Bank of America: Holding Depositors Hostage

Is It Time To Close Down Bank of America?

This is precisely the sort of arbitrage that ought to lead people straight to a nice date with Bubba:

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.

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.

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.

Incidentally, the amount of exposure in question is unknown but Bank of America has some $53 trillion in total derivative exposure (out of $75 trillion in total between it and Merrill, which is also a subsidiary of the holding company.)

Of course we do not know how much was shifted and BAC won’t comment on the record — but this sort of movement of liabilities should be flatly prohibited as the counterparty in question accepted the risk of the entity they traded with originally when the transaction was first initiated.  That the firm’s ratings have deteriorated and thus it may be required to post additional capital against these positions by those counterparties does not justify shifting the risk to depositors simply so the bank can avoid posting collateral against a deteriorating credit picture, which for all intents and purposes shifts the risk to the taxpayer since the FDIC has a line of credit at Treasury.  Never mind that posting that collateral should not materially impair operations.

After all the firm does have an excellent capital ratio.  Why they said so just this morning!

I can think of a handful of rather bemusing (and some not-very-funny) possibilities along the line of “speck into a snowball” issues that may arise in time on this deal, but for now I’ll sit with a wry smile and see what develops since at this point I have nothing to go on other than conjecture.  Feel free to speculate yourself in the comment section if you’d like… after all that’s exactly what Bank of America openly invited when they refused to document exactly what was moved, in what amounts, what the actual net exposure is and why the step was taken.

We need to rename Bank of America DAFFY DUCK!


Karl Denninger


Adding to Karl’s analysis, from the Bloomberg article cited:

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’s website.

Anyone remember those 23A Letter exemptions?  We wrote about those extensively back in 2008.  These letters basically allowed the banks to run two sets of books.  One set was on the record, meaning that was from where tier 1 capital ratios (among other things) were derived, and another set of books that no one got to see and were not counted in tier 1 capital.  Guess what’s on the hidden set of books?  If you guessed a bunch of defaulted or defaulting debt, you’d win the prize.  So, what is being run here is a massive accounting fraud; one that would make Arthur Andersen of Enron notoriety look like angels.

They’re using depositors’ money to backstop their bad loans and the government made it LEGAL for them to do so.   These aren’t just bad mortgages either, these are various and sundry toxic products with which BAC and other big Wall Street banks were playing hot-potato for nearly a decade.  Most homeowners have taken their loss; they’ve been foreclosed upon or will be in the near future, but where are the losses to the banks for their purposeful and intentional selling of mortgages to people who couldn’t pay?!  Those losses have all been shifted to the taxpayer and since that apparently, wasn’t adequate, they have now shifted it to THEIR DEPOSITORS!  One set of laws for them and another set for us.

Tell me again why Glass-Steagall was repealed?  Oh yeah, the banks didn’t want it; so, Congress obliged.  Why hasn’t anyone on EITHER side of the aisle proposed an immediate reinstatement of Glass-Steagall?  Same reason.  Banks don’t want it and they pay Congress to make sure they won’t get it.

So, to summarize for those in the cheap seats, Bank of America is essentially holding a gun to the heads of their depositors and daring anyone to screw with them.

Message to anyone still having money on deposit with Bank of America:  You’re being held hostage.

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