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 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. [Background.]

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. [Background.] 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.

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  • PLT

    It should be kept in mind that the FDIC is funded by fees assessed to member banks. Those banks, of course, find ways to pass those fees on to consumers. But, it may be somewhat misleading to claim or imply the US taxpayer will be directly liable for the losses on BofA derivative holdings through its operating entity in the event of failure due to FDIC payouts on customer deposits..

    • Kishka

      Yes, but ultimately, where does the capital come from? From the working people of America. It is yet another way to tax the 99% and to syphon the wealth upwards. So, at the end, the American people pay, no matter how you look at it.

    • Dave

      Congress had to bail-out the S&L’s in the late 80’s with taxpayer money, not FSLIC money!
      It’ll be the “same song, but with a different beat” this time around.

    • The FDIC is flat broke as a result of banks not funding it from 1996-2006 thanks to Congress who agreed that the fund, which then held 52B, was more than sufficiently funded. What this means to you and every other American is that the FDIC will have to borrow the 100B+ to make good on the deposits. The Treasury will have to borrow a 100B from the (Fed) public at the real risk of hitting a debt ceiling at the wrong time.

      If you see things through a political lens , yes the GOP was in charge of congress for most of those 10 years. But it doesn’t really matter. If Dems were in control they would have given the ten year “abstinence” their blessing for free money too.

      • vray

        “If Dems were in control they would have given the ten year “abstinence” their blessing”
        …would have? The FACT remains it was the GOPee in control. Firmly.

      • Do Your Homework

        Hey Dburn,

        The board of directors are appointed by the president of the united states and serve 6 year terms. 5 of the 6 directors in 1996 were appointed by Bill Clinton.

        So, using a ‘political lens’ you could say – at best – that any appointees later selected by a GOP president would have merely continued a practice started by DEM appointees.

        It took me all of 5 seconds to find this info.

        DEMs have had their hands in almost every aspect of the economic disaster. As much as you try to claim otherwise, a careful examination of the facts will prove that they are worse corporate puppets than any GOP they point fingers at.

  • rosemary schroeder

    Those of us without an economic degree aren’t stupid. We see what has happend to us retired people, our kids and their kids. It is an outrage. We are waiting to see these criminals on trial and jail for real justice in America. And WHEN WILL THAT HAPPEN??????????????????????????????????? We have become the most evil country on record. We can not be proud… that flag at half mast if you know better.

    • Decide you no longer want to hold dollars is the only way to take back control. As long as we use their printing press money we are all going to pay. Watch Secret of Oz on YouTube

  • Kevin Beck

    Bank of America should officially announce a name change (and they can keep the same ticker symbol, since the initials will still work) to: Big-A$$ Corruption.

    This will be a true test for whether we have a criminal entity in charge of the national money supply. Are you listening, Bennie? You and Little Timmy belong in prison for your total incompetence.

  • Tim Corr

    The sheeple get screwed again. I cant tell you how messed up that is. The obscene transfer of these CDSs to Bof As FDIC guaranteed entity should absolutely not be allowed. Between these, what should be illegal transfer of risks to the public (with the blessing of Bernacke and Timmy) and the money the fed is about to and already is sending overseas (without the american publics knowledge) to bail out the “To big to fail banks and bank rupt countries there, these folks should all go to jail. Its criminal and it just seems most people are to in the dark about these matters to care or do any thing about it. They really should go to jail for high treason.

  • Raymond F Melton

    Can someone please explain to me in simple terms — bottome line — how this might impact me if I now have a checking and savings account with BofA and a conventional and Roth IRA under Merril Lynch? What is the worst that could happen to me?

  • JEH

    For RFMelton, everything that’s paper will be worth the paper it’s written on – nothing. Get everything out while someone will still trade real value for it and buy gold, silver, food and bullets.

