This story from Bloomberg just hit the wires this morning. Bank of
America is shifting derivatives in its Merrill investment banking unit
to its depository arm, which has access to the Fed discount window and
is protected by the FDIC.
This means that the investment bank's European derivatives exposure is now backstopped by U.S. taxpayers. Bank
of America didn't get regulatory approval to do this, they just did it
at the request of frightened counterparties. Now the Fed and the FDIC
are fighting as to whether this was sound. The Fed wants to "give
relief" to the bank holding company, which is under heavy pressure.
This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input. You
will also read below that JP Morgan is apparently doing the same thing
with $79 trillion of notional derivatives guaranteed by the FDIC and
Federal Reserve.
What this means for you is that when Europe finally implodes
and banks fail, U.S. taxpayers will hold the bag for trillions in CDS
insurance contracts sold by Bank of America and JP Morgan. Even worse, the total exposure is unknown
because Wall Street successfully lobbied during Dodd-Frank passage so
that no central exchange would exist keeping track of net derivative
exposure.
This is a recipe for Armageddon. Bernanke is absolutely insane. No
wonder Geithner has been hopping all over Europe begging and cajoling
leaders to put together a massive bailout of troubled banks. His worst
nightmare is Eurozone bank defaults leading to the collapse of the large
U.S. banks who have been happily selling default insurance on European
banks since the crisis began.
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