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Thursday, November 3, 2011

Bank Of America Derivatives Timebomb Shows System Is Corrupt To The Core

The Federal Reserve recently allowed Bank of America to move its massive derivative positions from the bank holding company to its banking subsidiary which is an FDIC insured depository institution.  By allowing this transfer, the Federal Reserve has allowed Bank of America to shift the risk of loss on speculative derivative contracts from the non-bank affiliate.  A failure of Bank of America could result in huge losses for the FDIC which would ultimately be passed on to the taxpayers.

The most noteworthy aspects of this remarkable event include the following:
  • The disclosure of the derivatives transfer to Bank of America’s FDIC insured depository was apparently leaked by the FDIC which opposed the move due to the huge amount of risk being transfered to the FDIC and bank depositors.
  • In allowing the transfer, the Federal Reserve apparently violated Section 23A of the Federal Reserve Act which was supposed to keep the risks of investment banking activities at the bank holding company level.
  • The notional value of the Bank of America derivative contracts is $75 trillion.  The request for the derivatives transfer was initiated by counterparties of the contracts with Bank of America who were alarmed over the credit downgrade of Bank of America.
  • The transfer of the derivatives from Bank of America’s holding company to the FDIC insured depository institution has received remarkably little mainstream press coverage.  The quick approval by regulators at the Federal Reserve to protect the bank holding company indicates that the Federal Reserve is corrupt to the core and more interested in protecting the banks than the American public.
Bill Black, a former banking regulator, who exposed the corruption of banks and politicians during the savings and loan crisis, harshly criticizes the Fed’s actions in his recent article “Bank of America’s Death Rattle“.
Now here’s the really bad news.  First, this transfer is a superb “natural experiment” that tests one of the most important questions central to the health of our financial system.  Does the Fed represent and vigorously protect the interests of the people or the systemically dangerous institutions (SDIs) – the largest 20 banks?  We have run a real world test.  The sad fact is that very few Americans will be surprised that the Fed represented the interests of the SDIs even though they were directly contrary to the interests of the nation.  The Fed’s constant demands for (and celebration of) “independence” from democratic government, combined with slavish dependence on and service to the CEOs of the SDIs has gone beyond scandal to the point of farce.  I suggest organized “laugh ins” whenever Fed spokespersons prate about their “independence.”
If regulators were doing their jobs properly, banks would not be allowed to engage in massive speculation through derivatives trading.  The near meltdown of the financial system in 2008 has resulted in thousands of pages of new regulations but has done nothing to reign in “too big to fail banks” or reduce systemic risk in the financial system. source