Is Bank of America Headed for the Glue Factory?

By Mike Whitney

-Why is Bank of America moving derivatives from Merrill Lynch to an insured subsidiary? Is it because the derivatives could blow up at any time leaving Merrill with gigantic, unsustainable losses? If that’s the case, then it would make perfect sense to shift them into a depository institution that’s covered by the FDIC. That way, the taxpayers would wind up paying for the damage and no one would be the wiser. It’s like a stealth bailout, right?

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The only problem is that Bloomberg let the cat out of the bag, so now everyone knows what’s going on. And that’s going to be a very big problem for B Of A. Here’s a clip from the Bloomberg article:

“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.” (“BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit”, Bloomberg)

There are two things worth noting in this article. First, according to Bloomberg, “the transfers (of derivatives) are being requested by counterparties.” Well, how do you like that? In other words, the investors on the other side of these contracts want Merrill to put them under an insurance umbrella provided by the FDIC.

Now, why would that be? The only reason I can come up with, is that they know that a lot of these complex instruments are undercapitalized and ready to implode, so they want to make sure they get their money back any way possible. That means they need to latch on to Uncle Sam without anyone knowing about it. But, like we said, the cat is out of the bag.

The other thing worth noting is that the Fed and the FDIC are at loggerheads over the matter. (“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.”) Now, that’s not good at all, in fact, it’s a big red flag that suggests the Fed trying to pull a fast one on the American people. One does not have to look too far for other examples of Fed misbehavior; the endless bailouts (TARP, QE1 and 2, Operation Twist, ZIRP, etc) In fact, the Fed’s history is a tedious chronicle of one shifty deal after another. This is just more of the same; another gift to big finance at the public’s expense.

It’s ironic that the B Of A flap is taking place at the same time the non-partisan Government Accountability Office (GAO) just released its report on conflicts of interest in the Fed. It helps to put the Fed’s dubious behavior into context. This is a summary of the report from Washington’s Blog:

“The GAO detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves….

“The corporate affiliations of Fed directors from such banking and industry giants as General Electric, JP Morgan Chase, and Lehman Brothers pose ‘reputational risks’ to the Federal Reserve System, the report said. Giving the banking industry the power to both elect and serve as Fed directors creates ‘an appearance of a conflict of interest,’ the report added….

Joseph Stiglitz – former head economist at the World Bank and a Nobel-prize winner – said yesterday that the very structure of the Federal Reserve system is so fraught with conflicts that it is ‘corrupt’ and undermines democracy.

Stiglitz said, ‘If we [i.e. the World Bank] had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure.’” (“Non-Partisan Government Report: Federal Reserve Is Riddled with Corruption and Conflicts of Interest,” Washington’s Blog)

So, no one should be surprised that the Fed is involved in another sketchy deal. Even so, this particular maneuver really seems to have hit a nerve with some prominent and usually even-tempered, financial bloggers, like Yves Smith over at Naked Capitalism. Here’s Smith’s take on the Fed’s subterfuge:

“This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositories 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. It’s well nigh impossible to have an orderly wind down in this scenario…..This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.” (Naked Capitalism)

“Just plain evil.” Maybe that should be the Fed’s byline?

Anyway, Smith is not alone in her contempt for the Fed, but there are those who feel she may be off-base in her assessment of what is going on vis a vis the derivatives dump. Bank analyst Christopher Whalen at Reuters thinks that the transfer could be a sign that B of A is getting ready to throw in the towel. Here’s an excerpt from the article:

“…. the move to put the derivatives exposures of Merrill Lynch under the lead bank could be preparatory to a Chapter 11 filing by the parent company. The move by Fannie Mae to take a large junk of loans out of BAC, the efforts to integrate parts of Merrill Lynch into the bank units earlier this year, and now the wholesale shift of derivatives exposure all suggest a larger agenda.

“I don’t have any access to inside skinny, but what I see suggests to this investment banker that a restructuring may impend at Bank of America.” (“Is Bank of America planning for a Chapter 11?, Reuters)

“Restructuring”? So is B of A headed for the glue factory?

No one knows for sure, but the banking behemoth has been laying off workers by the thousands, slashing expenses, and raising fees while its stock has dropped 49 per cent in a year. These are hardly signs of a thriving business.

So, consider this: If you were in Fed chairman Ben Bernanke’s shoes, what would you do?

