COMMENTARY

Peter Burgess

Bank Of America Dumps $75 Trillion In Derivatives On U.S. Taxpayers With Federal Approval 102 comments | October 21, 2011 | about: BAC, includes: AIG, JPM Font Size: Print Email Recommend 1 Share 4533 inShare Bloomberg reports that Bank of America (BAC) has shifted about $22 trillion worth of derivative obligations from Merrill Lynch and the BAC holding company to the FDIC insured retail deposit division. Along with this information came the revelation that the FDIC insured unit was already stuffed with $53 trillion worth of these potentially toxic obligations, making a total of $75 trillion. Derivatives are highly volatile financial instruments that are occasionally used to hedge risk, but mostly used for speculation. They are bets upon the value of stocks, bonds, mortgages, other loans, currencies, commodities, volatility of financial indexes, and even weather changes. Many big banks, including Bank of America, issue derivatives because, if they are not triggered, they are highly profitable to the issuer, and result in big bonus payments to the executives who administer them. If they are triggered, of course, the obligations fall upon the corporate entity, not the executives involved. Ultimately, by allowing existing gambling bets to remain in insured retail banks, and endorsing the shift of additional bets into the insured retail division, the obligation falls upon the U.S. taxpayers and dollar-denominated savers. Even if we net out the notional value of the derivatives involved, down to the net potential obligation, the amount is so large that the United States could not hope to pay it off without a major dollar devaluation, if a major contingency actually occurred and a large part of the derivatives were triggered. But, if such an event ever occurs, Bank of America's derivatives counter-parties will, as usual, be made whole, while the American people suffer. This all has the blessing of the Federal Reserve, which approved the transfer of derivatives from Merrill Lynch to the insured retail unit of BAC before it was done. Contrary to popular belief, which blames the global financial crisis on subprime borrowers, it was the derivatives, based upon the likelihood that those borrowers would pay their debts, that were the primary catalyst triggering the global economic crisis of 2008. Back then, the derivative obligations of AIG (AIG) imploded the insurer. Under the pressure of fear-mongering from the Federal Reserve and the financial industry, the U.S. government committed hundreds of billions of dollars to bail out AIG's counter-parties, including the biggest banks of Europe and America. Had the government not stepped in, virtually all the banks on Wall Street would have gone bankrupt. A host of European and Asian banks would have followed. AIG was not FDIC insured. It could have been allowed to fail, and should have been allowed to fail. All the banks on Wall Street that would have failed should have failed. Their speculator counter-parties should have been bankrupted, and their retail depositors should have been made whole. The retail divisions could have been temporarily nationalized and sold off as soon as possible to more prudent management. Had this occurred, America would have experienced a deep but very temporary economic downturn, and, by now, the downturn would be over. But, with derivatives obligations tied intimately with FDIC insured depositary units, the debt will need to be paid by the government, as a matter of law. We will have no legal choice except to default, or pay them off. In 2008, politicians in Washington D.C., and Trojan horse operatives within the financial organs of our government, bailed out imprudent managements of big casino-banks. Bank executives not only didn't need to go bankrupt, as they should have, but collected huge bonuses. Later, in response to the abuse, Congress passed the Dodd-Frank legislation and the Volcker rule. These were supposed to insure that such bailouts were not needed in the future. Supposedly, this would prevent further abuse of the American taxpayer. The most recent abuse-event, involving BAC, illustrates the uselessness of such laws. Bank of America NA is FDIC insured, and has the blessing of the Federal Reserve, in spite of such a transaction being prohibited by Section 23A of the Federal Reserve Act. Specifically, the section reads in relevant part: 'A member bank and its subsidiaries may engage in a covered transaction with an affiliate only if-- 1. in the case of any affiliate, the aggregate amount of covered transactions of the member bank and its subsidiaries will not exceed 10 per centum of the capital stock and surplus of the member bank; and 2. in the case of all affiliates, the aggregate amount of covered transactions of the member bank and its subsidiaries will not exceed 20 per centum of the capital stock and surplus of the member bank ...' The Federal Reserve is an institution largely controlled by those who are probably the counter-parties to the Merrill Lynch derivatives. No doubt, its approval of the transaction, in spite of the prohibitions of section 23A arise out of a claim that Merrill is not a 'bank' as defined under the Act, and, therefore, not an affiliate. But, the Act also provides that: For purposes of applying this section and section 23B, and notwithstanding subsection (b)(2) of this section or section 23B(d)(1), a financial subsidiary of a bank-- 1. shall be deemed to be an affiliate of the bank; and 2. shall not be deemed to be a subsidiary of the bank. So, Merrill Lynch is clearly an affiliate of Bank of America, and the Federal Reserve is clearly violating the law by approving this particular transaction. But, here is the kicker. Congress has given ultimate power to the Federal Reserve to ignore its own enabling Act legislation. The law also reads: The Board may, at its discretion, by regulation or order exempt transactions or relationships from the requirements of this section if it finds such exemptions to be in the public interest The FDIC opposed the move, but there is nothing the FDIC can do, except file a petition for a writ of mandamus in court, against the Federal Reserve, seeking a declaration that the approval was illegal. But, the FDIC would lose, because Congress has given the Federal Reserve Board ultimate power to do whatever it wishes. So, the bottom line is this: When something bad happens, and the derivative obligations are triggered, the FDIC will be on the hook, thanks to the Federal Reserve. The counter-parties of Bank of America, both inside America and elsewhere around the world, will be safely bailed out by the full faith and credit of the USA. Meanwhile, the taxpayers and dollar denominated savers will be fleeced again. This latest example of misconduct illustrates the error of allowing a bank-controlled entity, like the Federal Reserve, complete power over the nation's monetary system. The so-called 'reforms' enacted by Congress, in the wake of the 2008 crash, have vested more, and not less, power in the Federal Reserve, and supplied us with more, rather than less instability and problems. This is not an isolated instance. JP Morgan Chase (JPM) is being allowed to house its unstable derivative obligations within its FDIC insured retail banking unit. Other big banks do the same. So long as the Federal Reserve exists and/or other financial regulatory agencies continue to be run by a revolving door staff that moves in and out of industry and government, crony capitalism will be alive and well in America. No amount of Dodd-Frank or Volcker rule legislation will ever protect savers, taxpayers or the American people. Profits will continue to be privatized and losses socialized. Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. This article is tagged with: Financial, Regional - Mid-Atlantic Banks, United States More articles by Avery Goodman » Who Just Took $83.3 Billion From The Federal Reserve And Why? Tue, Nov 8 CME Is Legally Liable For MF Global Customer Losses Tue, Nov 8 Bank Of England Essentially Admits Intervening In Gold Market Mon, Nov 7 You may also like AIG And Greece: A Tale Of 2 Bankruptcies Today by Elliott R. Morss The 3 Biggest Reasons To Stay Out Of Bank Stocks Tue, Nov 8 by Brian L. Wilson Madoff Victims Sue JPMorgan Tue, Nov 8 by FINalternatives The Earnings Picture Mon, Nov 7 by Zacks.com Recommend 1 Share 4533 inShare Email Print Comments (102) Add a comment bgoud007Comments (7) 'Even if we net out the notional value of the derivatives involved, down to the net potential obligation, the amount is so large that the United States could not hope to pay it off without a major dollar devaluation, if a major contingency actually occurred and a large part of the derivatives were triggered.' How did you come to this conclusion, since you have no idea what the net obligation is? You also realize that these derivatives are linked to many different variables and that only a small portion would be triggered by any particular event, right? Oh, wait, I see you are a precious metals bug, so you don't concern yourself with facts. Sorry! My mistake for confusing you with a legitimate analyst! 21 Oct, 04:19 PM5 SMaturinComments (78) '...only a small portion would be triggered by any particular event' Isn't that what the Vampire Squid said to AIG? 21 Oct, 05:01 PM2 Avery GoodmanComments (201) bgoud007, Anyone with common sense knows that, since BAC counter-parties are already demanding billions of dollars in collateral from BAC, leading to this move, simply because the credit rating of Merrill and the holding company have been reduced by one notch, the total potential net obligation, arising out of a potential major contingency trigger, must involve hundreds of billions or even trillions of dollars. But, excuse me, for mistaking you for a person who has any common sense. 21 Oct, 05:15 PM14 klarsoloComments (479) I'm not surprised at all to see that the author of this article is absolutely clueless about derivatives, ratings and collateral requirements. But of course that didn't stop him from jumping on the bandwagon of writing lengthy diatribes about stuff he doesn't understand. Unanswered questions are, among others, how volatile is that net obligation and what is the risk of default and the expected loss? Also, is it maybe hedged, partially or mostly? You obviously don't know. And why don't you attack JPM and other banks for doing similar things? Because hating BAC right now is THE thing and you want to join in. Also, why is the FDIC on the hook? Do you really think think if they took over BAC they'd put the derivatives first in line? Last I heard the deposits are protected, not necessarily the counterparties. You are just another clueless poster who thinks that 'trillions of exposure' must mean 'potentially trillions of losses'. 