s long-term credit ratings Sept. 21, cutting both the holding company and the retail bank two notches apiece. The holding company fell to Baa1, the third-lowest investment-grade rank, from A2, while the retail bank declined to A2 from Aa3.
Moody\u2019s Downgrade<\/p>\n

The Moody\u2019s downgrade spurred some of Merrill\u2019s 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\u2019s decision, said a person familiar with the matter.<\/p>\n

\u2026\u2026\u2026<\/p>\n

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\u2019s 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.<\/p>\n

\u201cCongress doesn\u2019t want a bank\u2019s FDIC insurance and access to the Fed discount window to somehow benefit an affiliate, so they created a firewall,\u201d Omarova said. The discount window has been open to banks as the lender of last resort since 1914. <\/p>\n

\u2026\u2026\u2026<\/p>\n

In 2009, the Fed granted Section 23A exemptions to the banking arms of Ally Financial Inc., HSBC Holdings Plc, Fifth Third Bancorp, ING Groep NV, General Electric Co., Northern Trust Corp., CIT Group Inc., Morgan Stanley and Goldman Sachs Group Inc., among others, according to letters posted on the Fed\u2019s website.<\/p>\n

The central bank terminated exemptions last year for retail-banking units of JPMorgan, Citigroup, Barclays Plc, Royal Bank of Scotland Plc and Deutsche Bank AG. The Fed also ended an exemption for Bank of America in March 2010 and in September of that year approved a new one.<\/p>\n

Section 23A \u201cis among the most important tools that U.S. bank regulators have to protect the safety and soundness of U.S. banks,\u201d Scott Alvarez, the Fed\u2019s general counsel, told Congress in March 2008.<\/p><\/blockquote>\n

If Bank of America is not actually insolvent, they wouldn’t be doing this.  This is outright fraud.<\/p>\n

What’s more, the Federal Reserve is an active accomplice in this .<\/p>\n

H\/t Naked Capitalism<\/a>, where Yves Smith notes:<\/p>\n

This changes the picture completely. This move reflects either criminal incompetence or abject corruption by the Fed. Even though I\u2019ve 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,<\/b><\/i> which would have to make depositors whole after derivatives counterparties grabbed collateral. It\u2019s 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.<\/p>\n

But it\u2019s 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.<\/p><\/blockquote>\n

(emphasis original<\/i>)<\/p>\n

Evil, incompetent, and convinced of their own Objectivist virtue. Ayn Rands supermen in a nutshell.<\/p>\n","protected":false},"excerpt":{"rendered":"

Bank of America is trying to take its Merrill Lynch’s dodgy derivatives division and move it to the FDIC insured bank. Interestingly enough, this has created a conflict between the Federal Reserve (who want to green light this) and the FDIC (who oppose the move): Bank of America Corp. (BAC), hit by a credit downgrade …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[970,969,1004,985],"tags":[],"class_list":["post-185077","post","type-post","status-publish","format-standard","hentry","category-corruption","category-evil","category-finance","category-regulation"],"_links":{"self":[{"href":"https:\/\/www.panix.com\/~msaroff\/40years\/wp-json\/wp\/v2\/posts\/185077"}],"collection":[{"href":"https:\/\/www.panix.com\/~msaroff\/40years\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.panix.com\/~msaroff\/40years\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.panix.com\/~msaroff\/40years\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.panix.com\/~msaroff\/40years\/wp-json\/wp\/v2\/comments?post=185077"}],"version-history":[{"count":0,"href":"https:\/\/www.panix.com\/~msaroff\/40years\/wp-json\/wp\/v2\/posts\/185077\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.panix.com\/~msaroff\/40years\/wp-json\/wp\/v2\/media?parent=185077"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.panix.com\/~msaroff\/40years\/wp-json\/wp\/v2\/categories?post=185077"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.panix.com\/~msaroff\/40years\/wp-json\/wp\/v2\/tags?post=185077"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}