Let’s say the second biggest bank in the country is starting to teeter because it’s loaded with all manner of dodgy (toxic?) derivatives that could blow up at any minute and take down the entire global financial system. Would you (a) Wait until the bombshell exploded knowing that the only choice you would then have would be to further expand the Fed’s balance sheet by another couple trillion dollars or (b) Try to sleaze the whole thing off on Uncle Sam and let the taxpayers pick up the tab?

I’m not sure, but I think Bernanke may have chosen (b).

Mike Whitney lives in Washington state.

*******************

EU Bank Failures Will Crash Wall Street — Again
8 warnings for Washington and Occupiers

By Paul B. Farrell

October 21, 2011 - -SAN LUIS OBISPO, Calif. (MarketWatch ) — Worst-case scenario’s closing fast: Occupy Wall Street growing. But no political power or allies yet. Feared yes, attacked by GOP proxy tea party. Soon the Occupation will explode into a new American Revolution.

Yes, coming soon says Martin Weiss in his “7 Major Advance Warnings,” which is “bound to have a life-changing impact on nearly all investors in the U.S. and around the globe.” His new Weiss Ratings warnings are the “most important” in a 40-year career. The stress on Wall Street banks will force them back to Congress for more bailouts.

Warning eight: No new bailouts. That will push the economy into a deep recession.

Then what? New Glass-Steagall? Not enough. Tax the rich? Not enough. Perp walks? Not enough. Presidential commission? Useless promises. Occupy Wall Street will fail without a fundamental constitutional change. No compromise. Or Wall Street wins, again. We go back to the same free market, deregulated, too-greedy to-fail, conservative Reaganomics policies that have been destroying democracy for a generation.

All this was so obvious, so predictable. America is at a crossroads. Occupy Wall Street buildup has emerged as America’s last great hope to restore democracy. Last week when USA Today called the Occupiers a “ragtag assortment of college kids, labor unionists, conspiracy theorists and others” hinting they’re a flash-in-the-pan “devoid of remedies,” I smiled, reminded of that famous painting of George Washington crossing the Delaware on Christmas 1776, leading what historians also called a “ragtag” Continental Army, surprising the British, and winning the Battle of Trenton.

America’s collective conscience wants true democracy restored
Yes, USA Today sees a “ragtag” army: No mission, no goals, no organization, no agenda, no leaders, and no staying power. Wrong. Look deeper: The Occupiers are the voice of America’s collective conscience demanding a return to our 1776 roots, to a “government of the people, by the people, for the people.”

Our collective inner voice knows America’s moral compass is broken. We’ve become a government “of, by and for” special interests, the wealthiest 1%, Wall Street insiders, CEOs and Forbes-400 billionaires. It happened fast: In one generation the Super Rich grabbed “absolute power,” killing the middle class American dream.

Wall Street banks are already dismissing the Occupiers … planning bigger bonuses this year… lifting limits on their license to gamble Main Street deposits in the $600 trillion global derivatives casino … they already spend hundreds of millions lobbying every year … they’re convinced they can defeat the Occupiers with campaign donations in the back rooms of Congress … writing off the fight as another business expense … ultimately expecting the Occupiers will vanish into the cold winter months.

One citizen. One dollar. One vote. Anything less is failure
Warning: Don’t be fooled. Occupy Wall Street knows exactly want it wants. The tea party, GOP’s proxy, isn’t fooled. They feel threatened, counter-attacking, worried their role will be lost in the 2012 elections, fearful they’ll lose sway over Republicans, so they’ve got a smear campaign against Occupy Wall Street. Won’t work:

Amid all the noise surrounding Occupy Wall Street we hear their “one simple demand.” Missed by most outsiders, that demand echoes down through American history, first heard in 1776 in the Declaration of Independence. Earlier the Occupiers voiced their one simple demand:

“We demand that integrity be restored to our elections. One citizen. One dollar. One vote. Only citizens should make campaign contributions. Campaign contributions by citizens should not exceed $1 to any political candidate or party. Help us reclaim democracy.”

Yes, one simple demand: “Stop the monied corruption at the heart of our democracy.” That one simple demand echoed over and over. And no compromise when dealing with so fundamental a principle of democracy. Compromises the last generation surrendered America to Wall Street and the Super Rich. Compromise this principle again, and we all lose, destroy America. No compromise. Period.