21 Oct, 05:26 PM6 Avery GoodmanComments (201) The FDIC is on the hook because, if a contingency occurred that triggered a large derivatives obligation, it could cause the deposit-taking division of the bank to become insolvent, which would then need to be closed, and trigger tens or hundreds of billions worth of FDIC payouts to depositors. In the article, it is clearly pointed out that JPM and other banks are doing the same thing. It is a serious mistake to allow any of them, including JPM, to house derivative bets inside an FDIC insured depository bank. No BAC-hating here. The article merely uses this incident to point out that the Federal Reserve feels free to violate its own governing laws whenever it sees fit, and no one, not even the staunch opposition of the FDIC, is able to stop it. Congress has foolishly given a bank-controlled entity omnipotent powers to void its own rules at any time convenient to the banks. I am addressing the issue of the Federal Reserve, NOT Bank of America. BAC is the momentary focus at hand, but the problem is the Federal Reserve's structural inability to act as a responsible regulator. But, one more thing...something you apparently are unaware of...derivative obligations have special status in bankruptcy and insolvency proceedings. For example, the Bankruptcy Code contains “safe harbor” provisions which protect the rights of a counter party to a derivative contract to seize collateral (which might otherwise be used to reimburse the FDIC for paying depositor claims). There is also protection for derivatives counter parties from the operation of the bankruptcy automatic stay, the executory contract provisions and the normal avoiding powers of the trustee. Normally, these powers would protect the rights of the FDIC to preserve collateral to repay taxpayers for payments made to depositors. The safe harbors apply to “credit swaps”, “interest rate swaps' and most other derivative obligations. 21 Oct, 06:25 PM13 klarsoloComments (479) Most of these derivatives are run-of-the-mill interest rate swaps, fixed to floating and vice versa. Probably 99 % of the notional is hedged or constitutes offsetting deals, leaving BAC with almost no risk whatsoever. You cannot just look at the size of the notional and conclude that this is a ticking time bomb. I know that doing that is fashionable since 2008, but not every single transaction that a bank does is just waiting to blow up. Banking is complicated. Most people don't understand what a bank does, just like most people don't understand how their cell phone, their PC or even their toaster works, but they hazily look at these big numbers and then, remembering 2008, assume the worst. You just wrote the 100th article on this issue. Did you have anything new to say that hasn't been mentioned before? Not to my understanding, so I'm not sure why you felt compelled to rehash all this. Felix Salmon wrote a relatively balanced piece on this matter, but most people just indulge in 'OMG, they are trying to make a profit?! SHUT THEM DOWN' outrages. They shifted the derivatives from one subsidiary to the other not because they expect to blow up next month and want the taxpayer to eat the cost, but because it saves them money and is perfectly legal. They even asked for permission to do that. Obviously the FDIC would object, because there is no theoretical upside in it for them at all, especially publicity wise. Also, the downgrade that triggered the whole thing was not even because BACs financial situation deteriorated, but just because Moody's now thinks BAC is no longer too big to fail. In their piece they even mentioned how the actual fundamental situation improved. But to no avail, people keep looking at the low stock price and then keep hacking away, writing article after article on why BAC is about to blow up, without ever bothering to quantify how that would work. Everybody now wants to regulate the bank's business model to the ground until there's no profit left to be made with anything. Just imagine, making a profit off of the poor exploited consumer! These days, if there's any theoretical risk anywhere then you simply can't let banks do it, right? Don't you think that by regulating all risk taking ability away you will do damage to the economy also? 21 Oct, 09:14 PM4 Avery GoodmanComments (201) Of course it is beneficial for BAC and other derivatives-issuing banks to both issue the derivatives and house them in FDIC insured divisions. The article is not intended to attack BAC, but, rather, to address the inability of the Federal Reserve, given its intense conflicts of interest, to act as a bank regulator. The failings of BAC arise out of extreme greed and incompetent management, which is the same issue afflicting all the world's casino bankers. People who are making angry comments about this article need to educate themselves about derivatives. Credit default swap exposure for all American banks is about $15 trillion, or about 6% of the total derivatives, and these type of derivatives are the ones that imploded the world financial system in 2008. Interest rate swaps are about 81%. Foreign exchange contracts are about 10-11%. The five banks, which issue the vast majority of all derivatives in America, are JP Morgan Chase, Bank of America, Citibank, Morgan Stanley and Goldman Sachs, in that order. All but Morgan Stanley seem to be housing the derivatives mostly in the commercial banking divisions, just like Bank of America wants to do. But, that doesn't make doing so any less dangerous. None of them should be allowed to house ANY derivatives in FDIC insured divisions. With the addition of Merrill Lynch derivatives, Bank of America NA will have about $75 trillion in gross notional exposure, making it the #2 FDIC insured bank on the derivatives hit parade. JPM will remain #1 with about $80 trillion. Bank of America has been #1 in exposure to exchange traded futures, for quite some time, and will remain in that position, after the addition of the Merrill Lynch exposures. JPM is #1 in OTC derivatives. It is not true that 'all' exposure is 'hedged'. For example, some of the alleged hedges are with entities that cannot possibly make good on them. But, aside from that, according to the Comptroller of the Currency (OCC) the 'netting benefit' is approximately 91% in America, leaving an average 'worst case scenario' exposure of about 9% after cancellation of countering notionals. According to the ISDA, the 'netting benefit' is the difference between gross mark-to-market value and credit exposure after netting. Nine percent of $75 trillion is a 'worst case scenario' $6.75 trillion in the case of Bank of America. Translated, this means that a BAC failure, without the other banks, implodes the world financial system. Add the actions of the other irresponsible big-bank managements, and you have the prospect of a 'thermonuclear' economic event analogous to a full exchange of nuclear bombs during the Cold War, if a major contingency, insured by the derivatives, actually happens. In this case, it is the economic system and the faith of the people in their governments that will be destroyed, not the physical buildings or people. You can find exact numbers on the BAC derivatives, as well as those issued by the other imprudent banks, at the Office of the Comptroller of the Currency. The URL for the derivatives information is: http://bit.ly/n3tPKu 22 Oct, 03:21 AM8 klarsoloComments (479) Even if you interpret the numbers from the OCC correct, and I seriously doubt that they got this right, because as a far as I know there is currently no way to tell what the real net exposure for anybody is (or we wouldn't constantly be debating this issue as it was the case with MS and their European exposure just a couple of weeks ago), you're still assuming a 100 % loss on all these transactions. How exactly would that materialize? You do know that the average recovery rate on loans for example is 70 %, right? Also, don't you think that some of these derivatives are negatively correlated to one another? But let's entertain the idea of a total loss for a second. If the banks do lose all that money it means that somebody just earned the same amount. Who is that somebody? At some point it is just silly to keep assuming the absolute worst scenario that is way, WAY beyond anything we have EVER experienced or is even remotely realistic, such as assuming that anything that is potentially at risk is a probable 100 % loss. If people want that kind of certainty and safety, maybe we should also mandate that people can't drive cars or ever leave the house. Oh, wait a minute, what if an airplane hits that house? Better ban those too then. Maybe we shouldn't be producing microchips either, because a baby could potentially swallow them and suffocate. I mean, it's conceivable, right? 22 Oct, 03:48 AM2 Avery GoodmanComments (201) I think that when you put the American people on the hook for the losses incurred by private companies seeking profits, you MUST consider the worst case scenario, although, in this case, even a less than worst case would be a potential catastrophe. Bank managements are being very imprudent in issuing these derivatives (which caused the 2008 Crisis) in the first place. However, the issue at hand is putting the derivatives into FDIC insured institutions, thereby forcing the cost of failure into the pockets of American taxpayers, and away from the executives who are profiting from issuing the derivatives. The FDIC, after a failure of one of these banks, including but not limited to BAC, will be deprived of the assets that are being used as 'collateral'. That is because bankruptcy and insolvency law gives special safe harbor to derivative counter-parties above claimants like the FDIC. Therefore, the FDIC will incur much higher costs if one of the banks must be closed. It will forgo most of the reimbursement on payouts to depositors that asset sales provide. This is an abuse of the FDIC insurance fund, and, thereby, of the taxpayers. A major FDIC payout will force massive money printing that will also be an assault against anyone who owns bonds or saves money in dollars. 