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   Federal Reserve Now Backstopping $75 Trillion Of Bank Of America's   
   Derivatives Trades   
      
   This story from Bloomberg just hit the wires this morning.  Bank of   
   America is shifting derivatives in its Merrill investment banking unit   
   to its depository arm, which has access to the Fed discount window and   
   is protected by the FDIC.   
      
   This means that the investment bank's European derivatives exposure is   
   now backstopped by U.S. taxpayers.  Bank of America didn't get   
   regulatory approval to do this, they just did it at the request of   
   frightened counterparties.  Now the Fed and the FDIC are fighting as   
   to whether this was sound.  The Fed wants to "give relief" to the bank   
   holding company, which is under heavy pressure.   
      
   This is a direct transfer of risk to the taxpayer done by the bank   
   without approval by regulators and without public input.  You will   
   also read below that JP Morgan is apparently doing the same thing with   
   $79 trillion of notional derivatives guaranteed by the FDIC and Federal   
   Reserve.   
      
   What this means for you is that when Europe finally implodes and banks   
   fail, U.S. taxpayers will hold the bag for trillions in CDS insurance   
   contracts sold by Bank of America and JP Morgan.  Even worse, the   
   total exposure is unknown because Wall Street successfully lobbied   
   during Dodd-Frank passage so that no central exchange would exist   
   keeping track of net derivative exposure.   
      
   This is a recipe for Armageddon.  Bernanke is absolutely insane.  No   
   wonder Geithner has been hopping all over Europe begging and cajoling   
   leaders to put together a massive bailout of troubled banks.  His   
   worst nightmare is Eurozone bank defaults leading to the collapse of the   
   large U.S. banks who have been happily selling default insurance on   
   European banks since the crisis began.   
   ---   
   Bloomberg   
   Excerpt:   
      
   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."   
      
   Moody's Downgrade   
      
   The Moody's downgrade spurred some of Merrill's partners to ask that   
   contracts be moved to the retail unit, which has a higher credit rating,   
   according to people familiar with the transactions.   
      
   Transferring derivatives also can help the parent company minimize the   
   collateral it must post on contracts and the potential costs to   
   terminate trades after Moody's decision, said a person familiar with the   
   matter.   
      
   Keeping such deals separate from FDIC-insured savings has been a   
   cornerstone of U.S. regulation for decades, including last year's   
   Dodd-Frank overhaul of Wall Street regulation.   
      
   U.S. Bailouts   
      
   Bank of America benefited from two injections of U.S. bailout funds   
   during the financial crisis. The first, in 2008, included $15 billion   
   for the bank and $10 billion for Merrill, which the bank had agreed to   
   buy. .   
   The second round of $20 billion came in January 2009 after Merrill's   
   losses in its final quarter as an independent firm surpassed $15   
   billion, raising doubts about the bank's stability if the takeover   
   proceeded.   
      
   The U.S. also offered to guarantee $118 billion of assets held by the   
   combined company, mostly at Merrill. 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.   
      
   Moving derivatives contracts between units of a bank holding company is   
   limited under Section 23A of the Federal Reserve Act, which is designed   
   to prevent a lender's affiliates from benefiting from its federal   
   subsidy and to protect the bank from excessive risk originating at the   
   non-bank affiliate, said Saule T. Omarova, a law professor at the   
   University of North Carolina at Chapel Hill School of Law.   
      
   "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.   
      
   http://dailybail.com/home/holy-bailout-federal-reserve-now-backs   
   opping-75-trillion-of.html   
      
      
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