Phase 2: EU bank collapse gives Occupiers new political power
The Occupiers Revolution enters a new phase soon: First Arab Spring rippled into American Fall. Next, EU bank collapses will ripple through Wall Street. For a long time we’ve been warning the 2008 meltdown never ran its course, foiled by mega-bailouts … bankers never shared the sacrifice … fought all reforms … are back to business-as-usual … learned no lessons … now even more delusional, expecting bigger bonuses … trapped in denial for three years … cannot see what’s ahead … a perfect setup for a bigger crash.

That’s why my eye locked on Martin Weiss’ “7 Major Advance Warnings.” Weiss has been a champion of the little guy for 40 years, author of “The Ultimate Money Guide for Bubbles, Busts, Recession and Depression.” Weiss Ratings of domestic and foreign debt markets downgraded U.S. debt before the S&P.

Both of us were warning well in advance of the 2008 crash. It was so predictable: Weiss warned of “failure of Bear Stearns Lehman, Washington Mutual, near-failure of Citigroup and the demise of Fannie Mae years before it collapsed.”

So listen closely to his “7 Major Advance Warnings,” which are “the most important in the 40-year history of my company.” Many will dismiss them, distracted by today’s campaign noise. Others will dismiss them as “over there,” problems for Europeans. Weiss warns: EU banks problems are “bound to have a life-changing impact on nearly all investors in the U.S. and around the globe.”

So listen and discount what Wall Street is selling you. Protect your portfolio. Here are edited highlights:

1. Greece will default very soon ...
”Banks must bite the bullet and take some big hits in their Greek loans. … Whether banks accept this ‘solution’ voluntarily or not, it will mean Greece is in default.”

2. The contagion of fear will spread …
Global investors know “if one major Western government can default, so can others.” They will refuse to lend “to highly indebted governments” or “demand outrageously high yields.”

3. European megabanks will collapse …
Some of the “largest banks will collapse under the weight of defaulting sovereign debts and … mass withdrawals … Spain … French banks” … the impact will ripple across “J.P. Morgan Chase, Bank of America and Citigroup … All three are in danger.”

4. EU governments suffer new credit rating downgrades ...
”France and Germany, will scramble to rescue their failing banks.” But “bank bailouts are seriously flawed” as “governments gut their own fiscal balance … suffer big downgrades,” or pay “far higher interest rates.”

5. Spain and Italy next to face default on their massive debts ...
With “$3.4 trillion in debt, or about 10 times more than Greece” they too risk default.

6. Global debt markets will suffer a critical meltdown ...
Anticipating “default by a country as large as Spain or Italy, nearly all debt markets in the world will freeze.” Withdrawals, panic “not only crush the borrowing power of the PIIGS” but threaten meltdowns in “France, Germany, Japan, the U.K. and the U.S.”

7. Vicious cycle: sovereign defaults, bank failures, global depression ...
Government defaults trigger more bank failures, “cut off the flow of credit to businesses and households, sink the global economy into a depression, and perpetuate the vicious cycle.”

Warning to investors: No bank bailouts, power to Occupation
History inevitably repeats itself: Arab Spring triggered Wall Street Fall. Next, the raging European monetary collapse will ripple through America’s banking system, completing the 2008 meltdown that never ended because Wall Street fought all reforms.

But now, a bigger meltdown as history repeats a dangerous cycle like the 1929 Crash and Great Depression.

History will also deal a fatal blow to Wall Street. Weiss adds a key warning: No bank bailouts. America’s banking system is bankrupt, structurally and morally. Washington is broken. And thanks to the Occupiers Revolution the masses will never accept new bank bailouts. Never. They’ll toss politicians and overthrow government first.

No new bailouts will be the stake in the heart of Wall Street, ending the “greed is good” power of America’s “bloodsucking vampire squid,” handing the Occupiers new political power in Washington.

Weiss’s worst-case scenario highlights everything we’ve both been warning investors about for a long time. The 2008 meltdown never ended, lessons never learned. But now the end game is accelerating.

Listen closely: Weiss final warning to all investors: “Get all or most of your money out of danger immediately … above all, stay safe!” Prepare for the coming bank collapse. And discover how this historic scenario will empower the Occupiers message to get money out of elections: “One citizen. One dollar. One vote.”

Compromise on that principle and Wall Street wins, again.

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