22 Oct, 04:02 AM7 Andrew MannComments (434) Avery, You are confusing notional value with exposure. It states clearly in the OCC report that current credit exposure is 364 billion, and collateral is held against around 80% of that. 22 Oct, 09:27 AM1 Avery GoodmanComments (201) Andrew, exposure arising out of credit swaps comprises only 6% of the total bank derivatives in the USA. 22 Oct, 05:58 PM2 Andrew MannComments (434) Avery, The word credit doesn't singularly refer to the CDs written, but to all derivatives. The word 'credit exposure' does not mean it solely applies to credit default swaps. In a previous comment you told a commenter to educate themselves, you should probably do the same. 23 Oct, 04:17 AM0 Avery GoodmanComments (201) Andrew, I didn't read your comment carefully enough. With a quick-read, I thought it said credit derivatives. Having reread it, I see it says credit 'exposure'. Actually, I would not change any views simply as a result of hundreds of billions of dollars of the taxpayer's money being at risk, rather than trillions. But, still, you are incorrect. Credit exposure on derivatives is measured using either 1. 'current exposure' (replacement cost of derivatives transactions, which is, essentially, their current market value, or 2. 'potential exposure' (an estimate of the future replacement cost of derivatives transactions, which is calculated using probability analysis over the remaining terms of the transactions. I believe that the OCC would be referring to current exposure. But, if they are referring to potential exposure, there are no guarantees that a significant event, like, for example, a dirty (radioactive waste) bomb attack in NYC, would not cause the probability model that has been used, to fly off by a wide margin. I have no problem with anyone who puts his own money at risk, so long as they are allowed to fail when they screw things up. But, when private companies, like these banks, are using the public wallet to house their risk, the proper way to measure risk is to use Murphy's law... whatever can go wrong will go wrong. The nearest example of Murphy's law, in operation, was the 2008 Crisis. All the big banks, all over the world, had carefully calculated 'risk' using various probability models. The potential exposure that was calculated for credit default swaps, using these probability formulas, was not anywhere near the actual exposure and ultimate cost. That is why taxpayers and dollar-denominated savers ended up bailing them out involuntarily. The 'Murphy's law credit exposure' to BAC derivatives ALONE is about $6.75 trillion, once offsets are taken, and the obligation is netted out in a worst case scenario. That number does not include the other big banks who are also utilizing the FDIC to backstop derivatives contracts, by housing them in the depository division. Regulators should not allow derivatives, whether from BAC, JPM or any other bank, into an FDIC insured banking division. Neither hundreds of billions, nor the actual trillions of dollars worth of risk should be allowed. It would not be allowed if the 'regulator' (a/k/a the Federal Reserve) was not hopelessly riddled with conflicts of interest. 23 Oct, 08:55 AM2 Andrew MannComments (434) Avery, At the height of the financial crisis the total losses associated with derivatives was in the hundreds of millions. This leads me to believe that is the highest that it could possibly go without a financial armageddon happening. The NCCE number pertains to all U.S. FDIC insured banks, and includes all derivatives. Total credit exposure is over 1 trillion, due to the fact that interest rates might rise., forec fluctuates etc. Whether it is legal to transfer these derivatives between subsidiaries is up for debate, but the facts about the derivatives market in general remain the same. 23 Oct, 09:55 AM0 Lamarr01Comments (2) How much collateral is in reserve at the FDIC? 26 Oct, 05:19 PM0 Lamarr01Comments (2) Other articles have mentioned the derivatives in question are with European banks. Is it likely these derivatives have declined beyond collateral requirements? Isn't it likely the derivatives that were moved to an account covered by FDIC are the most toxic? BofA could keep its derivatives that were still in the black in their investment accounts. Are these derivative contracts listed anywhere? Are they contracts between the involved parties? 26 Oct, 10:55 PM0 poet1Comments (92) YOU'RE SO SMART_ YOU ANSWER THEM: 'Unanswered questions are, among others, how volatile is that net obligation and what is the risk of default and the expected loss? Also, is it maybe hedged, partially or mostly? 22 Oct, 08:57 PM2 McGonicleComments (101) What happens when the hedging counter parities refuse to pay, as in the case of MBIA or AMBAC and do the same thing BAC and JPM are doing here, place the liability into a paper bag and place their assets into another, non-liable corporate form? 23 Oct, 04:02 PM1 onyx832Comments (23) common sense-- is that what your legal background advises you to use? attorneys usually rely on facts, not their own, often clouded common sense. 22 Oct, 12:57 PM0 The HammerComments (1403) Smart informed Americans have removed their assets from tbtf already. Fight back. 24 Oct, 08:39 PM0 SpyGuy2Comment (1) Uh, duh! Legit analysis? Not on your life. If one assumes a standard loss rate of less than 2% of the notional value that means being on the hook for a minimum of $1.5 trillion! These derivatives are highly likely to suffer a much high than normal loss rate. 27 Oct, 06:59 PM0 AlexSComments (292) Agree about your view of events that caused the 2008 meltdown. But there's more. In fact, under pressure from the banks, New York state allowed the corporate (now hollow) shell of AIG to start to 'borrow' money from the subsidiaries that fed out annuities, etc. The Fed was panicked. The day after New York's approval, the Fed assumed the obligations of AIG. If they hadn't, then the big banks would have kept all those annuity assets tied up in court. Can you imagine the panic as all those old folks were cut off from their incomes? The execs at the banks could, and played it for all it was worth (that would be 100% payback on the bets). So if you want to blame someone, blame the New York state insurance commission, which was supposed to keep AIG and the insurance subsidiaries at arms length. And blame that nitwit Governor of New York, who was also applying pressure to open up the annuities and use them for AIGs gambling losses. 21 Oct, 05:10 PM6 cpmodComments (4) Amazing ignorance . Another no nothing second floor expert. 21 Oct, 05:38 PM1 stocknerdComments (508) The 75 trillion is, well beyond the pale of reality.The number is only possible loss if the world ends. The USA does not have that much money anywhere. What is the GDP of the USA? Not 75 T. 21 Oct, 06:09 PM2 klarsoloComments (479) Do you have even the faintest understanding that the vast, VAST majority of this exposure is through ordinary interest rate swaps which usually constitute no risk at all to the bank but quickly mount up to staggering notionals on paper? Example: If you do a $ 50 million fixed to floating swap with counterparty A and then offset it with a $ 50 million floating to fixed deal with counterparty B then you're left with no risk, but a $ 100 million exposure in derivatives. 21 Oct, 11:06 PM2 Jack StrukelComment (1) CRIMINALS AND CRIMINALITY SEEM TO PUT BANKS AND OUR FEDERAL REGULATORS IN THE SAME BOAT. THIS TYPE OF CORPORATE BUSINESS WITH TAXPAYERS SUBJECT FOR THE BAIL OUT IS UN-AMERICAN AND THE REASON THE PEOPLE ARE DEMONSTRATING AGAINST WALL STREET. CAPITALISM AS WE HAVE KNOWN IT IS GOING TO FAIL IF THIS TYPE OF CONDUCT IS NOT STOPPED. MANY PEOPLE NEED TO GO TO JAIL. SOM 21 Oct, 06:16 PM3 gerald vaughnComment (1) What is going on in our Govenrment and in the White House. On or by November 5th close out all your bank accts at all major U.S. banks and lets start marching on Washington. We need Occupy Washington and Wall Street. I'm tired of this crap!! 21 Oct, 06:34 PM3 klarsoloComments (479) Yes, please take your $ 200 out and show them evil banks. How dare they want to make a profit. It should all be for free. 21 Oct, 11:08 PM2 Avery GoodmanComments (201) No one should be making a profit by shifting liabilities and losses upon the American taxpayer. That is a welfare mentality that has no place in a free market. But, America has become a crony capitalist economy, not a free market. That is what we must change by prohibiting derivatives from being placed inside FDIC insured institutions. 22 Oct, 05:32 PM5 poet1Comments (92) you're constant angry posts make you sound like one who works for a bank. BTW, there's a HUGE difference in making a profit & the limitless greed that has ruined our country. and of course, that psychopathic greed is what drives the ceo of every banking institution- it is UNPATRIOTIC & they should all be tried for treason 22 Oct, 09:25 PM1 RedHeadKingPinComments (7) Yes, it SHOULD be 'free'. Or at least, funded by tax dollars and operated as a public utility - if we're speaking of simple, basic use of a bank as a place to store money are draw checks from. Don't use a cheap 'false dichotomy' ploy, unless you are actually this simple minded. Yes, it IS evil to try and maximize profit off of this process. You are a severely misguided human being. I don't know whether your simple mindedness leads to your tendency to see false dichotomies, or if it's your moral shortcomings that have resulted in an generally addled cognitive capacity. But you are very, very wrong. 25 Oct, 11:11 AM0 klarsoloComments (479) Wow, are you for real? This could be from the Onion. 25 Oct, 06:22 PM0 sweetenigmaComment (1) I don't know anything about derivatives but the Federal Reserve Act was created in secrecy by big bankers and passed by congress on December 23rd,1913 while Americans were too preoccupied with Christmas to even see it coming. President Woodrow Wilson signed it into law as an exchange for financial campaign support(from the bankers) on his next election. Woodrow later said in regards to the federal reserve act.. 'I am a most unhappy man. I have unwittingly ruined my country. The growth of the nation, therefore, and all our activities are in the hands of a few men. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men' The author of this article is right on point. Th Federal Reserve is corrupt and it must be abolished forever. 21 Oct, 07:59 PM6 Chris KentComments (27) $75T? I'm still too stuck on that number to sit and really read the legal ramifications of this article. How do you write $75T in derivatives? And over how much time? How is it possible that some of them have not expired by now? Most of these came through Merrill as I understand it. If many of these derivatives came through Merrill, how were they missed by BAC executives at the time of the buyout... oh I forgot, Ken Lewis cowboy'ed this acquisition, no due diligence done there!!! 21 Oct, 11:02 PM1 Andrew MannComments (435) 75 trillion is a notional amount. 