The banksters are at it again

If you haven't heard the term 'bankster' before, it emerged in common usage around the time of the 2007/2008 financial crisis - or, if you will, the first instalment of the ongoing financial crisis, which is very much still with us (and will be for years to come). It's a combination of the words 'banker' and 'gangster', and sums up the ethical proclivities of the larger banks and their senior executives fairly accurately, IMHO.

It seems they're at it again. Bloomberg reported in October:

Bank of America Corp. [BoA], 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.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

There's more at the link.

What this means is that the Federal Reserve wants the FDIC to protect and insure investment transactions in the same way that it protects and insures banking transactions. However, the two are very different in nature. If I make a deposit of (say) $1,000 into my savings account, I'm investing my money in the expectation that it'll be there when I want to withdraw it. The FDIC insures that account as an additional safeguard. However, if I make an investment of $1,000 in the financial markets, hoping that the value of my investment will rise, I'm taking a calculated risk. If its value declines instead, I'll lose money on the deal. I know that before making the investment. However, it now appears that the Federal Reserve wants the FDIC to insure my investment, my 'bet' on the market, in the same way that it would insure my deposit into a savings account. In other words, I'll be indemnified for the risk I'm taking by the US government, via the FDIC's line of credit with the US Treasury.

Needless to say, this is lunacy! It exposes every US taxpayer to vastly increased liability for transactions that should not be subject to such insurance at all. As Karl Denninger points out, it's being done for Bank of America's benefit, so that it doesn't have to post more collateral as security for its investment transactions.

So let's see what we have here.

Bank customer initiates a swap position with Bank. In doing so they intentionally accept the credit risk of the institution they trade with.

Later they get antsy about perhaps not getting paid. Bank then shifts that risk to a place where people who deposited their money and had no part of this transaction wind up backstopping it.

This effectively makes the depositor the "guarantor" of the swap ex-post-facto.

That the regulators are allowing this is an outrage.

If you're a Bank of America customer and continue to be one you deserve whatever you get down the line, whether it comes in the form of higher fees and costs assessed upon you or something worse.

Incidentally, the amount of exposure in question is unknown but Bank of America has some $53 trillion in total derivative exposure (out of $75 trillion in total between it and Merrill, which is also a subsidiary of the holding company.)

Of course we do not know how much was shifted and BAC won't comment on the record -- but this sort of movement of liabilities should be flatly prohibited as the counterparty in question accepted the risk of the entity they traded with originally when the transaction was first initiated. That the firm's ratings have deteriorated and thus it may be required to post additional capital against these positions by those counterparties does not justify shifting the risk to depositors simply so the bank can avoid posting collateral against a deteriorating credit picture, which for all intents and purposes shifts the risk to the taxpayer since the FDIC has a line of credit at Treasury. Never mind that posting that collateral should not materially impair operations.

Again, more at the link. Bold, italic and underlined print are Mr. Denninger's emphasis.

Bear in mind, the total debt of the US government stands at about $15.1 trillion right now. BoA's exposure to financial derivatives is at least $53 trillion. That's three and a half times as much as current US government debt! And we, the taxpayers of this country, will be on the hook to guarantee much of it - no-one knows how much for sure - if BoA is allowed to shift its investment transactions beneath the financial transaction 'insurance umbrella' of the FDIC.

Does the Federal Reserve care that it's burdening the taxpayers of this country with such a responsibility? Like hell it does! It doesn't give a damn about you and I, the 'little people' of this country. Its loyalties are to the bankers and investment houses from which most of its senior staff are drawn. It's an incestuous relationship, whereby the banks and investment houses are 'in bed' with the most powerful financial agencies of our government, for the mutual benefit of all concerned - and no-one else.

If that doesn't make you spitting mad, it should! It's yet another reason why we need to 'clean house' in the 2012 elections, and elect Representatives and Senators who'll stop this madness. If we don't . . . we're doomed.





Peter

EDITED TO ADD: Jim March, a long-time online buddy, added this information as a comment to this post. I thought it was important enough to copy it here, in the body of the article.

The situation is actually far, far worse than you think.

Peter, I hope you pay attention to this post because I'm about to blow your mind.

In 2005 the bankster's lobbyists got a re-write of the bankruptcy rules passed. First thing it did is made it even harder on consumer bankruptcies and student loan debt discharges, so that alone tells you this was a pro-banker bill.

It also set up a "chapter 15" bankruptcy process especially for "international financial institutions". It defined the term "forward contract" as including the kinds of garbage we now know are dirty words: swaps, derivatives, hedges, etc.

It then says that in a chapter 15 bankruptcy, "forward contracts" get paid FIRST - before any other debtor.

Yup. The gambling debts get paid first.

Go find a bill from 2005 titled "Bankruptcy Abuse Prevention and Consumer Protection Act". Do a text search on the phrase "forward contract". Under the chapter 15 section you'll find that such "forward contracts" and other idiotic instruments:

"shall not be stayed, avoided, or otherwise limited by operation of any provision of this title or by any order of a court or administrative agency in any proceeding under this title."

So. It's not just that the FDIC back-stops the gambling debts (which is what "derivatives" are). Oh no. Problem now is, BofA's money goes flowing out to that crap the moment the bank goes bankrupt, leaving the FDIC to try and pick up the pieces of whatever is left (which will be a lot!).

But it STILL gets worse. The "derivatives market" is an unregulated international casino worth somewhere over a quadrillion dollars - 1,000 times a trillion. The numbers are just silly. Well let's ask a key question then: how easy would it be for a highly placed manager at BofA to place bets with an overseas accomplice that they both know will lose? The money goes wooshing out to the overseas bookie and the executive in question follows it out by plane to a villa in Monaco or whatever and a seriously fat retirement.

Final thought: the bankruptcy "reforms" of 2005 are now easily spotted as preparation for the blowup that happened in 2007/2008. So while the "powers that be" were mocking Peter Schiff, Ron Paul and the like regarding the housing bubble, in secret they fully agreed with the people who knew the bubble was going to blow - and made detailed preparations for it via their "friends" in congress.

Thanks, Jim. Your added information merely underscores the importance of getting rid of everyone - politicians and banksters alike - responsible for this fiscal catastrophe!