  • the colossal destructive power of $1.25 quadrillion in derivatives are akin to a force of nature which can neither be deflected nor avoided. If a principled and relatively influential person of Mr. Black’s stature can do nothing more than scream foul from the grandstands what the hell do you expect hoi polloi like us to do? the game is rigged, the dice are loaded and all that is left for a reasonable individual to do is to take shelter until the storms of destruction pass over. protect yourself to the extent and means at your disposal. gather together with like minded individuals and undertake practical measures to ensure your survival in the midst of this approaching cataclysm. get out of the major metropolitan areas if at all possible. acquire Au/Ag on this extended consolidation. ensure that you have adequate supplies of non perishable foodstuffs and water filtration systems, medicinal supplies etc. and a reliable rugged vehicle.hopefully you have relatives or friends in rural areas with whom you can shelter or actually cohabit with. God help us all!



    • DD

      More to the point why is the US giving Israel over $8 million dollars EVERYDAY and has done so since the early 70s. You never hear that on the news do you and that FEW people actually complain about this?
      The US is not the be all and end all of civilization on this planet, never has been, never will be!! It hides behind this ridiculous myth they people here think they are free when in fact they are not. The US was and is ALL FOR connecting the world’s financial system to gain control, power and to manipulate other other countries,only it has backfired.

      Also show me one other country where you have to give your SSN to open up a bank a/c. DMV, doctors, dentist, utilities, open a credit card a/c., amongst other things. There is isn’t another country on the planet that has to give over this kind of info to open up such stupid accounts as untilities or DMV. Can someone please tell me why the DMV needs my SSN?

      And people here think they are free – don’t make me laugh, I might just wet myself.

      • Do Your Homework


        If all he** breaks loose in the middle east Israel will be a strategic location for the US. Take a look at a map and you’ll clearly see why we need Israel as an ally. They are surrounded by countries who would love nothing more than to wipe us off the planet.

        I can’t tell you what the $8 mil is for, it does sound like an absurd amount considering the shape our economy is in. However, we can’t let Israel fall to their enemies. The saying ‘the enemy of my enemy is my friend’ applies here.

        • DD

          Oh Please!!! Why do you think Israel has so many enemies? I don’t need a map to know that stealing land from the Palestines (amongst other things) is wrong? Check out “” for starters.

          The only reason Hell will break lose in the ME is because the US/UK and Israel want Hell to break lose over there. The US/UK and Israel NEED to leave the ME for good, then you will have more peace than you know what to do with, plus the world will be a MUCH NICER place. Next, the US will be going into Iran under the same lies as the Weapon of Mass Delusion BS in Iraq. Such lies and hypocrisy at its best! People who think the US/UK and Israel are in the ME for the good must live on planet Zog.

  • Al

    and you wonder why the wall street protests are going on. Maybe people don;t know the exact facts. But they are getting tired of this sort of thing. Corporate CEO with massive compensation packages are making foolish and sometimes criminal moves to make themselves look better.

  • DD

    I’d like to know what will happen to anyone with a BofA mortgage if BofA collaspes. I guess another bannk would take over like it did w/Countrywide.

    Did you know that when Mozillo was fined those miions of dollars a year or two ago for his scam with Countrywide, that it only amounted to 16c on the dollar. Not bad eh? Dick Fuld from Lehman Bros still lives in his 50 roomed McMansion. Do you live in a 50 rommed McMansion or even a 10 roomed McMansion? No I didn;t think so.

    Suck it up people.

  • Al Christie

    I’m confused about the difference between the bank and the holding company – I’m not sure which one I hold shares of stock in. In other words, what will happen to common stock shares of “BAC”? Will they go in the toilet? If so, wouldn’t this be a good stock to short? Or will the shares be propped up somehow? It’s very hard to make decisions when the government keeps interfering with the market.