22 Oct, 01:26 AM0 dgarrowComments (3) That is just BOA there ar $250 TRILLION in the top 5 banks and $600 TRILLION world wide. If one goes it will take the others down and Greece could start it all.Numbers form OCC.gov and BIS.org 24 Oct, 12:08 AM0 FalconflightComments (64) You have politicians actually believing they can manage some of the most complex matters one can face. These nat'l pols are generally not only not very bright, but actually closer to dull normal (I won't name the several dozen that instantly come to mind). Yet, with their staff and lobbyists, manage by legislation such as Dodd-Frank, Sarbaines-Oxely, and 'Obamacare' which as we know or at least suspect, are the driving force of America's future. 21 Oct, 11:37 PM1 Andrew MannComments (435) Avery, I agree with the last part of your article. The revolving door between Wall Street, and Washington is appalling. You mislead readers by saying there are trillions of dollars in exposure. Total exposure for the U.S. derivatives market is a little over 300 billion (out of a 244 trillion notional value). The majority of these derivatives are not speculation, as you would like your readers to believe. 22 Oct, 01:30 AM1 frostedComment (1) TILT This makes me angry sad and digested all at the same time. It has been shown several times that the mortgages used to create the toxic assets in the first place were improperly handled and that in court the banks can not produce the note. So do not send any more money to any firm or bank that is claiming a sub-prime loan obligation. You do not owe anyone anything. time to start over just like in pinball the light is flashing TILT 22 Oct, 09:05 AM1 moneyTalksBSWalksComments (16) Your article title has 'bash BAC' written all over it despite your claims later on that the target of the article was not BAC but the Federal Reserve. What BAC is doing may not be socially desirable but why should they not do it if their competitors are? Also let's assume for a moment that your loss claims are correct(they're not as several posters have pointed out). Do you really believe that the Federal Reserve will print money to cover BAC's counter parties? More than likely what will happen is that the Federal Reserve will disappear overnight via emergency legislation if there is any kind of event that threatens social order. As we have seen over the last 3 years precedence and law are really meaningless in extraordinary times whether in the financial system or national security. I think the points you make about the structure and nature of the Federal Reserve are mostly valid though. As the GAO also recently points out, there is an inherent conflict of interest in how the Federal Reserve functions in that their primary interest is protecting their masters(financial system) and not the American public. Perhaps we need to have a system that is more similar to how federal judges and Supreme Court judges are appointed (that system is not perfect either but imo will be better than how the Federal Reserve system works) 22 Oct, 10:27 AM1 weidnerlawComments (2) All the critics here are defending the fed and our govt based on the authors speculation of worst case and estimation of values. The problem is (some of us) have learned not to trust any numbers, but we do know that the govt and banks are all conspired together....and the ultimate loser is....wait for it....wait for it....the us taxpayer! 22 Oct, 02:11 PM1 poet1Comments (92) so, what are the answers smarty? :' how volatile is that net obligation and what is the risk of default and the expected loss? Also, is it maybe hedged, partially or mostly? ' 22 Oct, 09:06 PM0 klarsoloComments (479) Do you want me to answer? Or the author of the article? I've already provided plenty of arguments for my case, but I cannot give you precise answers to these questions. Neither can anyone else. But at least I'm not writing articles assuming that outlandish worst case scenarios should now be seen as almost assured. 23 Oct, 06:49 PM0 Avery GoodmanComments (201) Wrong, again, klarsolo! It is worth noting that there is no precedent for the incredibly unstable situation these banks have put us in. Back in 1995, for example, all American institutions had written a total of $16 trillion in notional value of derivatives. This compares to $209 trillion now being housed in American FDIC insured instituions with a big depository base, and another $100 trillion plus at Morgan Stanley/Goldman Sachs (which are technically FDIC insured but have few depositors). In the 1980s, derivatives basically did not exist. They were not needed then, and are not needed now. If institutions who do not suck at the public teat want to issue derivatives, and others want to buy them, let them. When the derivatives implode, let the people who profited from them go bankrupt, but don't steal from savers and taxpayers to subsidize yourselves. If a real capitalist America means that we will have a lot of people in NYC jumping out of tall buildings, during such episodes, then let it be so. All things would be as they should be. The issue is foisting the liability for potential losses upon the American people, and it does not actually matter whether the losses are hundreds of billions or trillions. There are those who can give exact, derivative by derivative and counter-party by counter-party answers to your questions. They are the people who seek to privatize gains, and socialize losses. They are the people who have foisted these derivative obligations upon the American people through the auspices of the FDIC. A few executives at the 5 biggest banks in America are the only ones who know all the details of the derivatives they have written. They choose to keep the exact information secret. It should be noted that the vast majority of the people working at these institutions are fine people...probably something on the order of well over 99%. But, there is also a hard core of sociopaths, and it doesn't take many sociopaths who happen to possess the nuclear bombs of the financial world, to bring down a nuclear winter upon the entire world population. Based upon publicly available aggregate information, however, as stated clearly above, the worst case scenario for Bank of America, alone, are losses of about $6.75 trillion, based upon aggregate information available from the Office of the Comptroller of the Currency. That is well above the net capital available to BAC, which is in the $110 billion range, and well in excess of the total assets of the bank. In light of the priority given to derivative counter-parties under bankruptcy and insolvency laws, as well as Dodd-Frank, that means few, if any assets, will be available to be sold by the FDIC. Taxpayers will not be reimbursed for hundreds of billions, or even trillions in depositor reimbursements, even with a derivatives failure that is only a tiny fraction of the 'Murphy's Law' exposure of $6.75 trillion. Nor, would depositors who happen to have more than $250,000 receive any fraction of their excess deposits because few if any assets would be available to repay them. Given that the entire US GDP is less than $15 trillion, taxes would be have to be raised as far as possible, and the excess money needed would have to be printed. The net result will be a massive theft from taxpayers and dollar denominated depositors, all to insure that casino bankers make nice profits and get paid nice bonuses, in the short term future. In short, allowing banks to house derivatives inside FDIC insured units equals irresponsibility bordering on criminality on a massive scale never before experienced in human history. 24 Oct, 04:42 AM8 McGonicleComments (102) Fully agreed. Just like MBIA, the FDIC's only choice will be either pay in full, or run like hell. Except the FDIC Is tied directly to the public fisc. This is insane; the name bank appears to have at least three or four meanings today; and the largest 'banks' are proposition betting mills that now hold the future of the world in their hands. I agree they are run by sociopaths. Though i feel as though i understand the reasons why they have come to control our government and political process, I still cannot understand why this has come to pass in the name of freedom and corporate rights. 24 Oct, 12:43 PM0 poet1Comments (92) this was supposed to appear higher, in response to a post by klarsolo 22 Oct, 09:30 PM0 SepthakaComments (15) You won't see any stories about JPM or C moving derivatives into their deposit-taking banking entities. You know why? They are already there. Both JPM and C have all of their trillions of derivatives already in their banking entity. Where are the articles of outrage? The Fed won't allow banks to take any incremental risk when taking on positions from affiliates under very stringent regulatory rules. By moving derivatives into the bank, Bank of America has managed its derivatives much more wisely than JPM and C which have entered into its derivative positions directly with their banking entities and such market transactions do not require from regulatory approval. 22 Oct, 09:47 PM2 CarouselComments (228) 'No one should be making a profit by shifting liabilities and losses upon the American taxpayer.' ^ No further facts are needed, it doesn't matter how businesses are run, or what the standard practice is, it still comes back to this point. It is not right to place this responsibility on the taxpayer, regardless of the risk, there is still a chance it could happen. 23 Oct, 05:07 AM3 SepthakaComments (15) What continues to seemingly be lost on the 'blog'-experts is JPM and C already have all their derivatives in their banking entities and have had them there for many years. Where is the outrage for those? BAC has alot of its derivative business outside of its banking entity. 23 Oct, 09:17 AM0 User 35533Comments (26) I am just stunned that there are so many people here defending the banks/downplaying the risk of derivatives. The fact is that these instruments are really not central to the basic intermediary function banks used to provide (thanks to Glass-Steagall, they functioned much like a utility, giving them low but steady profit margins.) Most of them have been booked to generate fee income - and we already know how that worked out with the securitization of home mortgage and other collateralized asset pools. Since the repeal of Glass-Steagall, we now have TBTF banks operating like casinos with full taxpayer backing. I personally don't care how many derivatives the investment banking folks wish to trade as long as they are completely distinct from those institutions taking taxpayer/small saver deposits insured by the FDIC. The minute those distinctions do not exist any more, the taxpayer is on the hook. There is no greater (corporate) welfare fraud heist known to man. 23 Oct, 03:07 PM3 David C. CaseComments (4) Exactly - well stated. At the time the repeal of Glass-Stegall was being 'debated' (of course, the fix was in from the beginning), there were those of us who offered to allow the repeal of G-S to apply to any and all banks that were willing to give up their FDIC membership and protection. Obviously, there were no takers; but, more importantly, it has since been proved that the so-called 'Chinese Wall' was an unmitigated farce and it has been further proved that those in congress who promoted the repeal of G-S were dishonorable people who clearly betrayed the public trust. 