Bank of America putting taxpayers at risk for TENS OF TRILLIONS in bailouts

If you have money in Bank of America, I would take it out tomorrow and move it to your local bank because BoA appears to have potentially trillions of dollars in gambling losses it has just moved to the same subsidiary that holds your bank account.

(Some, including U.S. Senator Bernie Sanders (I-VT), advocate moving money out of major banks for a different reason: to punish them for their predatory behavior. That’s a totally separate issue.)

The 2008 financial crisis could look like a hiccup if European defaults trigger massive credit default swap (CDS) payouts from major US banks.

The riskiest major US bank is Bank of America, which has $75 TRILLION in derivatives:

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.

What SHOULD happen if Bank of America suffers a multi-trillion-dollar gambling loss? The FDIC-insured portion of the bank should remain intact and regular depositors' accounts should remain untouched while the rest of the bank goes bankrupt, shareholders are wiped out, and other creditors fight for scraps in bankruptcy court. Those who placed winning bets with BoA would likely receive pennies on the dollar. And taxpayers would not contribute a nickel.

But Bank of America today did something that potentially puts taxpayers on the hook to bail out tens of trillions of dollars in idiotic BoA gambling losses. BoA moved tens of trillions of dollars of potential gambling losses into the same BoA subsidiary that holds massive quantities of FDIC-insured bank deposits.

This is supposed to be illegal. Banks holding companies are not supposed to shift high-risk assets and liabilities into the FDIC-insured bank. This is a fundamental protection of taxpayers against banks gambling with taxpayers' money:

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…

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 FDIC is fighting this, but lackies of the mega-banks the Federal Reserve is allowing BoA to break the law:

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.

I’m going to go out on a very short limb and presume one of Bank of America’s counterparties is Goldman Sachs. Years ago, Goldman helped cook Greece’s books to get Greece loans it had no business getting. Based on Goldman’s behavior, I would be shocked if Goldman didn’t then turn around and use its inside information to place massive bets (through credit default swap derivatives) against Greece’s debt. Merrill Lynch (now part of Bank of America) apparently was the stooge for many such stupid CDS bets that Bank of America is now on the hook for. If so, then Bank of America is on the hook to Goldman for tens of trillions of dollars if the European debt crisis explodes. And Goldman — worried BoA wouldn’t be able to pay off its gambling debt — has now forced Bank of America to taxpayers on the hook for the gambling debt.

If taxpayers are stuck with tens of trillions in derivative contract (gambling) losses, we’ll all soon look back at the 2008 banking crisis as “the good old days.”

Posted by James on Wednesday, October 19, 2011