Bloomberg News reports that Bank of America (with Federal Reserve approval) put Merrill Lynch credit-default swaps into BofA’s deposit-holding arm after a credit downgrade caused counterparties to demand it put up billions more in collateral.
Got that? Probably not, so let’s put it another way: 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.
Bill Black puts it this way in a Bloomberg quote:
“The concern is that there is always an enormous temptation to dump the losers on the insured institution.”
And Yves Smith says this:
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.
Bob Ivry, Hugh Son, and Christine Harper report that the downgrade would have required BofA to put up more than $3.3 billion in collateral to back up the credit-default swaps it bought when it purchased Merrill Lynch in 2008. They report that JPMorgan Chase already holds virtually all of its massive derivatives portfolio in its deposit-taking arm. Has it always done that?
Meantime, The New York Times’s Binyamin Appelbaum reports this on Twitter:
Simon Johnson, throwing bombs at Boston Fed conference, says @bobivry story “looks terrible” for Fed, asks audience if it’s true. Silence.
At base, the question here is why is Bank of America only now moving these derivatives to its depositary institution and why the Fed is willing to help it do so, despite the fact that its own rules are designed to prevent it.
Smith and Black say that this move smacks of “desperation” on the part of Bank of America. If so, it does for the Fed too, which Bloomberg says wants “to give relief to the bank holding company.”
Good work by Bloomberg here keeping an eye out for taxpayers.
You know what would make this piece just right? A mention of just two words and the history that goes with them.
Glass/Stegall.
The government should not be on the hook for the bets of an investment bank which is impossible when you allow a deposit and investment bank to merge.
#1 Posted by Thimbles, CJR on Wed 19 Oct 2011 at 11:28 PM
this is a straight up bank robbery , with FED complicity .
BofA didn't pay the FDIC to insure these derivatives or approve of the collateral swap
the US Government needs to seize BofA before they pull this off
#2 Posted by blindman, CJR on Thu 20 Oct 2011 at 01:44 PM
"Johnny Cash" knows the solution: http://www.youtube.com/watch?v=AuMtzTHLGGQ&feature=player_detailpage#t=30s
#3 Posted by Dan A., CJR on Thu 20 Oct 2011 at 04:00 PM
The government should not be insuring deposits. PERIOD.
All of the government financial regulatory crapola - FDIC, SIPC, FSLIC/OTS/OCC/CFPB, PBGC.... All of it is designed to somehow keep the "reward" to investors while eliminating the "risk".
It doesn't work. Putting the taxpayers on the hook for losses only encourages imprudent investment and eliminates accountability.
#4 Posted by padikiller, CJR on Thu 20 Oct 2011 at 04:55 PM
The collusion between BofA and the Federal Reserve is total. Congress needs to pass immediate legislation retroactively prohibiting the holding of these kind of assets by federally insured entities. Essentially the taxpayer is footing the bill for the additional $3 billion in collateral that BofA should have paid out of its own pocket. Absolute baloney.
#5 Posted by Andrew B Williams, CJR on Thu 20 Oct 2011 at 08:44 PM
Speaking of William Black, Bernie Sanders - the only guy who's been investigating the energy market manipulation from 2008 and the only guy who fought the bush tax cut capitulation in 2010 is gearing up for a new fight, against the federal reserve.
And he's called in some friends, many of the guys that should have been on Obama's speed dial in 2007-08.
http://neweconomicperspectives.blogspot.com/2011/10/us-senator-bernie-sanders-dream-team.html
"Nobel Prize-winning economist Joseph Stiglitz and other nationally-renowned economists agreed today to serve on a panel of experts to help Sen. Bernie Sanders (I-Vt.) draft legislation to reform the Federal Reserve.
Sanders announced formation of his expert advisory panel in the wake of a damning report that faulted apparent conflicts of interest by bank-picked board members at the 12 regional Fed banks.
Top executives from Goldman Sachs, J.P. Morgan Chase, General Electric and other firms sat on the boards of regional Federal Reserve banks while their firms benefited from the central bank's policies during the financial crisis, the Government Accountability Office investigation found. The dual roles created an appearance of a conflict of interest, according to the GAO."
Who did he pick?
"Joseph Stiglitz, the 2001 winner of the Nobel Prize. The economics professor at Columbia University is a former chief economist for the World Bank.
Jeffrey Sachs, director of The Earth Institute and an economics professor at Columbia University. He also is special advisor to United Nations Secretary-General Ban Ki-moon.
Robert Reich, Professor of Public Policy at the University of California, Berkeley. Reich has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He also served on President-Elect Obama's transition advisory board. In 2008, Time Magazine named him one of the ten most successful cabinet secretaries of the century.
James K. Galbraith, Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government at the Lyndon B. Johnson School of Public Affairs, University of Texas at Austin. Galbraith served in several positions on the staff of the U.S. Congress, including Executive Director of the Joint Economic Committee.