24 Oct, 05:19 PM2 McGonicleComments (102) I think this article is a very concise and informed discussion of the risks. For those of you who are dashing the author's reasoning based on the idea that these instruments are hedged, can you respond to concept of 'counterparty risk'? As I understand it, the monoline insurers, MBIA, AMBAC, AIG (CIT? dont know as much about its death) simply called 'efficient breach' and refused to pay for the part they played in hedging these instruments. Then they moved the money among their corporate forms. My read of what has happened is that the banks are preparing for a potential black swan moment by consolidating their risk in a protected corporate form. Since that form also hold FDIC insured deposits, they are holding that money hostage to the risk of the collapse of their bank holding company, and firewalling off their other assets into another brokerage or corporation. So, 1) they have bought insurance against complete collapse via a chinese wall. 2) they will ensure that the federal government must place an unlimited line of credit to backstop any losses they face, whether small or large, and if there are none, they have risked nothing. 3) they have effectively made the government a counterparty so that the government must use the 'full faith and credit' of the fisc to protect them or refuse to do so and wreck the system. If I am misunderstanding the import of these transactions, by all means, educate me, colleagues. Finally, some of you may disagree with the scale of the liabilities here, but aren't measly 'tens of billions in losses' enough to implode the entire system in an atmosphere of great pressure and fear? I think since 2008 we have got used to throwing around figures like Trillions with the big T when really even the largest companies have revenue throughput of billions to tens of billions and losses of this scale would annihilate even the largest corporations, like AAPL and DOW? no? 23 Oct, 04:16 PM1 SepthakaComments (15) McGonicle, you aren't apparently familiar with any of the banks' derivatives positions in question. Most of these banks' derivatives trades are where the bank simply performs a customer facing function. The bank faces the customer and then hedges that risk with an affiliate. The affiliate manages the market risk. HOWEVER, the bank typically will not have to pay the affiliate on the hedge unless the customer pays on the derivative with the bank. Thus, the bank has no counterparty risk. 25 Oct, 05:17 AM0 McGonicleComments (102) Monoline insurers and AIG were not 'affiliates' that refused to pay on what they'd insured in your comment? 25 Oct, 11:15 PM0 dgarrowComments (3) Can someone explain the $600 Trillion worldwide derivatives effect on the world and how much is 'owned' by the Big 5 US banks. Why are they not traded out in the open with someone besides them making the rules as they go. It is like the inmates guarding the prison which in this case holds all the cash. 23 Oct, 11:41 PM0 dgarrowComments (3) The fact is that the top 5 banks own 244 TRILLION with a T' in unregulated,unregistered derivative securities. That is 5 times the total of all of America's assets both private and government combined. They can't hide these numbers and yet they are not covered by the media. Links below with bank exposure on page 25 at OCC.gov 24 Oct, 12:08 AM0 StilldazedComments (286) Well, it sure is the right month for this kind of scary stuff. Should we go 'trick or treat' at the TBTF in our local area? 24 Oct, 02:02 AM0 time4changeComment (1) Derivities were the cause of the melt down - bottom line. Klarsolo has too many questions in his/her anwers to be credible. It reads like an employee of BAC. Speaking as one who has lost my life savings and career to the meltdown - the Federal Reserve is serving the big banks and thus tax payers are on the losing end. 24 Oct, 10:16 AM2 klarsoloComments (479) I am sorry that you have lost so much because of the financial meltdown and I can understand your anger. However, I'm not sure why posting questions makes me like an employee of BAC. It's sad that you apparently think everybody who doesn't agree with you must have a hidden agenda and may be your enemy. 25 Oct, 06:28 PM0 wamu'sfraudComments (5) You seen to cast a pale over the author's view but can't seem to offer any form of actual constructive debate or facts... explain your counter position better - and use facts. 1 Nov, 07:43 AM0 an80sreaganiteComment (1) Aren't derivatives 'securities' as opposed to accounts of deposit and therefore exempt from any FDIC insurance? See: http://1.usa.gov/qlGQcn And, you'll have to excuse my ignorance, but if derivatives are securities and the SEC control securities, then what does the FDIC or Fed have to do with any of this? What relationship or relevance does the Fed have in all this, as they are just a very large private bank and (I, naively, assume) subject to the rules and regulations, not creating to providing rules and regulations (other than to possibly set debt-to-asset ratios for banks they lend to). 24 Oct, 01:22 PM0 Avery GoodmanComments (201) Generally speaking, most derivatives are not within the definition of securities under the SEC Act. They are also not deposits. The Fed is a quasi-private bank, but it has (incredibly) been given the role of a 'regulator' over its member banks. The Fed is a structurally conflicted organization with deep ties to the banks it is supposed to govern. In other words, the fox is guarding the hen house. To make matters worse, Congress has unwisely given derivatives priority over 'collateral' assets. That means that the FDIC is behind the derivatives counter parties, in terms of legal priority. If there is a failure of a derivatives- issuing mega bank, even a small fraction of the potential 'Murphy's Law Exposure' (which in the case of BAC is about $6.75 trillion), potentially some or even all assets might also be exhausted paying off derivatives claims, leaving less or even nothing for the FDIC receiver. The USA has guaranteed the FDIC with its 'full faith and credit', and will be legally obligated to pay off depositors, regardless of the disappearance of the bank's assets into the hands of derivatives counter parties. In the event that one of the big derivative issuing depository institutions fails, the US government will be forced to raise taxes or print money to pay off $250,000 per depositor. Depositors with more than $250,000, will not receive the normal legal right to what is called a 'dividend' (a pro-rata share of any money raised by asset sales, in excess of the $250,000). This is because derivatives counter-parties will have already taken the bank's assets, leaving less, or even little or nothing to sell. 25 Oct, 11:13 AM0 SepthakaComments (15) Once again people don't seem to understand how derivatives work. The 'trillions' mentioned when describing derivatives volumes relates to the notional amount of the derivatives. And most of those derivatives are interest rate swaps and to a lesser extent currency swaps. When a customer wants to swap fixed rate to floating rate of $1 million the actual exposure is a small percentage of $1 million, usually the difference between fixed and floating rates - not $1 million. And banks hedge their risks so their 'value at risk' is extremely small. These blog fauxperts don't know what they are talking about and push articles like these for cheap attention. 25 Oct, 08:24 PM1 McGonicleComments (102) I'm telling you the hedges in question do not work when the parties refuse to pay for 'efficient breach' reasons; why pay billions when the massive lawsuit would be cheaper. 25 Oct, 11:16 PM0 Avery GoodmanComments (201) Septhaka, Unfortunately, according the the Comptroller of the Currency, you are incorrect. The gross notional is $75 trillion. The net is a maximum of about 9% of that, because 91% can be offset. That assumes that the hedges are with solvent entities, which often DID NOT prove to be the case, back in 2008. Thus, worst case Murphy's law scenario = about 6.75 trillion net. We do not know the exact distribution of the derivatives, nor the names or solvency of the counterparties. The exact amount could be more or less, depending on whether the hedges are valid, what type of derivatives are involved, etc. The lack of information, and inability to give exact numbers, is because BAC and the other derivatives issuers refuse to release the information. Lack of information is not a justification for allowing derivatives into FDIC insured banks. It is, in fact, ALL THE MORE REASON why derivatives should NEVER be allowed inside an FDIC insured institution. That some bankers and others cannot understand this, or do simple math, does not justify a denigration of bloggers or anyone else who objects to outrageous actions. On the contrary, it presents troubling issues relating to the educational system of whatever country educated them. 26 Oct, 09:45 AM1 RedHeadKingPinComments (7) I think the author addressed your first question in his 21 Oct, 06:25 PM reply. The FED is not just a private bank. It's more like a semi-private cartel. Or, a cartel of private banks, with public oversight (as if). I encourage you to read more on the FED's true nature. It's quite odd. They do make certain policy decisions, as per the article. They're a menace. 