Shady BLEEPING Bank of America

[DaddyTorgo]

BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit - Bloomberg (http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html)
Fed & BofA Dump Billions in Losses onto Taxpayers | The Big Picture (http://www.ritholtz.com/blog/2011/10/fed-bofa-dump-billions-in-losses-onto-taxpayers/)

If you have any doubt that Bank of America is going down, this development should settle it …. Both [professor of economics and law, and former head S&L prosecutor] Bill Black (who I interviewed just now) and I see this as a desperate move by Bank of America’s management, a de facto admission that they know the bank is in serious trouble.

The short form via 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…

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.

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.
Now you would expect this move to be driven by adverse selection, that it, that BofA would move its WORST derivatives, that is, the ones that were riskiest or otherwise had high collateral posting requirements, to the sub. Bill Black confirmed that even though the details were sketchy, this is precisely what took place.

And remember, as we have indicated, there are some “derivatives” that should be eliminated, period. We’ve written repeatedly about credit default swaps, which have virtually no legitimate economic uses (no one was complaining about the illiquidity of corporate bonds prior to the introduction of CDS; this was not a perceived need among investors). They are an inherently defective product, since there is no way to margin adequately for “jump to default” risk and have the product be viable economically. CDS are systematically underpriced insurance, with insurers guaranteed to go bust periodically, as AIG and the monolines demonstrated.

The reason that commentators like Chris Whalen were relatively sanguine about Bank of America likely becoming insolvent as a result of eventual mortgage and other litigation losses is that it would be a holding company bankruptcy. The operating units, most importantly, the banks, would not be affected and could be spun out to a new entity or sold. Shareholders would be wiped out and holding company creditors (most important, bondholders) would take a hit by having their debt haircut and partly converted to equity.

This changes the picture completely. This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. [Background (http://www.washingtonsblog.com/2009/03/credit-default-swap-holders-changed-laws-so-they-get-paid-ahead-of-bankruptcy-creditors.html).] [B]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.

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.

[cubboyroy1826]

I was reading about this last night and it sure appears to be more shady stuff from the big bank. I am not very educated on derivatives but from what the so called experts are saying this would put the depositors money at risk thus screwing the little guy. It will be interesting to see where this heads.

[Toddzilla]

And you wonder why people have taken to the streets in protest...

[cubboyroy1826]

Actually protesting stuff like this I think is something we can all get behind, of course except for those within BofA who want this to go through.

[DaddyTorgo]

I was reading about this last night and it sure appears to be more shady stuff from the big bank. I am not very educated on derivatives but from what the so called experts are saying this would put the depositors money at risk thus screwing the little guy. It will be interesting to see where this heads.

That's exactly what they did. They moved the exposure from a place where it would just cause a bankruptcy in the holding company (which is no big deal, the operating components could then be spun out as still-profitable entities) into one of the deposit-banks, so that in the event of a bankruptcy caused by revaluing and additional collateral calls, the derivatives counterparties (who thanks to the 2005 law are first in line) will get first dibs on the assets of the bank (including deposits), thus forcing the FDIC and the taxpayers to bail them out and make all the depositors solvent.

Time for me to actually stop being a fence-sitter and move my bank account.

[molson]

Maybe if we give them another $45 billion it will help them to sort things out.

[DaddyTorgo]

If anyone wants to come egg the CEO's house, he lives in the town where I grew up - I can show you where.

[cubboyroy1826]

That's exactly what they did. They moved the exposure from a place where it would just cause a bankruptcy in the holding company (which is no big deal, the operating components could then be spun out as still-profitable entities) into one of the deposit-banks, so that in the event of a bankruptcy caused by revaluing and additional collateral calls, the derivatives counterparties (who thanks to the 2005 law are first in line) will get first dibs on the assets of the bank (including deposits), thus forcing the FDIC and the taxpayers to bail them out and make all the depositors solvent.

Time for me to actually stop being a fence-sitter and move my bank account.

Thanks for the clarification. I thought that was what this whole mess meant but did not want to post it an be wrong. The fact that the derivatives counterparties are first in line throws up a big red flag in this case. I am telling you whether you are on the left or the right of the aisle this is just plain stealing from the American people. Lets hope politicians on both sides put the kibosh on this.

