Bank of America's Socialize the Risk and Reap the Reward Business Model

boycott BoABank of America just made $6.2 billion dollars in record profit.

Buoyed by one-time gains from accounting changes and the sale of assets, Bank of America reported a $6.23 billion profit for the third-quarter

What were those accounting changes and sale of assets? It appears Bank of America moved Merrill Lynch derivatives to a FDIC insured subsidiary. Bloomberg:

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

By moving toxic assets, i.e. derivatives, into a FDIC insured subsidiary, gives BoA's Merrill derivative holdings indirect access to the Federal Reserve discount window and also if the bank fails where the derivatives are now located, the FDIC is required to pay depositors through their insurance guarantee. It appears from Bloomberg's report that $53 trillion of BoA's derivatives are being tied into depositors*, which implies the Federal Reserve and the U.S. taxpayer have the potential to be on the hook.

Bank of America’s holding company -- the parent of both the retail bank and the Merrill Lynch securities unit -- held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

Nice huh? Bank of America just transferred risk to the taxpayer with no approval by regulators, Congress and of course the public. Additionally, BoA lowered their risk by $2.1 billion to the European debt crisis. Guess how? They bought $1.7 billion in credit default swaps, the same vehicles which brought down AIG in 2008. When credit default swaps are issued and the underlying asset defaults, someone must pay and in systemic disasters like Europe, odds are it will be you and me through more taxpayer funded bail outs.

Now check out these numbers quoted by Bloomberg:

Sovereign and non-sovereign exposure to Greece, Ireland, Italy, Portugal and Spain declined to $14.6 billion on Sept. 30 from $16.7 billion three months earlier, the Charlotte, North Carolina-based lender said today in a financial supplement posted on its website. The amount at risk in Spain dropped to almost $4.5 billion from about $6 billion.

This implies while BoA reduces their risk in Spain, somewhere else, they must have increased it.

Clearly Bank of America could care less the world is disgusted with their screw jobs on the little guy. Why would they when nothing ever happens from civil to criminal penalties to stopping their foreclosure mills.

*Bloomberg notes JPMorgan Chase is even worse, with $79 trillion in derivatives tied to their national bank (depositors).

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Comments

Zerohedge picked up on this story

and they have posted details of OCC derivatives and Quarterly derivatives reports with more on actual deposits, ZeroHedge post.

Something I did not realize, BoA only has about $1 trillion in deposits. hmmm. Derivatives valuations do not mean actual losses or total risk, depending on the instrument.

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Not surprising

When you think about the amount of money these institutions would make by only charging their millions of customers an extra cent a month, you can see how desperate companies like Bank of America would have to be to charge $5 a month for debit card usage.

That's a lot of money! They know it will anger their customer base, so I think it would have to be pretty bad for them to do it - I am not surprised to read any of this. Thanks for posting.

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