CommunityFDL Main Blog

The Next Bailout: BofA Moves Derivatives into Insured Institution

(image: trialsanderrors)

Bank of America announced a way for them to make it look like they made a $6.2 billion profit in the last quarter. The “profit” came mostly from an accounting trick and the sale of their stake in a Chinese bank, part of their downsizing strategy. But they had lower revenue and income in their credit card, real estate and investment banking businesses, which is pretty much their entire business. If you add up the accounting gains totaling $6.2 billion and the net on the sale of the bank, you’d see that the bank lost $1.4 billion last quarter.

The market shrugged off the gimmicks, and at this point BofA is up 10% on the day. But I think that actually has a lot more to do with this:

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.”

This has been described as another bailout, and it’s not hard to see why. The derivatives go into the insured institution, protecting the counter-parties, and they would be paid off in the event of a failure. Notice that the counter-parties themselves are managing the process, requesting that their bets get implicit government backing. The notional value on these derivatives trades is $75 trillion, with a T. This includes their European derivatives exposure. And according to Bloomberg, JPMorgan Chase has already done this.

When the FDIC is screaming bloody murder and the Federal Reserve reassures that an action is perfectly legitimate and should cause no concern, watch your wallet.

CommunityThe Bullpen

The Next Bailout: BofA Moves Derivatives Into Insured Institution

Bank of America announced a way for them to make it look like they made a $6.2 billion profit in the last quarter. The “profit” came mostly from an accounting trick and the sale of their stake in a Chinese bank, part of their downsizing strategy. But they had lower revenue and income in their credit card, real estate and investment banking businesses, which is pretty much their entire business. If you add up the accounting gains totaling $6.2 billion and the net on the sale of the bank, you’d see that the bank lost $1.4 billion last quarter.

The market shrugged off the gimmicks, and at this point BofA is up 10% on the day. But I think that actually has a lot more to do with this:

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.”

This has been described as another bailout, and it’s not hard to see why. The derivatives go into the insured institution, protecting the counter-parties, and they would be paid off in the event of a failure. Notice that the counter-parties themselves are managing the process, requesting that their bets get implicit government backing. The notional value on these derivatives trades is $75 trillion, with a T. This includes their European derivatives exposure. And according to Bloomberg, JPMorgan Chase has already done this.

When the FDIC is screaming bloody murder and the Federal Reserve reassures that an action is perfectly legitimate and should cause no concern, watch your wallet.

Previous post

Occupy Orlando….Day Three

Next post

Sherrod Brown Pressures Boehner on Chinese Currency Bill

David Dayen

David Dayen