Following Keith's interesting piece, "Pistols at Dawn" (which doubtless
sent the savvy list members straight off to their brokers), and watching
gold and silver bolt sharply up today, I read this CounterPunch article
and had to agree, something big is going down right now. If what is
outlined below is in fact happening, we are likely to see the US economy
tank before the EU dissolves. In fact, it could strengthen the EU's
resolve to hold it together and take advantage of a fast declining
dollar in order to help stabilize the Euro, if that's still possible.
Not that that's good or bad, just that that's how things tend to happen.
I don't wish to live through the decline of either currency, unless it's
a balancing, but obviously there are many quite eager to take advantage
of tax payers again. Will TARP II succeed in being passed?
It's been amusing to listen to the American side cast blame on the EU
for all economic incompetence and inaction, with the press eating it
right up.
Natalia
Is Bank of America Headed for the Glue Factory?
By Mike Whitney
CounterPunch
October 21, 2011
http://www.counterpunch.org/2011/10/21/is-bank-of-america-headed-for-the-glue-factory/
Why is Bank of America moving derivatives from Merrill
Lynch to an insured subsidiary? Is it because the
derivatives could blow up at any time leaving Merrill
with gigantic, unsustainable losses? If that's the
case, then it would make perfect sense to shift them
into a depository institution that's covered by the
FDIC. That way, the taxpayers would wind up paying for
the damage and no one would be the wiser. It's like a
stealth bailout, right? The only problem is that
Bloomberg let the cat out of the bag, so now everyone
knows what's going on. And that's going to be a very
big problem for B Of A. Here's a clip from the
Bloomberg article:
"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.
"Three years after taxpayers rescued some of the
biggest US 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 US
firms." ("BofA Said to Split Regulators Over Moving
Merrill Derivatives to Bank Unit", Bloomberg)
There are two things worth noting in this article.
First, according to Bloomberg, "the transfers (of
derivatives) are being requested by counterparties."
Well, how do you like that? In other words, the
investors on the other side of these contracts want
Merrill to put them under an insurance umbrella
provided by the FDIC.
Now, why would that be? The only reason I can come up
with, is that they know that a lot of these complex
instruments are undercapitalized and ready to implode,
so they want to make sure they get their money back any
way possible. That means they need to latch on to Uncle
Sam without anyone knowing about it. But, like we said,
the cat is out of the bag.
The other thing worth noting is that the Fed and the
FDIC are at loggerheads over the matter. ("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.") Now, that's not good at
all, in fact, it's a big red flag that suggests the Fed
trying to pull a fast one on the American people. One
does not have to look too far for other examples of Fed
misbehavior; the endless bailouts (TARP, QE1 and 2,
Operation Twist, ZIRP, etc) In fact, the Fed's history
is a tedious chronicle of one shifty deal after
another. This is just more of the same; another gift to
big finance at the public's expense.
It's ironic that the B Of A flap is taking place at the
same time the non-partisan Government Accountability
Office (GAO) just released its report on conflicts of
interest in the Fed. It helps to put the Fed's dubious
behavior into context. This is a summary of the report
from Washington's Blog:
"The GAO detailed instance after instance of top
executives of corporations and financial
institutions using their influence as Federal
Reserve directors to financially benefit their
firms, and, in at least one instance,
themselves....
"The corporate affiliations of Fed directors from
such banking and industry giants as General
Electric, JP Morgan Chase, and Lehman Brothers pose
'reputational risks' to the Federal Reserve System,
the report said. Giving the banking industry the
power to both elect and serve as Fed directors
creates 'an appearance of a conflict of interest,'
the report added....
Joseph Stiglitz - former head economist at the
World Bank and a Nobel-prize winner - said
yesterday that the very structure of the Federal
Reserve system is so fraught with conflicts that it
is 'corrupt' and undermines democracy.
Stiglitz said, 'If we [i.e. the World Bank] had
seen a governance structure that corresponds to our
Federal Reserve system, we would have been yelling
and screaming and saying that country does not
deserve any assistance, this is a corrupt governing
structure.'" ("Non-Partisan Government Report:
Federal Reserve Is Riddled with Corruption and
Conflicts of Interest," Washington's Blog)
So, no one should be surprised that the Fed is involved
in another sketchy deal. Even so, this particular
maneuver really seems to have hit a nerve with some
prominent and usually even-tempered, financial
bloggers, like Yves Smith over at Naked Capitalism.
Here's Smith's take on the Fed's subterfuge:
"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
depositories 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....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." (Naked Capitalism)
"Just plain evil." Maybe that should be the Fed's
byline?
Anyway, Smith is not alone in her contempt for the Fed,
but there are those who feel she may be off-base in her
assessment of what is going on vis a vis the
derivatives dump. Bank analyst Christopher Whalen at
Reuters thinks that the transfer could be a sign that B
of A is getting ready to throw in the towel. Here's an
excerpt from the article:
".... the move to put the derivatives exposures of
Merrill Lynch under the lead bank could be
preparatory to a Chapter 11 filing by the parent
company. The move by Fannie Mae to take a large
junk of loans out of BAC, the efforts to integrate
parts of Merrill Lynch into the bank units earlier
this year, and now the wholesale shift of
derivatives exposure all suggest a larger agenda.
"I don't have any access to inside skinny, but what
I see suggests to this investment banker that a
restructuring may impend at Bank of America." ("Is
Bank of America planning for a Chapter 11?,
Reuters)
"Restructuring"? So is B of A headed for the glue
factory?
No one knows for sure, but the banking behemoth has
been laying off workers by the thousands, slashing
expenses, and raising fees while its stock has dropped
49 per cent in a year. These are hardly signs of a
thriving business.
So, consider this: If you were in Fed chairman Ben
Bernanke's shoes, what would you do?
Let's say the second biggest bank in the country is
starting to teeter because it's loaded with all manner
of dodgy (toxic?) derivatives that could blow up at any
minute and take down the entire global financial
system. Would you (a) Wait until the bombshell exploded
knowing that the only choice you would then have would
be to further expand the Fed's balance sheet by another
couple trillion dollars or (b) Try to sleaze the whole
thing off on Uncle Sam and let the taxpayers pick up
the tab?
I'm not sure, but I think Bernanke may have chosen (b).
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