Tuesday, October 25, 2011
Brian Moynihan, CEO of Bank of America
In an ominous sign for the economy, Bank of America, in an attempt to protect itself from its toxic assets, recently moved $75 trillion (with a “t”) in derivatives from its non-federally-protected Merrill Lynch securities unit to a subsidiary insured by the Federal Deposit Insurance Corp (FDIC).
By doing so, BofA has positioned the FDIC to be the fall guy if the derivatives shift causes the subsidiary to fail, which would then require the federal agency to step in and save the day. The situation is disturbingly similar to that the one that led to the financial crisis just three years ago.
The move was demanded by counterparties, evidently in this case the high-finance equivalent of insurance companies, after Moody’s downgraded BofA’s credit rating a month ago.
FDIC officials reportedly argued with the Board of Governors of the Federal Reserve, which sanctioned the move by BofA. The FDIC disapproved because it may not be able to handle a rescue of this size—in which case the federal government would have to engage in yet another costly bailout of the nation’s second largest bank and leave taxpayers footing the cost.
Three years ago, BofA received $45 billion from the Department of the Treasury to keep it from crashing during the financial crisis.
-Noel Brinkerhoff
FDIC To Cover Losses On $75 Trillion Bank of America Derivative Bets (by Bill Zielinski, Problem Bank List)
Is Bank of America Headed for the Glue Factory? (by Mike Whitney, CounterPunch)
BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit (by Bob Ivry, Hugh Son and Christine Harper, Bloomberg)
GAO Report Highlights Federal Reserve Conflicts of Interest (by David Wallechinsky and Noel Brinkerhoff, AllGov)
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