Forum Post: Bank of America...someone help me understand..
Posted 12 years ago on Oct. 19, 2011, 5:13 p.m. EST by kmanpdx
(105)
This content is user submitted and not an official statement
From Bloomberg: http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html
BofA..."has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits" -- and "The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company"
Does this mean, that should BofA default, we the people, will be on the hook to bail them out? Someone please tell me this isn't so??
BOA posted a 6.5 billion profit today or yesterday. Why bail them out. Oh wait, my pension fund has BOA stock, nevermind.
Ummm.........no it means BofA moved possibly toxic (and therefore money losing) assets from a debt laden arm of it's company to the Merrill Lynch unit which has more capital on hand and therefore can more easily absorb any losses.
This isn't correct. You're forgetting that the unit they're trying to move potentially toxic derivatives to is an FDIC-insured deposit institution. Therefore, B of A is moving default risk onto the FDIC.
Wow, GREAT lookin' out!
This is a frightening story.
First, we're always on the hook to bail out FDIC-insured depositors at any bank.
Second, B of A is one company (a master unit) with multiple, subsidiary units. Those different units have different credit ratings. B of A has some derivative contracts at one of the units with a bad credit rating. When a bank or a unit of a bank "writes" derivatives, it often has to pay a penalty (called "collateral" in this instance) if its credit rating goes down. What B of A is trying to do is to move the derivative contracts from the unit that has the bad credit rating to a unit that has a good credit rating.
The problem is that that unit has a good credit rating because it is a unit that takes FDIC-insured deposits and is FDIC-regulated. So, B of A is trying to move risk onto the books of the FDIC.
Notice how the private "counterparty" demands collateral when B of A's risk goes up. What should the FDIC do when banks try to push more risk onto it? I say the FDIC ought to be expanded and reformed:
the repeal of glass steagal under clinton allowed any bank to trade speculative investments with FDIC insured deposits :) nothing new. the bankers are sh!tting themselves because Dod-Frank makes it illegal again.