25 Oct, 11:22 AM0 hoboskinComment (1) everyone has to stop paying the Federal Reserve taxes at the same time.. then u might see some headlines in DC.... 24 Oct, 01:26 PM0 CarveoutComment (1) Interesting. Not sure how the Fed forced it way into the FDIC and can't attest to when Congress gave them that authority but regardless what would the overall goal of this move be? Are they trying to clean-up BofA and make another bank devoid of incalculatable risk by putting that risk onto the FDIC and slowly building back up the credibility of our financial institutions? Is this part of the Feds plan? By keeping rates low for two more years would some of these expire worthless? Any upside for the FDIC or would these contracts go to zero upon expiration? What a great trade that would be if there was upside. Can see the headlines now (maybe in my dreams) - 'FDIC flush with cash due to BofA derivative transfer!' The FDIC charter does guarantee deposits up to $250k now and beyond if structured correctly. Depositors are still the first protected in a liquidation (I liquidated a few banks in my time). In the end it would seem that you would need to understand the composition of the derivative portfolio including maturities of contracts. Really interested in understand the goals of this move more than theories on protecting the rich and 'fat cat bankers.' 25 Oct, 01:20 PM0 Andrew MannComments (435) Avery, You really prove that you are a lawyer in that you never admit or deny anything. I challenge you to prove me wrong: The derivative exposure constituted by BAC/ Merril Lynch is not in the trillions. If you say that the exposure is in the trillions you admit you know nothing about the U.S. derivatives market. If you say no, then you can admit you are a liar/farud, who makes bombastic statements to get pageviews/attention 26 Oct, 03:21 AM0 StilldazedComments (286) I don't know anything about derivatives, but I do know that it isn't ethical for a company to take risks and make it so that the risk ultimately has to be covered by the govt. (taxpayer) if it is a bad risk. Do the ethics change by the dollar amount? Hey, a few million here a few million there, after a while we're talking big money ( to my generation a million is big money). Never mind billions or trillions. Correct me if I'm wrong, a billion is 1000 million? And a trillion is a million million? 26 Oct, 06:23 AM0 Avery GoodmanComments (201) Andrew, I thought I had already proved you wrong, point by point, several times, above, but, apparently, you have still not recognized that fact. Contrary to what you want to believe or advocate, the 'current' exposure is NOT the true risk. Current exposure assumes that the derivatives are all unwound right now, before any trigger event happens. The supposed risk 'models' that the banks deliver to the OCC for purposes of 'probability' models, are equally worthless. They are created by the same banks who want to off load risk on the FDIC and are subject to human error of the type that culminated in the 2008 financial crisis. This is about putting public money at risk to enhance or maintain private profits. The worst case scenario model is the correct one to use in estimating the risk, and that means the risk is in the trillions. But, even if the risk were in the multi-hundred billion dollar range, as you erroneously believe, it would not change the fundamental issue addressed by this article. Risk should NOT be offloaded to the FDIC by BAC. And, to be fair, neither JPM nor C nor anyone else should be allowed to continue housing their derivatives inside an FDIC insured unit. Most important of all, the Federal Reserve has proven itself to be a 'regulator' so hopelessly conflicted that it cannot regulate. It should never have approved this transfer, nor should it have allowed JPM nor C to house derivatives inside an FDIC insured institution. 26 Oct, 11:48 AM2 Andrew MannComments (435) Avery, You like to quote the OCC when it suits your purposes, but when their analysis conflicts with your opinions they are 'erroneous.' You have not proved anything with your opinionated tirade. It states clearly in the OCC report, that you quoted, that Net Current Credit Exposure is a little over 350 billion dollars. Do you even know what derivatives are? The vast majority of derivatives deal with interest rates, and have counterparties. The banks are intermediaries, matching parties that want to hedge risk. Now you will try to say that Credit Exposure is in the range of 14 trillion, but the banks in the OCC report have bought CDS in excess of the 14 trillion (AKA they are hedging.) Your total analysis is wrong Avery. Please tell me where I differ from the facts, and I will gladly correct you. now, if you say that what the OCC reports is 'not a measure of total risk.' You are dealing in conspiracy theory. As I have already pointed out, the maximum loss due to derivatives during the financial crisis was in the hundred of millions. Please, don't bother trying to respond it really just shows how ignorant you are. 26 Oct, 12:13 PM0 Avery GoodmanComments (201) No conspiracy theories here. Just facts that you, either out of lack of knowledge or an agenda, refuse to accept. BAC is facing counter-party demands for collateral to the tune of billions of dollars already. That is what led to this attempt to offload risk to the FDIC. I do not question the raw data possessed and analyzed by OCC. I question the idea that you have that the current market value of the derivatives or the probability models supplied by banks are accurate determinants of the actual risk of derivatives of any kind. You seize upon the term of art called 'credit exposure'. You proceed to reinterpret that term, not by its correct definition, but, instead, into a new layman's version of 'risk'. Then, you base a flawed argument on this mischaracterization, and allege that the actual risk is the credit exposure. But, the fundamental issue is one of definitions. It is one of offloading risk onto taxpayers. Whether it involves hundreds of billions or trillions is not the critical point. You are intentionally ignoring the fundamental issue, in an attempt to nit-pick instead on trivia. Most troubling is that you are even incorrect in your nit-picking! 26 Oct, 12:56 PM2 Andrew MannComments (435) Avery, You just proved my point. The fact that you, cannot come up with a legitimate number of risk that is thrust upon taxpayers is really telling. This 'number' is only relevant if BAC goes bankrupt, it has no problems with liquidity please see their most recent earnings report. You are fear-mongering, plain and simple. You fail to address the points I made in my previous comment (the losses in derivatives at the height of the financial crisis, the fact that the huge majorities of derivatives have counterparties, and that the majority of credit exposure had collateral to back it). Until you back up your opinions with facts, it is clear you know nothing about the overall derivatives market. The basis of your article is fear mongering. Anyone can say the overall risk is more than is stated by the OCC. The only thing that separates you from a conspiracy theorist is that you have a juris doctorate, and a persuasive argument (to the uniformed) to back it up. 26 Oct, 01:04 PM0 Avery GoodmanComments (201) All of the opinions expressed have been backed by hard facts. You simply have an agenda, or are an uninformed person. As incorrect and incomplete as your understanding clearly is, the mantra you continually repeat is actually a non-issue. Whether the shifting of risk involves hundreds of billions or several trillion dollars risk does not change the fact that it should never be happening. No private player should be offloading risk to earn profits onto taxpayers, while keeping the profits for themselves. Your argument is of no value. It consists of an attempt to further an agenda by shifting attention from what is most important to what is a side issue. 26 Oct, 02:20 PM1 Avery GoodmanComments (201) Andrew, Even though the difference between hundreds of billions and trillions is relatively unimportant to the main point of the article, I do want to say one more thing. It is important to insure that other readers are not misled by your misunderstanding of, or intentional mischaracterization of the term 'current credit exposure'. 'Current' exposure is the replacement cost of derivatives. It is the cost of unwinding them right now. But, obviously, the banks are not going to be unwinding these derivatives right now. The FDIC insured units of BAC, JPM, C and the others are not going to spend $350 billion to pay off counterparties in order to end these contracts. If they wanted to do that, they wouldn't be moving them into their high credit rated FDIC sub-units. On the contrary, BAC, in particular, is almost certainly doing this to avoid the billions in collateral calls they were recently facing from the downgrade in the holding company credit rating. The other banks placed contracts in FDIC units so they could pledge the smallest amount of collateral possible. The current credit exposure metric that you refer to, therefore, is meaningless. Instead, these derivatives are going to be kept inside the FDIC units until a trigger event either happens or doesn't happen. If a major trigger event does occur, within their shelf life, or the shelf life of the ever-increasing number of new derivatives contracts being written everyday, the potential exposure will be many many times 'current' credit exposure. 26 Oct, 05:25 PM1 Andrew MannComments (435) Avery, You are turning this into a moral argument. You still refuse to address previous points I have made. There is little to no risk associated with these derivatives. BAC is not going bankrupt anytime soon. There is no risk to 'taxpayers' as you put it. Your overall premise is fear mongering, emotional, and opinionated. There is no fact basis for your article. The numbers are not 'irrelevant.' There were several times in your article, and comments where you said that this transaction constitutes trillions in exposure. If you were going to write an article on ethics you shouldn't have brought out numbers. 26 Oct, 06:41 PM0 StilldazedComments (286) Andrew it is an argument about morals and ethics, not numbers. These transfers to be govt. insured is the whole point!!! As to the risk only time will tell, but it should not be gambled on the taxpayers dime. The Federal Reserve is not the government. 1 Nov, 04:40 AM0 McGonicleComments (102) The argument about the total amount of notional exposure is a red herring. A 'few' billions in losses at the critical time and place can destroy entire companies. I still don't understand why we are arguing about the numbers i'm more interested in what argument anyone here would make devil's advocate or otherwise that permitting this move is a good thing, or that the strategy it represents is giving us a clue to what the big banks think may happen next. 26 Oct, 11:56 AM1 Avery GoodmanComments (201) Correction; NOT one of definitions. 