HOLY BAILOUT - Federal Reserve Now Backstopping $75 Trillion Of Bank Of America's Der

FreudianSlippers

http://dailybail.com/home/holy-bailout-federal-reserve-now-backstopping-75-trillion-of.html

This story from Bloomberg just hit the wires this morning. Bank of America is shifting derivatives in its Merrill investment banking unit to its depository arm, which has access to the Fed discount window and is protected by the FDIC.

This means that the investment bank's European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn't get regulatory approval to do this, they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to "give relief" to the bank holding company, which is under heavy pressure.

Wow, this is a particularly big deal. But then I saw this too:

Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure

This would suggest to me that there are much more important international monetary problems than the Euro at the moment. Are we turning a blind eye on impending financial meltdown of the Dollar and the Euro?

whatstherush

FreudianSlippers wrote: »

http://dailybail.com/home/holy-bailout-federal-reserve-now-backstopping-75-trillion-of.html



Wow, this is a particularly big deal. But then I saw this too:

Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure

This would suggest to me that there are much more important international monetary problems than the Euro at the moment. Are we turning a blind eye on impending financial meltdown of the Dollar and the Euro?

Isn't that the nature of CDS's. You don't have to own a bond to take out a CDS on it, so infinite CDS's can be taken out and hence the losses can be infinite or in BOA case 75 trillion. IMO a CDS on bond you don't own is a pure and simple gamble, in saying that for BOA to be on the hook for 75 trillion all the bonds would have to go bad, without knowing the nature of those bonds its hard to say what that likely hood is, but I would hope it isn't high.

FreudianSlippers

whatstherush wrote: »

Isn't that the nature of CDS's. You don't have to own a bond to take out a CDS on it, so infinite CDS's can be taken out and hence the losses can be infinite or in BOA case 75 trillion. IMO a CDS on bond you don't own is a pure and simple gamble, in saying that for BOA to be on the hook for 75 trillion all the bonds would have to go bad, without knowing the nature of those bonds its hard to say what that likely hood is, but I would hope it isn't high.

Maybe it's my misunderstanding, but I was under the impression that it's the very nature of derivative trading that causes the problems in the first place. Either way, a $75trillion backing is worrying.

I do take the point that it would involve a large amount of them going bad, but there is obviously a worry that a large enough percentage will that this backing was established.
Or should this be read as good financial news that the Fed is willing to back these banks should it go bad? Genuine questions btw

Hayte

Bank of America Corp. (BAC) thought the Merrill Lynch acquisition in 2008 was a good deal, which isn't difficult to understand at the time because they were getting it for a third of its value at the same time the previous year. Merrill Lynch is now a rather burdensome subsidiary of BAC and to cut a long story short, that deal is probably going to go down as one of the worst in recent history.

If Merrill's derivatives portfolio implodes on Merrill's books then it exposes Merrill (obviously) and BAC to collateral calls on an unknown but probably huge notional value in trades.

So this is the plan:

BAC transfers $X of derivatives that are likely to go bad to Bank of America (BoA), an FDIC insured deposit bearing subsidiary of BAC. BoA has $Y of FDIC backed deposits.

If that derivative portfolio fails spectacularly, it potentially wipes out those deposit accounts but hey, FDIC has insured them anyway up to $250,000. Non uber rich people won't actually lose their savings because FDIC insured deposits are backstopped by the US Government. Instead, the Government will probably do what it usually does when its faced with a black hole of debt. It pillages social security and spreads the burden on the entire US population through austerity measures.

This is basically a type of legal, industrial scale insurance scam with the blessing of the insurance company who are bought by the scam artists anyway. It is only possible in a world where Glass Steagal has been repealed and its also a thinly veiled TARP 2.0 in case you didn't have any doubts already.

BAC wouldn't risk its deposit subsidiary's credit rating if Merrill Lynch's problems could be contained in Merrill Lynch's shop. So even though we don't know the size of the derivative portfolio or the risk of it collapsing, we do know from BAC's maneuvering that they are bracing themselves for a pretty big bang. I think the $1.04 trillion figure comes from BoA financial disclosures which show that they had $1.04 trillion in deposits at some point in the middle of 2011 so something around that amount is now at risk of being wiped out and bailed out (again) by taxpayers.

I believe this is only in the news at all because of anonymous whistleblowers. No major news outlets are reporting the s**t out of it because large parts of the US media industry are bought and paid for by private interests anyway. I'd like to say that government, politics and the financial service industry are broken but the reality is that they are working in perfect harmony. It is reaping great benefits for senior management at BAC + major stakeholders + providing campaign dollars for political careers. At the same time BAC is mitigating great losses to the company with an ingenious solution to a real problem. Unfortunately, most of us are not recipients of these benefits and the wealth produced by this engine and are actually getting chewed up by it. But we don't really matter at this point anyway and thats really just the way it is.