Lawrence Mishel, president of the Economic Policy Institute, the premier research organization focused on U.S. living standards and labor markets.
William Black, associate professor of economics and law at the University of Missouri, Kansas City. He worked with the Federal Home Loan Bank Board, the Federal Savings and Loan Insurance Corporation and the Office of Thrift Supervision.
Nomi Prins, a senior fellow at Demos, was a managing director at Goldman Sachs, a senior manager at Bear Stearns in London, a senior strategist at Lehman Brothers, and an analyst at the Chase Manhattan Bank (now JPM Chase)
William Greider, author of Secretsof the Temple: How the Federal Reserve Runs the Country, a monumental account of how the American central bank, cloistered and protected from public accountability, exercises its control over the US economy - workers, consumers, investors.
Jane D'Arista, an Economic Policy Institute research associate, has written on the history of U.S. monetary policy and financial regulation, The former Boston University School of Law professor previously served as a staff economist for Congress.
Tim Canova, professor of economics and law and co-director of the Center for Global Law & Development at the Chapman University School of Law in Orange, Calif. He was an early critic of financial deregulation and warned of the dangers
#6 Posted by Thimbles, CJR on Sat 22 Oct 2011 at 11:59 PM
Speaking of William Black, Bernie Sanders - the only guy who's been investigating the energy market manipulation from 2008 and the only guy who fought the bush tax cut capitulation in 2010 is gearing up for a new fight, against the federal reserve.
And he's called in some friends, many of the guys that should have been on Obama's speed dial in 2007-08.
http://neweconomicperspectives.blogspot.com/2011/10/us-senator-bernie-sanders-dream-team.html
"Nobel Prize-winning economist Joseph Stiglitz and other nationally-renowned economists agreed today to serve on a panel of experts to help Sen. Bernie Sanders (I-Vt.) draft legislation to reform the Federal Reserve.
Sanders announced formation of his expert advisory panel in the wake of a damning report that faulted apparent conflicts of interest by bank-picked board members at the 12 regional Fed banks.
Top executives from Goldman Sachs, J.P. Morgan Chase, General Electric and other firms sat on the boards of regional Federal Reserve banks while their firms benefited from the central bank's policies during the financial crisis, the Government Accountability Office investigation found. The dual roles created an appearance of a conflict of interest, according to the GAO."
Who did he pick?
"Joseph Stiglitz, the 2001 winner of the Nobel Prize. The economics professor at Columbia University is a former chief economist for the World Bank.
Jeffrey Sachs, director of The Earth Institute and an economics professor at Columbia University. He also is special advisor to United Nations Secretary-General Ban Ki-moon.
Robert Reich, Professor of Public Policy at the University of California, Berkeley. Reich has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He also served on President-Elect Obama's transition advisory board. In 2008, Time Magazine named him one of the ten most successful cabinet secretaries of the century.
James K. Galbraith, Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government at the Lyndon B. Johnson School of Public Affairs, University of Texas at Austin. Galbraith served in several positions on the staff of the U.S. Congress, including Executive Director of the Joint Economic Committee.
Lawrence Mishel, president of the Economic Policy Institute, the premier research organization focused on U.S. living standards and labor markets.
William Black, associate professor of economics and law at the University of Missouri, Kansas City. He worked with the Federal Home Loan Bank Board, the Federal Savings and Loan Insurance Corporation and the Office of Thrift Supervision.
Nomi Prins, a senior fellow at Demos, was a managing director at Goldman Sachs, a senior manager at Bear Stearns in London, a senior strategist at Lehman Brothers, and an analyst at the Chase Manhattan Bank (now JPM Chase)
William Greider, author of Secretsof the Temple: How the Federal Reserve Runs the Country, a monumental account of how the American central bank, cloistered and protected from public accountability, exercises its control over the US economy - workers, consumers, investors.
Jane D'Arista, an Economic Policy Institute research associate, has written on the history of U.S. monetary policy and financial regulation, The former Boston University School of Law professor previously served as a staff economist for Congress.
Tim Canova, professor of economics and law and co-director of the Center for Global Law & Development at the Chapman University School of Law in Orange, Calif. He was an early critic of financial deregulation and warned of the dangers
#7 Posted by Thimbles, CJR on Sun 23 Oct 2011 at 12:03 AM
...and a bunch of other people you can read for yourself
The names I bolded are people I know should be getting their hands dirty. The ones I didn't, not familiar enough with them to know or not really the economic types to be setting policy, but informative all the same.
Why has it taken so long for anyone to get these guys together and why has it taken a lone socialist senator? Seriously, is the level of care for the country's economic future so small so small by the political class that they decided to leave its fate in the inept hands of Larry Summers and Tim Geithner? That was the best they could do?
#8 Posted by Thimbles, CJR on Sun 23 Oct 2011 at 12:16 AM
He ought to ask Herman Cain to join in, given his experience with the Federal Reserve system.
#9 Posted by padikiller, CJR on Sun 23 Oct 2011 at 08:17 AM