[Warhammer]

I'm not sure the best way to do it, but we need to draw a line in the sand with banks and investment houses.

Maybe the best thing for all of us to do is flee the big banks in favor of local banks.

[Logan]

The best thing to do was not to erase that line in 1999.

[miked]

But he testified to congress that BoA is entitled to profit. Entitled!! And if we raise their corporate tax rate, they won't hire anyone, they'll just start to hit you with a fee every time you use your card...wait...what?

[panerd]

There's really only one way to send a message to these guys. Stop using their services. (Credit cards included) I realize that this newer generation has been taught they have to overextend themselves and live on credit but you don't have to. Use local banks, don't go into too much debt, and when you do use local credit unions or banks for loans.

They could care less about facebook rants or protestors when those people still bank with them and still carry their cards in their wallet.

[DaddyTorgo]

There's really only one way to send a message to these guys. Stop using their services. (Credit cards included) I realize that this newer generation has been taught they have to overextend themselves and live on credit but you don't have to. Use local banks, don't go into too much debt, and when you do use local credit unions or banks for loans.

They could care less about facebook rants or protestors when those people still bank with them and still carry their cards in their wallet.

Yep. Exactly why I need to cut the cord. I just need to do a few things first...like get an actual credit card (thanks to the state of CA's new rule that if you bank with an out-of-state bank you can only withdraw what...$100 a day from an ATM? That ain't gonna fly on business trips).

Been credit card free for like...I dunno...more than 5 years now. Not looking forward to going back...been trying to put it off.

[lcjjdnh]

Theoretical question that I hope some of you can clear up for me:

Many of you seem upset with the idea that when Bank of America fails, taxpayer money might go toward bailing it out (which I agree with). However, I'm assuming many of you do not support environmental regulations on firms in other industries. How exactly do you square these two views? One prevents externalities that would impact taxpayers' pocketbooks. The other prevents externalities that would impact their health. Both companies are profiting because they are not internalizing the cost to society of their actions. Why is one action so much more offensive than the other.

[panerd]

Yep. Exactly why I need to cut the cord. I just need to do a few things first...like get an actual credit card (thanks to the state of CA's new rule that if you bank with an out-of-state bank you can only withdraw what...$100 a day from an ATM? That ain't gonna fly on business trips).

Been credit card free for like...I dunno...more than 5 years now. Not looking forward to going back...been trying to put it off.

I commend you on the credit card stuff and strongly encourage you to cut the cord on the Bank of America. I actually left BOA over some shady mortgage stuff last year (local not national mind you). I do still have a Chase card and a Discover Card just in case but don't ever use them. It isn't easy sometimes watching friends get new IPhones and flatscreens while I save up for big purchases but I sure hope it pays off in the end. And there really isn't any other way to send a message without sticking to some principles.

[Flasch186]

For me, its more about unwinding from their autobill pay. Thats tough stuff there. I dont get paper statements from almost anyone anymore...

ugh Paypal tie in, etc.

[panerd]

Theoretical question that I hope some of you can clear up for me:

Many of you seem upset with the idea that when Bank of America fails, taxpayer money might go toward bailing it out (which I agree with). However, I'm assuming many of you do not support environmental regulations on firms in other industries. How exactly do you square these two views? One prevents externalities that would impact taxpayers' pocketbooks. The other prevents externalities that would impact their health. Both companies are profiting because they are not internalizing the cost to society of their actions. Why is one action so much more offensive than the other.

With pollution the government (sovereign immunity) is the problem a lot of the time. Do as I say not as I do...

Environment | Libertarian Party (http://www.lp.org/issues/environment)

[panerd]

For me, its more about unwinding from their autobill pay. Thats tough stuff there. I dont get paper statements from almost anyone anymore...

ugh Paypal tie in, etc.

