More on the Transfer of B of A Toxic Assets to Federally Insured Program

Criminal Scumbag Ken Lewis Testilies Before Congress

The following is a scathing article by William Black Ph.D. professor of Economy and Law and former federal prosecutor of the S&L Scandal.  This is further coverage of the news that Bank of Ameerica Corporation (a holding company) is transferring trillions of dollars worth of uninsured CDOs mostly toxic assets from its Merrill Lynch subsidiary to Bank of America (the bank not the holding company) which is federally insured by FDIC (and eventually the US Taxpayer). The FDIC fought this but the Federal Reserve  approved and pushed it through.

Proffessor Black pulls no punches in his explanation of the outright fraud involved here and gives a clear picture as to why and how this has occurred. It should make any US citizen that is not an officer of a major bank mad as hell. But of course most will go on with the false left-right paradigm and blame it on a party. Its pathetic. From the Dailybail.com

William Black: Not With A Bang, But A Whimper: Bank Of America’s Derivatives Death Rattle

BAC continues to deteriorate and the credit rating agencies have been downgrading it because of its bad assets, particularly its derivatives.  BAC’s answer is to “transfer” the bad derivatives to the insured bank – transforming (ala Ireland) a private debt into a public debt. (Photo – Bank of America San Francisco Headquarters)

Background coverage of this story can be found here:

• HOLY BAILOUT – Federal Reserve Now Backstopping $75 Trillion Of Bank Of America’s Derivatives Trades

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Guest post by William K. Black

Bob Ivry, Hugh Son and Christine Harper have written an article that needs to be read by everyone interested in the financial crisis.  The article (available here) is entitled: BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit. The thrust of their story is that Bank of America’s holding company, BAC, has directed the transfer of a large number of troubled financial derivatives from its Merrill Lynch subsidiary to the federally insured bank Bank of America (BofA).  The story reports that the Federal Reserve supported the transfer and the Federal Deposit Insurance Corporation (FDIC) opposed it.  Yves Smith of Naked Capitalism has written an appropriately blistering attack on this outrageous action, which puts the public at substantially increased risk of loss.

I write to add some context, point out additional areas of inappropriate actions, and add a regulatory perspective gained from dealing with analogous efforts by holding companies to foist dangerous affiliate transactions on insured depositories.  I’ll begin by adding some historical context to explain how B of A got into this maze of affiliate conflicts.

Ken Lewis’ “Scorched Earth” Campaign against B of A’s Shareholders

Acquiring Countrywide: the High Cost of CEO Adolescence

During this crisis, Ken Lewis went on a buying spree designed to allow him to brag that his was not simply bigger, but the biggest.  Bank of America’s holding company – BAC – became the acquirer of last resort.  Lewis began his war on BAC’s shareholders by ordering an artillery salvo on BAC’s own position.  What better way was there to destroy shareholder value than purchasing the most notorious lender in the world – Countrywide.  Countrywide was in the midst of a death spiral.  The FDIC would soon have been forced to pay an acquirer tens of billions of dollars to induce it to take on Countrywide’s nearly limitless contingent liabilities and toxic assets.  Even an FDIC-assisted acquisition would have been a grave mistake.  Acquiring thousands of Countrywide employees whose primary mission was to make fraudulent and toxic loans was an inelegant form of financial suicide.  It also revealed the negligible value Lewis placed on ethics and reputation.

But Lewis did not wait to acquire Countrywide with FDIC assistance.  He feared that a rival would acquire it first and win the CEO bragging contest about who had the biggest, baddest bank.  His acquisition of Countrywide destroyed hundreds of billions of dollars of shareholder value and led to massive foreclosure fraud by what were now B of A employees.

But there are two truly scary parts of the story of B of A’s acquisition of Countrywide that have received far too little attention.  B of A claims that it conducted extensive due diligence before acquiring Countrywide and discovered only minor problems.  If that claim is true, then B of A has been doomed for years regardless of whether it acquired Countrywide.  The proposed acquisition of Countrywide was huge and exceptionally controversial even within B of A.  Countrywide was notorious for its fraudulent loans.  There were numerous lawsuits and former employees explaining how these frauds worked. 

Setting Up Another Bailout for B of A – Socialism for Corporations

Protesters at St. Louis B of A not allowed to close their accounts.

The criminals at the Fed are trying to force the FDIC to accept trillions of dollars worth of unsecured derivatives to be transferred from B of A’s subsidiary Merrill Lynch to Bank of America Bank where they will be then insured by the FDIC and thus the American tax payer. This is from the scumbag bank that will not let people close their accounts. From Washingtons Blog:

The Federal Reserve and Bank of America Initiate a Coup to Dump Billions of Dollars of Losses on the American Taxpayer

Posted on October 18, 2011 by WashingtonsBlog

The Federal Reserve and Bank of America Initiate a Coup to Dump Billions of Dollars of Losses on the American Taxpayer

Bloomberg reports that Bank of America is dumping derivatives onto a subsidiary which is insured by the government – i.e. taxpayers.

Yves Smith notes:

If you have any doubt that Bank of America is going down, this development should settle it …. Both [professor of economics and law, and former head S&L prosecutor] Bill Black (who I interviewed just now) and I see this as a desperate move by Bank of America’s management, a de facto admission that they know the bank is in serious trouble.

The short form via Bloomberg:

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…

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, according to the data, which represent the notional values of the trades.

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

Now you would expect this move to be driven by adverse selection, that it, that BofA would move its WORST derivatives, that is, the ones that were riskiest or otherwise had high collateral posting requirements, to the sub. Bill Black confirmed that even though the details were sketchy, this is precisely what took place.

And remember, as we have indicated, there are some “derivatives” that should be eliminated, period. We’ve written repeatedly about credit default swaps, which have virtually no legitimate economic uses (no one was complaining about the illiquidity of corporate bonds prior to the introduction of CDS; this was not a perceived need among investors). They are an inherently defective product, since there is no way to margin adequately for “jump to default” risk and have the product be viable economically. CDS are systematically underpriced insurance, with insurers guaranteed to go bust periodically, as AIG and the monolines demonstrated. [Background.]