  • Mydnite Cynderella

    Mydnite thinking aloud:

    “Treasury/Bank of America do not have $$ to cover deposits, so it’s important to keep adding new customers and new deposits to make up the $$ for the existing deposits. Soooooo…..who’s running a ponzi scheme now?? “

  • I would not characterize any of this information as misleading. There is only one reason why those derivatives would be moved to an FDIC insured account – otherwise, why do it??? We are now The Bank of The American Taxpayer (BofAT)- The Bankers Bank of Choice. The reason for this move is because Europe is getting ready to go down, and many of those derivative contracts on Eurpoean banks. If B of A has 400 Billion in liquid assets, and they were to go to maximum leverage (legally allowed 30) that’s only 12 TRILLION by my math. Even then, going out on leverage, we the B of AT
    are still funding that. Isn’t this the same scenario that happened in 2008 when AIG, Lehman and Bear Stearns had margin calls???

  • SonAmericanRevolution

    What no one wants to acknowledge is that 911 was a coup d’etat by Israel and that people wonder why “regulators” are not making “sensible” decisions that protect the American people. The reason is the same as why isn’t 911 being investigated despite the obvious evidence of a crime(s) (as documented and clarified by AE911ruth) ? ISRAEL NOW CONTROLS THE ENTIRE USA AND HAS NO INTEREST IN PROTECTING THE AMERICAN PEOPLE.


  • Eronildes Santana de Oliveira

    I received the e-mail underline, what is it?
    Federal Reserve Bank”

    Enviado: Ter 24/07/12 05:35


    Prioridade: Normal

    Payment Release Instruction from Federal Reserve Bank / OPEN THE ATTACHED AND READ


    NOTICE.txt 4 kb

    Federal Reserve Bank of America
    33 Liberty Street,
    New York, NY 10045.

    Our Ref: FRB-75BFNYUS09 Your Ref:——-

    Attention Fund Beneficiary,

    Payment Release Instruction from Federal Reserve Bank of New York

    Acting on our capacity as the international correspondent bank to the International Monetary Fund Organization, this is to officially notify you that we have received a confirmation advice from the International Monetary Funds External Auditors Committee, World Bank, United Nations Organization and the Federal Reserve Bank of America respectively via International Payment Voucher Number: IMF/FRBWDC/BOA-93WB82UN567-G requesting our bank to direct the HSBC BANK USA N.A, a subsidiary of the Federal Reserve Bank of America to disburse your due wining/inheritance and contract payment valued at Ten Million Three Hundred Thousand United States Dollars (US10.3M) in your favor via their branch in New York.

    In consideration of the above, you have been issued with this Exclusive Reference Identification Number (IMF/FRB-NY/9USXX10751/09), Vide Transaction No.: WHA/EUR/202 and Transfer Allocation No.: FRB/X44/701LN/NYC/US, Password: 339331, Pin Code: 78569, Certificate of Merit No: 104, Release Code No: 0876; Immediate HSBC Telex Confirmation No: -222568; Secret Code: XXTN014. Having received these vital payment numbers, you are instantly qualified to receive and confirm your payment within the next 72hrs. As necessary clearance has been granted from the International Monetary Funds External Auditors to release the funds to you with immediate effect.

    In view of this directive received from the International Monetary Funds (IMF), we have on our own part verified your payment file as directed to us, and your name is next on the list of outstanding fund beneficiaries to receive their payment at this Last quarter of year 2012. With that being done, you are required to urgently contact the HSBC USA N.A. in New York through their International Funds Release Supervisor:

    Contact Person: Sir Nelson Haggin.
    (Head, Funds Release Supervisor)

    And reconfirm your international payment voucher number and your reference identification number respectively before that office with a view to the final remittance approval and subsequent crediting of your bank account to the tune of funds as stated herein.

    We wish to inform you of the need for you to also re-confirm the following information before the HSBC BANK USA N.A. in New York to enable the officer in-charge to proceed with the preliminary arrangements that will enhance the immediate release of your funds. Owing to security reasons, be clearly informed that we will not respond to any phone calls/general inquiries placed to our bank with regards to the remittance of your funds by beneficiaries as we are barred from doing so, you are therefore advised to communicate only with the accredited officer for further remittance advice.

