BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit - Bloomberg
Another take:
Bank of America Deathwatch: Moves Risky Derivatives from Holding Company to Taxpayer-Backstopped Depository
So the short form: BOA thinks that it's going to get fucked on it's CDS exposure to the euro crisis. CDS's are just crazy-ass unregulated betting that the banks have been doing on the side.
So it moved that money over to it's deposit business, which has FDIC backing. Due to the rules on these things, in the event of a failure the derivative business will get first call on any assets, including the roughly $1 Trillion in deposits. That means the FDIC will have to pony up that amount or the average person gets screwed and a panic occurs. The FDIC has next to no assets right now because banks have been failing like champs, so that money is going to directly come from the taxpayer.
Also the bank will likely still fail because it was probably going to before this, which will probably lose the job of you or someone you know.
Have a nice day.
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 werent 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 doesnt believe regulatory approval is needed, said people with knowledge of its position.
....
Bank of Americas 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.
Another take:
Bank of America Deathwatch: Moves Risky Derivatives from Holding Company to Taxpayer-Backstopped Depository
This changes the picture completely. This move reflects either criminal incompetence or abject corruption by the Fed. Even though Ive expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. Its well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.
So the short form: BOA thinks that it's going to get fucked on it's CDS exposure to the euro crisis. CDS's are just crazy-ass unregulated betting that the banks have been doing on the side.
So it moved that money over to it's deposit business, which has FDIC backing. Due to the rules on these things, in the event of a failure the derivative business will get first call on any assets, including the roughly $1 Trillion in deposits. That means the FDIC will have to pony up that amount or the average person gets screwed and a panic occurs. The FDIC has next to no assets right now because banks have been failing like champs, so that money is going to directly come from the taxpayer.
Also the bank will likely still fail because it was probably going to before this, which will probably lose the job of you or someone you know.
Have a nice day.