Bank of America’s Death Rattle
Bank of America Corporation, which owns Merrill Lynch and Bank of America N.A. (the actual bank), moved almost $15 trillion in derivatives from Merrill Lynch’s books to BofA’s books. Bank of America, unlike Merrill Lynch, is insured by the FDIC because it is a deposit bank.
Senate Democrats penned an angry letter to Ben Bernanke this week over the Federal Reserve’s lenience with Bank of America’s recent balance sheet maneuvers. The bank, they claim, is putting taxpayers at risk of cleaning up after it again, by moving trillions of dollars in derivatives from Merrill Lynch to Bank of America.
The letter cites Section 23A of the Federal Reserve Act, which “restricts transactions between banks and their non-bank affiliates, placing limits on the amount of each transaction relative to a bank’s capital and prohibiting purchases of certain ‘low quality’ assets.” Section 23A was designed to keep FDIC-insured entities from engaging in risky activity, much like the Volcker Rule, part of the Dodd-Frank bill, was designed to do.
By moving the derivatives onto the deposit bank’s sheets, BofA has done two things according to the letter: increased their credit risk without increasing their capital cushion, and made the FDIC the “backstop” for in the event of default. Effectively, BofA has made U.S. taxpayers a counterparty to their risk, and they might have done it just to avoid having to raise collateral capital for Merrill Lynch.
The end result is that Bank of America is clearly gearing up to go completely under, taking out the entire FDIC with it. Bank of America’s toxic derivatives will single handedly wipe out all of the FDIC holdings and cause congress, in an effort to stand by the FDIC, go deeper into debt by borrowing from the FEDERAL RESERVE BANK once again. It is pattently obvious that this is why the FEDERAL RESERVE BANK was completely in agreement with Bank of America transfering the trillions in toxic derivatives to begin with.
And, that is not even a conspiracy theory. It is blatantly obvious and on the books for all to see.