Yikes: B of A has moved derivatives from Merrill Lynch to a subsidiary flush with insured deposits

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 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.”

http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html

As if the FDIC has enough money to even begin to bail them out..sheesh.

Do you think the downgrade triggered some covenant making this necessary perhaps?

These derivatives were generated because Mother Merrill screwed the pooch calculating risk numbers.

Mother Merrill converted to a new database system, offshored support for that new system, went 10 years reading incorrect risk numbers (and selling said incompetent risk numbers to investment shops (aka hedge funds), and then got caught holding Shit Mountain of bribery-driven "AAA" no-bonds-behind-them Goldman Casino bets.

Derivatives are bets on the performance of other people's bonds.

Derivatives have no underlying face value.

Derivatives do not have mortgage payments coming in.

FDIC... no-no-no !!

The offshores who let MM screw up... they never, ever say "No." The IBM-hire offshores, particularly.

They do not have "Quality Control" in their vocabulary for managing dumb American accounts.

MM lost $3.5-billion on one batch that I know of. Had all the numbers done up prettily....

And they got huge bonuses ! There's bonuses for dumb.

The language about returning default items in one of the Merrill press releases indicates that's where they went.

Since they're incompetent at calculating risk numbers, this is no surprise. MM has been a dumping ground since the 1980s.

Not necessarily from B of A but within the industry.

replaced by the FDIC. Think of it. You don't gamble on Wall Street, put your savings in a "safe" bank and you lose your money doing nothing at all. Not to mention bank failures.

IS to BUST the FDIC, that one last New deal program?

a commercial bank during the great collapse, so they could be protected by the FDIC...

FDIC was/is not involved with GS.

btw: checking and saving accounts, yes.

Market accounts, no.

banking illiterates like me? I'll own up to my areas of ignorance and this is one of them. I barely understand the world of finance. Basic principles of macroeconomics? I'm fine. Not a clue what this is saying or means in practical terms. Thanks!

And sticking it in the same entity as the FDIC insured deposits. So it is possible they will have to use the deposits, crash the entity and the FDIC will have to insure the deposits and fix the mess. Or if it is too big to fail, they might need to bail it out depending on which is better.

Here's the gist of what might be at odds with the BAC attempt at bank fraud:

“Congress doesn’t want a bank’s FDIC insurance and access to the Fed discount window to somehow benefit an affiliate, so they created a firewall,” Omarova said. The discount window has been open to banks as the lender of last resort since 1914.

As a general rule, as long as transactions involve high- quality assets and don’t exceed certain quantitative limitations, they should be allowed under the Federal Reserve Act, Omarova said.

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.

The central bank terminated exemptions last year for retail-banking units of JPMorgan, Citigroup, Barclays Plc, Royal Bank of Scotland Plc and Deutsche Bank AG. The Fed also ended an exemption for Bank of America in March 2010 and in September of that year approved a new one.

Section 23A “is among the most important tools that U.S. bank regulators have to protect the safety and soundness of U.S. banks,” Scott Alvarez, the Fed’s general counsel, told Congress in March 2008.

To contact the reporters on this story: Bob Ivry in New York at bivry@bloomberg.net; Hugh Son in New York at hson1@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.

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Here's the letter itself:

http://www.federalreserve.gov/federalreseract20100903.pdf

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From which, if cut-and-paste agrees---- and it does not, dammit... --- so hopefully typed:

"BANA has agreed not to purchase any low-quality assets as part of this proposal. In addition BAC has made the following commitments to ensure the quality of the assets transferred to BANA:

1) BANA commits for a four year period.... (a list of Transferred Assets capitalization and liquidity requirements culminating in this amazing stinger)... For example, under this dollar for dollar capital requirement, the risk-based charge for each low-quality loan would be 100 percent (equivalent to a 1250 percent risk weight) that would apply to a similar defaulted loan asset that is not part of the transferred asset pool."

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BAC's allocated capital pool is constrained, even after troubled assets return to performing status. Those constraints are in place legally today.

Those restrictions on the BAC allocated capital pool apply to the whole of the allocated capital pool for the whole of the four years.

Derivatives, of course, are worse than low-quality loans as they are bets. They are not preferred payment slices/tranches of real income streams. They are bets.

There is no backing.

Trying to change the numbers in a capital pool by off-loading derivatives ??? Imagining that FDIC will cover Goldman Casino bets ???

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Whatever they are smoking, I'd like to try it once before I get too senile to recall enjoying it.

Isn't that why they are exempt from regulation?

(Well, almost president.)

In practice both honest bonds and the fraudulent bundled CDSes are/were owned by shell corporations.

One packet, one shell.

A packet of bonds is the collection that is auctioned off together in one sale unit. The Fed runs the most of these auctions.

The shell function as a legal convenience. Not significant to economic impacts.

the Federal Reserve wants to help the do it. The Back Door Bailout!