Blog on the Run: Reloaded

Wednesday, October 19, 2011 8:36 pm

I’m old enough to remember when they wanted to be the best bank in the neighborhood

Filed under: Evil,I want my money back. — Lex @ 8:36 pm
Tags: ,

Now, they just want to crap all over everything. Bank of America, getting ready to screw you again, even harder:

Bank of America, 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 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.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

Yeah, we should, but bankster politicians of both parties (Mel Watt, I’m lookin’ at you) have put the kibosh on that.

So, how bad is this? Yves Smith at Naked Capitalism offers some perspective:

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. 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.

I invented the #LWS (LiquidateWallStreet) hashtag on Twitter yesterday as a goof. Less than 24 hours later, we’ve officially arrived at the point at which an American taxpayer could burn down a Bank of America facility and plausibly claim self-defense.

(h/t: Fec)

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6 Comments »

  1. Thanks. We should all be screaming bloody murder over this one.

    BTW, the $8.5B fraudclosure settlement has been struck down and BAC is once again on the hook for “hundreds of billions in putback liabilities and civil liability exposure, and potentially the forced bankruptcy of its Countrywide unit.”

    Comment by Fec — Wednesday, October 19, 2011 10:42 pm @ 10:42 pm | Reply

  2. Almost enough to make me recall with fondness the era when the heads of people who pulled stuff like this would be posted on pikes outside the Tower as a warning to others. They did that when I was a kid, as I recall.

    Comment by Lex — Wednesday, October 19, 2011 10:51 pm @ 10:51 pm | Reply

  3. Good times. The ale was cheap then, but those disease-ridden fleas were a bitch.

    Comment by Fec — Wednesday, October 19, 2011 11:06 pm @ 11:06 pm | Reply

  4. “Almost enough to make me recall with fondness the era when the heads of people who pulled stuff like this would be posted on pikes outside the Tower as a warning to others. They did that when I was a kid, as I recall.”

    Yeah I recall Madison Guaranty and the people who did stuff like that. One when on to become POTUS and the other is presently serving as Obama’s Secretary of State.

    Bill Safire gave us a look into her character in his essay

    Blizzard of Lies

    He was impeached

    Comment by Fred Gregory — Thursday, October 20, 2011 1:08 am @ 1:08 am | Reply

  5. Hmm, let’s see, Fred: The McDougals trashed an S&L — illegal, yes — at roughly zero actual cost to taxpayers and went to prison. Neil Bush destroyed an S&L, stuck taxpayers with an actual tab of significance and walked.

    Not even the Republican Wurlitzer could turn up a scrap of evidence that Hillary committed a crime.

    Willie J. was impeached for lying under oath about a matter not germane to the investigation at issue (i.e., he did NOT commit perjury) and was acquitted by … a Republican-controlled Senate. The voters, who occasionally are not misled, junkpunched the GOP that year in return.

    As for Madison Guaranty, if you want an unbiased history of Whitewater et al., which I doubt, I strongly recommend Jeffrey Toobin’s book “A Vast Conspiracy.”

    Bank of America finds your inability to keep your eye on the ball useful, also. And as I point out, there’s blame enough to go around for both parties on that.

    Comment by Lex — Thursday, October 20, 2011 2:55 pm @ 2:55 pm | Reply

  6. ,,,,,, “we’ve officially arrived at the point at which an American taxpayer could burn down a Bank of America facility and plausibly claim self-defense”

    Like this ?

    September 16, 1920

    Comment by Fred Gregory — Tuesday, October 25, 2011 3:28 pm @ 3:28 pm | Reply


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