    1) Full Name;
    2) Full Address;
    3) Your contact telephone and fax number;
    4) Your Age and Profession;

    5) Copy of any valid form of your Identification;
    6) Your Bank name;
    7) Your Bank Address;

    8) Account name and Number;
    8) ABA/Routing Number;

    10) Swift or Sort Code/IBAN

    Thank you for your anticipated co-operation.



    Notice To Recipient: This email (and any attachments) is only intended for the use of the person or entity to which it is addressed, and may contain information that is privileged and confidential. You, the recipient, are obligated to maintain it in a safe, secure and confidential manner. Unauthorized
    redisclosure or failure to maintain confidentiality may subject you to federal and state penalties. If you are not the recipient, please immediately notify Federal Reserve Bank of New York by return email, and delete this message from your computer

  • Zion

    Gods judgement, spirit and Jesus added to sun and solar
    flares is taking down B of A and greed. Why did banks and B of A hire American
    Christian hating muslims to service American Christian loans?

    In 3 years I’ve tried 6 attempts to modify back to the 5.75%
    loan and I was denied once and I was ignored on the other attempts. I was not
    being greedy or forcefull, I just wanted my original LOCK-IN AGREEMENT! Because
    no loan is equal, neither is the statement true, Equal housing Opportunity
    and Equal housing lender. How can they be equal if they judge and condemn the
    poor and glorify the rich? I was told I could not afford the cheaper loan when
    I immediately called countrywide, but I had to sign because my family was going
    to be on the street if we waited and the bank new this. Our first time buying a
    house was hell, so shall fire come down from heaven by God’s hand. Because of
    Countrywides and Bank of Americas afflicting deeds of and exploiting the wages
    towards Americans, the worth of my house and property has decreased $50,000.
    The same amount they are foreclosing on my loan for. I find my house in
    pre-foreclosure online at 2/3 the price they’re trying to keep me obligated to
    under a predatory loan that changed on me without notification. I did not know
    this until I went to sign in 2008. I was locked-in at 5.75% and they changed it
    to 6.25%. It was supposed to be $0 down, 0 credit, $0 at closing as the builder
    claimed, but we ended up having to give our last $3,000 to our name. Now for
    some reason, probably to hide the way I have been treated ever since we
    purchased the loan and house, no-one seems to be able to find my lock-in
    agreement document that even my escrow and loan documents states is supposed to
    be there. So instead of giving me a copy of my lock-in agreement, B of A is
    foreclosing on me and trying to sell my note and loan to someone else trying to
    hide what they did and how they treated, a White, American Indian, German and Irish American
    Christian Child of God. I am telling the World, Universe and God Himself, to
    deal with Banks, greed, exploitation and their judging against man and his
    credit. So shall they all exploiters and extortioners of mans wages be given
    what they have done to God’s Children, DOUBLE in the Name of My Lord, Jesus
    Christ, in the form of storms and solar flares with God, His Spirit, Power, His
    Son and Blood being added in the Air, Light, Solar substance and water too,
    with God’s energy and power piercing through and eternally purifying All
    physical and spiritual substance. It IS DOne!

    Now instead of B of A adhering to our rights and answering
    our QWR and our request for the lock-in agreement they for some reason don’t
    have, which shows proof of them upholding preditory lending practices and
    neglect towards their borrowers rights, they put my house into pre-foreclosure
    and it gets put up for sale at 2/3 for what my loan is. I still can’t get my
    lock-in agreement. I tried to get it from Countrywide and they sold out to B of
    A. Now B of A is doing the same thing. So because B of A is doing the same as
    Countrywide did to me, so will B of A fail in the name of our Lord, Jesus
    Christ, Amen. All B of A had to do was give me the cheapest loan available at
    the time and give the same equally to everyone no matter what their credit
    score was. But they made sure of it that I DID NOT HAVE NOR GET AN EQUAL
    HOUSING OPPOTUNITY NOR LENDER. B of A has come against God and His Children, so
    shall He give banks, the same they render unto Us.