Yesterday there were reports that Bank of America Corporation was going to move it’s Merrill Lynch derivatives unit, which is not insured, into Bank of America, which is insured by the FDIC. Early reports suggested that the Federal Reserve supports this move, while the FDIC opposes it. Quoted at The Big Picture, Professor Bill Black explains the process of what is happening and what it means to the public:
1.The bank holding company (BAC) is moving troubled assets held by an entity not insured by the public (Merrill Lynch) to the Bank of America, which is insured by the public
2. The banking rules are designed to prevent that because they are designed to protect the FDIC insurance fund (which the Treasury guarantees)
3. Any marginally competent regulator would say “No, Hell NO!”
4. The Fed, reportedly, is saying “Sure, no worries” by allowing the sale of an affiliate’s troubled assets to B of A
5. This is a really good “natural experiment” that allows us to test whether the Fed is protects the public or the uninsured and systemically dangerous institutions (the bank holding companies (BHCs))
6. We are all shocked, shocked [sarcasm] that Bernanke responded to the experiment by choosing to protect the BHC at the expense of the public.
At his own blog, Black adds, this this transfer would be “transforming (ala Ireland) a private debt into a public debt.”
Yves Smith notes that this development is a clear sign that “Bank of America is in trouble,” something she has been saying for quite some time now.
So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.
Smith goes on:
But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.
It’s another bailout, happening with a gun to the taxpayers’ heads, though albeit somewhat after the fact. More importantly it’s a transfer of wealth from the public to the private with no input from the public.