26 Oct, 02:12 PM0 tdwhitneyComments (7) Andrew - I'm no expert on this crap, and I suspect that there's still plenty of gray area in terms of what the actual risks are to the financial system from potential losses of credit default swaps, especially when done on such a large scale by one company. It's pretty clear that AIG almost blew itself up and almost caused massive damage to the entire financial system, because of greed and stupidity. Simple question: Should they have even been allowed to make those idiotic bets? And should taxpayers be responsible to foot the bill for such idiocy in the future? 27 Oct, 12:56 AM2 muddauberComment (1) What in the world is the Federal Reserve doing backing derivatives?? That does it! I'm joining Occupy Wall Street! 26 Oct, 11:58 PM1 tdwhitneyComments (7) Re-reading Andrew's comment. 'No' risk to taxpayers? WTF??? that's a good one. AIG selling a gazillion dollars worth of insurance on junk mortgage backed-securities provided no risk huh? 27 Oct, 06:06 PM2 VukeComments (1292) Very interesting article and equally gripping posts. Andrew Mann's passionate defense of derivatives is admirable, but not convincing. Even his own article the subject of derivatives raises questions. http://bit.ly/uISbMu Andrew's argument is backed by two questionable assertions: an apparently low VaR and the fact that less than one trillion was lost in the last crisis. What, however, happens in the event of a new flock of black swans, greater than any envisaged as yet? And, what, truthfully occurred in the last financial meltdown? Given the lack of transparency and obvious urgency during that event is it not likely unpleasant facts and figures were suppressed in order to weather the storm - and that many of these instruments are far more suspicious than currently portrayed? Opaque transactions such as these have no place as taxpayer obligations. Nor should they be allowed in To Big To Fail institutions. Avery's argument is bolstered by historical financial precedents. Andrew's, on the contrary, is based on current banking assertions, something of which we have all earned the right to be a mite bit suspicious. 27 Oct, 10:49 PM3 McGonicleComments (102) The only principled reason to defend the banks action would be to say that it was legal, or was permitted by the government, or at least was a reasonable use of a government program meant to protect depositors and therefore the banking system as a whole. The first is a maybe, the second a resounding no, and the third a farce. The only defense that can be given is that from the bank's point of view, it is a sound business decision because it shifts risk at a minimum cost and that they can get away with it because the worst case scenario is that it is challenged after the fact in an atmosphere of great stress. However, why any individual who was not an attorney or spokesperson for a giant bank would make such an argument except as a devil's advocate is beyond me. The only reason i can think of it that it places their own view of the facts of the situation on a higher footing than those that would take the natural point of view, which is that the government should never have permitted this action, nor should it in any special way be helping these institutions that place their own continued artificial existence over the public or national good. To continue to do so is national suicide, in my view. 28 Oct, 07:03 PM2 Andrew MannComments (435) Vuke, So you are openly saying that what the OCC reports is fraudulent? This can be said about anything any agency, or entity reports. I do not dabble in conspiracy theories. My article was not based on any argument, and it was not meant to validate the size of the notional value. Anyone who read the article would know that.I explicitly state that the market is excessive. The point was to shed light on an often misunderstood, and sensitive topic, that not very many people know about. The VaR calculated is not absurdly low when you look at the precedent, and the total amount of losses attributed to derivatives was in the hundreds of millions ,across all banks, not just 'under a trillion' as you insinuate. Keep crying doom doom doom, it will never happen. People look at the notional value, and then tune everything else out. Due to the fact that the huge majority of derivatives contracts have counterparties current exposure is a little over 300 billion with 72% of that being held in collateral, but I guess you looked over that bit of FACT when reading my article? 31 Oct, 12:28 AM0 VukeComments (1292) Good Heavens Andrew, I would never 'openly' accuse anyone in the financial industry of fraud. Assumption or calculation errors, maybe. I'll grant you a superior knowledge of derivatives but I sense an edge for me in an understanding of human nature. Looking at hundreds of trillions of dollars in derivatives, priced by arcane mathematical formulae, (see this JP Morgan explanation http://math.uchicago.edu/~sbossu/VarSwaps.pdf ) leads one to assume chances of error are high. Someone, in that case, has to absorb losses and it shouldn't be the public. Your FACTS are somewhat based on assumptions. Mine are merely cautions, illustrated today by the collapse of MF Global, a 200 year old firm destroyed shortly after quants became involved. 31 Oct, 09:12 PM1 McGonicleComments (102) Are you to wonder why we are both mentioning the demise of the this 'insignificant' hedge fund? Its a crack in the dyke. Dexia is another crack. They are tells. So are the CHF and JPY intervening against the dollar. This is telling you something. The market is hurting and it is only propped by government easing. Earnings were great in 2008. Banks were making billions. Everyone was willing to pay 73$ for a share of CROX. It is a canary in the coal mine. What happened after that? 1 Nov, 01:31 AM1 ShermansWarComments (2) The fundamental issue here is totally ignored by Mr Mann, regardless of how many times Mr Avery makes the point. If I may,I would like to quote Mr. Avery and ask Mr. Mann to respond to these comments directly, as opposed to the basket of red herrings he caught that he implores us to look at, then buy: 'I am addressing the issue of the Federal Reserve, NOT Bank of America.' 'Congress has given ultimate power to the Federal Reserve to ignore its own enabling Act legislation.' 'Congress has foolishly given a bank-controlled entity omnipotent powers to void its own rules at any time convenient to the banks. ' 'The issue at hand is putting the derivatives into FDIC insured institutions, thereby forcing the cost of failure into the pockets of American taxpayers, and away from the executives who are profiting from issuing the derivatives. The FDIC, after a failure of one of these banks, including but not limited to BAC, will be deprived of the assets that are being used as 'collateral'. 'The FDIC opposed the move' 'With derivatives obligations tied intimately with FDIC insured depositary units, the debt will need to be paid by the government, as a matter of law. We will have no legal choice except to default, or pay them off.' 'the Bankruptcy Code contains “safe harbor” provisions which protect the rights of a counter party to a derivative contract to seize collateral (which might otherwise be used to reimburse the FDIC for paying depositor claims).' 'The safe harbors apply to “credit swaps”, “interest rate swaps' and most other derivative obligations. ' 'No one should be making a profit by shifting liabilities and losses upon the American taxpayer.' 'This all has the blessing of the Federal Reserve, which approved the transfer of derivatives from Merrill Lynch to the insured retail unit of BAC before it was done.' 'The so-called 'reforms' enacted by Congress, in the wake of the 2008 crash, have vested more, and not less, power in the Federal Reserve' ' In the article, it is clearly pointed out that JPM and other banks are doing the same thing. It is a serious mistake to allow any of them, including JPM, to house derivative bets inside an FDIC insured depository bank.' 'All but Morgan Stanley seem to be housing the derivatives mostly in the commercial banking divisions, just like Bank of America wants to do. But, that doesn't make doing so any less dangerous. None of them should be allowed to house ANY derivatives in FDIC insured divisions.' 'The article is not intended to attack BAC, but, rather, to address the inability of the Federal Reserve, given its intense conflicts of interest, to act as a bank regulator.' 'If institutions who do not suck at the public teat want to issue derivatives, and others want to buy them, let them. When the derivatives implode, let the people who profited from them go bankrupt, but don't steal from savers and taxpayers to subsidize yourselves. If a real capitalist America means that we will have a lot of people in NYC jumping out of tall buildings, during such episodes, then let it be so. All things would be as they should be. The issue is foisting the liability for potential losses upon the American people, and it does not actually matter whether the losses are hundreds of billions or trillions.' ''I am addressing the issue of the Federal Reserve, NOT Bank of America.' I hope this clears the issue up for you Mr Mann, and we can move on from arguin about what is and isn't exposure or how much it is. As a US taxpayer I dont care if it's only one dollar, and I'm sure you can grant there is at least a dollar at risk here, Mr. Mann. Even my 2 teenage sons can understand the basic concept that the FDIC was created to protect depositors, not bankers, and certainly was never meant to be used to potentially put the taxpayers of the united states on the hook for any bank failures. It was meant to protect us from them. It really is that simple. 30 Oct, 11:59 PM3 Andrew MannComments (435) What is the point of all those quotations? Bank of America is not going bankrupt. They are awash in liquidity, and are no where near being insolvent. That means no risk to taxpayers. Moving notional derivatives to an FDIC insured subsidiary, to avoid putting up billions in collateral, is acceptable if it is legal. If you don't like the laws, write your congressman. There is no logical reason to blame a profit seeking organization for maximizing profit legally. I completely agree that glass - steagall should never have been repealed, but whining about it won't bring the law back. I brought up the factual number of exposure, because Avery was incorrect in saying that the move put taxpayers on the hook for 'trillions' of dollars. By inserting the 'trillion dollars in exposure' phrase Avery was trying to get a WOW factor that is not based in reality. 