I don't recommend anyone to withdraw all their money and stuff it in a shoebox under their bed. I don't recommend you go crazy and buy gold or anything like that. But if you are sick of "too big to fail" banking practices that benefit large monopolies at your expense, then you should look into moving your savings to a local cooperative bank or credit union. There are some disadvantages in the sense that they may not have anywhere near as many ATMs all over the country or comparable online services. If you pay for utilities with cashback you may need to plan further ahead. But if you are tired of being part of the problem by having your money used in this way, then there are alternatives. I appreciate that BoA is everywhere and for convenience factor its like the McDonalds of personal banking. You know you shouldn't do it, but some days you walk past 2 or 3 McDonalds and you just have to buy a double bacon and egg mcheart attack.

Hayte

I'm kind of astonished this is not getting more attention.

Between the plan to levy a $5 monthly fee for basic debit card/credit card facilities, BAC's credit downgrade last month, the continuing death spiral of its share price (in a chart that looks positively Lehman-esque) and this latest move with Merril Lynch, there is something in this story directly affects alot of American citizens, whether they realize it or not.

SupaNova

I'm in awe of the FED's can kicking abilities. For 3 years now they have threaded the line, proving doomsayers of both ilk(deflation and hyperinflation) wrong.

The quoted text below is from an article by James Conrad(a trader) from 2008 who gives a possible explanation as to why we didn't see a massive inflation then. If you haven't seen them before, you can go take a look at the charts mentioned below under the heading Reserves and Monetary base here:
http://research.stlouisfed.org/fred2/

The Federal Reserve has embarked on the biggest money printing surge in history, though the world economy has yet to feel its effect. To prevent newly printed dollars from causing immediate hyperinflation, these newly printed dollars have been temporarily sequestered into the banking industry’s reserves, rather than being released for general use. This was done in a number of creative ways.

First, the number of “reverse repurchase agreements” has been increased to $97 billion. A “repurchase agreement” is a non-recourse method by which the Fed increases the money supply by paying dollars for collateral. The collateral, in this case, are toxic defaulting mortgage bonds that banks want to be rid of. The cash enters the system and theoretically stimulates the economy because it supplies banks with money to make loans with.

A “reverse repurchase agreement” is the exact opposite. It is a method of reducing the money supply by selling bonds to the banks, and taking the cash back out of the system. In this case, the Fed gave banks cash for toxic defaulting mortgage bonds. Then, it took the same cash back by selling the banks new treasury bills just received from the U.S. Treasury. The Fed, in turn, bought these T-bills with the newly printed dollars. The banks, having gotten rid of toxic assets, were allowed to transfer private risk to the taxpayers. This process bolsters bank balance sheets by privatizing bank profits, and socializing bank losses.

At the same time, the U.S. Treasury has been very busy selling newly printed Treasury bills to anyone foolish enough to buy them. To a large extent, the fools reside overseas, but some reside inside this country, and the sale of these U.S. bonds has resulted in a substantial inflow of foreign reserves to the Treasury. Banks have also been offered favorable interest rates on both reserve and non-reserve deposits held at the Fed.

This was combined with what is probably a tacit agreement by which the banks were given the money and led to redeposit most newly printed cash back into the Fed, in a category known as “Reserve balances with Federal Reserve Banks”. This category has ballooned from $8 billion in September to $578 billion on November 28th.

On October 9, 2008, the Federal Reserve began paying interest on deposits at Federal Reserve Banks. The overnight rate happens to have dropped way below the “official” federal funds rate. Meanwhile, rates paid by the Fed on required deposits are only .1% less than the federal funds rate, and on voluntary deposits only .35% less than the federal funds rate.

Accordingly, U.S. banks can engage in a dollar based one-nation carry trade, which further sequesters the newly printed dollars.
Banks are borrowing from the Fed, then taking the same money, redepositing it, and earning a spread on the interest rate differential. Banks can also deposit newly printed dollars into a category known as “Deposits with Federal Reserve Banks, other than reserve balances.” This category also earns interest in a similar way, and has risen from $12 billion to $554 billion in the same time period. The funds will eventually be used for direct lending from the Fed to open market borrowers, at huge levels of risk that even the free-wheeling cowboys who run things at America’s private banks are not willing to accept.

That being said, most money center banks in America are certainly NOT risk averse, even now. People who are bailed out of foolish decisions never become risk averse. They are, however, very insolvent, and, aside from the non-recourse provisions of Fed repurchase agreements, they would prefer, for bad publicity reasons, not to default on their obligations to the Fed. Aside from the newly printed dollars given to them by the Fed and the recent transfer of all risk to the taxpayers, they have no liquidity of their own with which to make new loans. That is why they aren’t making any. The Fed will eventually make the loans itself and take all the risk, while using the private banking system as merely a means for delivery.

Right now, however, the Fed wants to sequester the new dollars, until the U.S. Treasury has finished the major part of its funding activities. That will allow the Treasury to borrow money at very low rates. The Fed intends to feed money into the system, but at the minimum rate needed to prevent the DOW index from staying under 8,000 for any significant period of time. Right now, most measures are designed simply to stop U.S. banking laws from automatically requiring the closure of most big banks.

The extent of manipulations engaged in by this Federal Reserve is mind numbing. The total number of sequestered dollars has now reached well in excess of $1.2 trillion dollars. That means that Fed credit, so far, has been effectively increased only by about 10%, over the last 2.5 months, rather than 150% that appears on the surface of the Fed balance sheet. The rest is temporarily sequestered.