31 Oct, 12:39 AM1 William HoeyComment (1) Thanks for this important dialogue. My opinions are based on 40 years in 'banking' and included the phenomenal rise of TBTF institutions. Mr. Mann truly doesn't understand the point and 'whining about it' (Glass-Steagall) may indeed bring it back, hopefully in time to prevent the debacle that will happen when these derivative exposures are fairly and accurately valued. Mr. Avery's estimate of the potential exposure appears accurate when you look at the probable collateral value lying under the supposedly covered derivatives. In the remaining mortgage backed paper, the second wave is coming as the enabling 'silent second mortgages' used to qualify a near zero down payment borrower are beginning to require amortization (the usual terms are 5 years, negative interest amortization, then 25 years to amortize the combined balance of the original amount and the accrued unpaid interest) in the faace of changed economic circumstances and collateral that is worth less than half of the total of the obligations owed. Most of these loans are still rated highly as they may well have had no default until now, when the new payment effectively doubles. The layered mortgage backed securities and their layered derivative cousins will require massive insurance and counterparty payment, triggering another round of defaults. The Fed in its 'toxic asset' purchases in the initial bailout, acquired a bunch of this kind of paper, and there is much more soon to become available, I believe. This will prove the folly of the transfers that Mr. Avery has so eloquently and clearly written about. Mann is whistling in the dark. 31 Oct, 03:57 AM3 wamu'sfraudComments (5) Bravo! 1 Nov, 07:52 AM0 Andrew MannComments (435) I find it very interesting that the majority of people who are responding to my comments have the same writing style, no bio, and a very small number of comments. You have no facts to back up your opinion that Avery is correct in his trillions in exposure. The majority f the collateral held against the 350 billion or so in current exposure is cash and cash equivalents not MBS. Also, credit exposure does not equal outright obligation. It only becomes an obligation if all counterparties default. Are you telling me that a bigger and badder Lehman is going to happen? 31 Oct, 09:34 AM0 McGonicleComments (102) 'majority of people who are responding to my comments have the same writing style, no bio, and a very small number of comments' on the internet, this is the equivalent of an ad hominem attack, attacking the credibility of the author, and not the substance of their comment. 'Are you telling me that a bigger and badder Lehman is going to happen?' Yes. I believe that it is happening before our eyes, and the derivatives move we are witnessing is a huge tell. That is only my opinion, but i have worked on multiple mutlimillion dollar financial litigations and it is as much a surprise when the bottom drops out to the big boys. Not to the smart ones betting against them; they make and stand to make billions. MF Global? What is that telling you? Is that like Indymac, or it is just more b/s? What about the decision to treat the greek haircut as a voluntary move that does not trigger credit events? seems like the invisible hand is intervening quite often now. You can dismiss these smaller incidents as the things that happen all the time in the history of the market; no doubt they do. But as we saw 8/11, and again near 10/1, the market won't tell you what's about to happen in advance; its gonna show you by crying off 10-15% in a matter of days. There is a tremendous amount of money to be made in the current volatility. That's not gonna matter when we find the USGOVT and european stability facility on the hook for hundreds of billions of dollars in crap risk. We can argue about it, whine about it, whatever. The market will show you on that one magical day what matters. 31 Oct, 03:54 PM2 Andrew MannComments (435) 'majority of people who are responding to my comments have the same writing style, no bio, and a very small number of comments' So I guess pointing out a fact violates your version of internet etiquette? All of my comments did have substance, and facts to back them up. For you to say otherwise is ridiculous, and in itself a personal attack. You are really going off on a tangent in your comment. I am sure that time will prove me right, in that this derivatives transfer will have no effect on the FDIC whatsoever. I find it amusing that people comment about their own opinions, theories, and conjectures on this website and never do any kind of substantive research into the basics of what they are saying. Thanks for the response. 31 Oct, 05:09 PM0 McGonicleComments (102) Now you are being an Ass. No, not about etiquette, i'm saying you are attacking the speaker, not the speech. You have four times as many comments as I, but they contain four times less wisdom? Come on. Your comment implied that your imagined adversaries are sock puppets, or trolls, when it is far from the case. Now you are trolling. Perhaps the derivatives move we are discussing will have no effect; that remains an unknown. Then we must guess; why have those hundreds of ranks above our pay grade decided to make this move? That is called a priori thinking; look at the action and then define the reason why it was taken. 'I find it amusing that people comment about their own opinions, theories, and conjectures on this website and never do any kind of substantive research into the basics of what they are saying. Thanks for the response.' You are being a troll. I mentioned that i was involved in suits countenancing billions of dollars of VaR. You are getting angry when what I think most of our opposition revolves around one fact; why for the reason of pure defense of the rights of a corporation are you defending their actions? Because it fits with your view that such actions are legal and therefore defensible and permissible? Then let you ride on Rome as Caesar, saying I alone make the law and the law says I shall rule. To wit, the S+L crisis that came to a head around Black Monday nearly destroyed the FDIC. It is a completely plausible scenario that this would happen again. 1 Nov, 01:22 AM1 Andrew MannComments (435) And I am the angry one? As I said before, time will prove me right. 1 Nov, 10:34 AM0 OMGcheetosComment (1) Avery 1 Mann 0 1 Nov, 01:28 AM3 ShermansWarComments (2) What I find very interesting, Mr. Mann, is that you willfully and intentionally ignore the main thrust of this article. The point of quoting Mr. Avery was so you would be compelled to respond to the issue directly as opposed to continuing to obfuscate the issue by arguing about the amount of exposure, which isn't relevant. You respond with the fantastic assertion that there is zero risk. This in and of itself is a blatant lie, but more importantly, wholly irrelevant. The amount of exposure is not the issue I querried you about, and I specifically made no reference to a specific amount for the express purpose of preventing you from muddying the waters with your spurious arguments as to what is and is not exposure, or risk. So, from your comments we learn: A) We CANNOT agree that there is even a single dollar at risk in in any of these derivatives , across the 4 major banks that house them in the FDIC retail savings divisions. I would submit it is self evident you are incorrect. Half a moron can see it was done for the sole purpose of COVERING their risk by putting the US Gov.t and the US taxpayer on the hook should things go tits up. B)Moving notional derivatives to an FDIC insured subsidiary, to avoid putting up billions in collateral, is acceptable in your mind. Whether it is legal or not to you is clearly also irrelevant, as the federal reserve is able to make its own exceptions, and ignore it's own rules. The issue isn't whether it is legal to due it, but that the federal reserve shouldn't be above the law. You seem to think it is or should be. In case you are not grasping the issue, it is NOT acceptable to the majority of people, certainly not to me, and not to those people protesting around the world about this and similar such abuses of the law. What is being done here isn't legal, rather the federal reserve gave itself an exemption, and inasmuch as it is not a legislative body really has no authority to do so, and if it does that in and of itself is an abuse of the law that needs to be rectified. C)You have no basic understanding of a representative democracy or how it works, inasmuch as you say ' there is not point discussing it. That is EXACTLY what people should do, especially on an appropriate forum discussing an article by an author who has raised the topic in a democratic society. It is in fact our obligation to discuss it. That you are trying to subvert the thrust and point of the article by arguing about the amount of exposure is laughable, it has not bearing on the fundamental issue. If anyone's argument is out of place or inappropriate here it is yours. D)Lastly, and most amusingly , you open your response to my comments with the assertion that ' Bank of America is not going bankrupt.' as if that was the issue, and irrespective of my efforts ( through the use of selective quotations)to illustrate you that was not the point. The effort was in vain,apparently. Your comment that 'There is no logical reason to blame a profit seeking organization for maximizing profit legally' is the most galling, as the federal reserve was not intended by Americans to be a For Profit organization, unless once again you are missing the point and talking about BOA and not the Federal Reserve bank. The bottom line remains that the Taxpayers and the US Govt. should never have been put in the position of being responsible for these derivatives by putting them in FDIC retail banking affiliates ( or subsidiaries) in the first place. Especially when we can't make any profit of them. Socializing the risk and privatizing the profits is not an acceptable use of FDIC insurance. Nor is it legal,self granted exemptions by the Fed notwithstanding. 1 Nov, 04:05 AM3 Andrew MannComments (435) Relevancy is subjective. The entire point of my posts was to point out Avery's mistake in saying there is trillions in exposure. The relevant issue to you is that you don't like the 'taxpayers' taking on any modicum of risk. Well every bank has some risk whether is is local,regional, or national so I guess we should all get up in arms whenever a bank makes a risky investment. Obviously moving these derivatives is legal, because all of the big banks have done it. You really have an axe to grind, and I suggest you use all of this energy when you vote. 1 Nov, 10:31 AM0 wamu'sfraudComments (5) Totally unregulated fraudulent lending - by the now (pre-calculated) failed fraudulent lenders - as now owned by the TBTF aiders and abettors - have caused this disaster. This was the plan all along. 1 Nov, 07:54 AM0 averagejoedepositorComment (1)