I agree. I really miss Bill Pay and also miss having an ATM on basically every corner. And I also am not saying that people can't be pissed off at Bank of America even if they are customers. I just think the only way the big banks are going to listen is when the protestors talk with their wallets. (And I realize this is a complete generalization but the young people protesting on tv that I see with their iphones either are in credit card debt with the very banks they are protesting or living off mommy and daddy who probably bank with the giants)

[Toddzilla]

Bailing out banks (or the auto industry) isn't the issue. It's bailing out companies that willfully put billions of dollars of other peoples money at risk for their reward. If BoA is being a good corporate citizen, then they deserve help. If they're being scumbags, fuck em, let then fail.

[lcjjdnh]

With pollution the government (sovereign immunity) is the problem a lot of the time. Do as I say not as I do...

Environment | Libertarian Party (http://www.lp.org/issues/environment)

So you'd be OK if the government "cleaned" up its act? Further, doesn't sovereign immunity apply in many other areas (including, if not waived--which it typically is by statute--torts)? Is the government unjustified in providing protections in those areas?

[JediKooter]

Welp, that explains BofAs recent fee hikes they are rolling out for debit cards...

[lungs]

Anybody know a phone number to call to cancel my credit card with these bastards? They sure don't make it easy to find.

[digamma]

I'm no friend of BofA, but the article above is terribly misguided and in some cases just flat out incorrect.

[stevew]

Anybody know a phone number to call to cancel my credit card with these bastards? They sure don't make it easy to find.

1-900-MIX-A-LOT?

[DaddyTorgo]

I'm no friend of BofA, but the article above is terribly misguided and in some cases just flat out incorrect.

How so? You can't just say that...you've got to give specifics.

[digamma]

How so? You can't just say that...you've got to give specifics.

Sure I can.

I don't really have time now, but the 53 or 71 trillion number is misleading and meaningless. What you care about is net positions. That is likely their gross notional position. Banks trading swaps make money by making markets and usually have positions on both sides which cancel each other out from a net exposure standpoint.

[RendeR]

I'm no friend of BofA, but the article above is terribly misguided and in some cases just flat out incorrect.



PLEASE support this statement, because every article I'm seeing is saying the exact same things. They can't all be wrong.

[DaddyTorgo]

Sure I can.

I don't really have time now, but the 53 or 71 trillion number is misleading and meaningless. What you care about is net positions. That is likely their gross notional position. Banks trading swaps make money by making markets and usually have positions on both sides which cancel each other out from a net exposure standpoint.

I understand CDS, and gross/net probably better than a lot of folks on this board. But you have no sources saying that's the gross number and not the net number. You're just saying that's "likely."

[sterlingice]

PLEASE support this statement, because every article I'm seeing is saying the exact same things. They can't all be wrong.

well, actually...

(That said, this is about BoA, so I'm going to err on the side of, at least, unethical)

SI

[Coffee Warlord]

I commend you on the credit card stuff and strongly encourage you to cut the cord on the Bank of America. I actually left BOA over some shady mortgage stuff last year (local not national mind you). I do still have a Chase card and a Discover Card just in case but don't ever use them. It isn't easy sometimes watching friends get new IPhones and flatscreens while I save up for big purchases but I sure hope it pays off in the end. And there really isn't any other way to send a message without sticking to some principles.

Rather simple to be responsible with a credit card, too. Just use it like a debit card - never rack up more than your current bank account can immediately pay off.

Only reason I have a credit card is because Chase did away with the rewards on my debit card.

[RendeR]

Well yes, I suppose they ALL could be wrong but the odds are a bit high for that.

[sterlingice]

Rather simple to be responsible with a credit card, too. Just use it like a debit card - never rack up more than your current bank account can immediately pay off.

Only reason I have a credit card is because Chase did away with the rewards on my debit card.

Same- I got into some credit card debt after college but I'm all paid off. Now I use my CC because, well, I get airline miles for every buck spent whereas I get nothing from my debit card. I don't pay them a dime in interest or fees so I essentially get something for free (ultimately, in exchange for the fees they over-charge merchants).

SI

[digamma]

I understand CDS, and gross/net probably better than a lot of folks on this board. But you have no sources saying that's the gross number and not the net number. You're just saying that's "likely."

Fine. This is the same issue that came up with the french bank a few weeks ago.

I'd also venture to guess that the percentage of CDS contained there is relatively small. CDS is proportionately a small part of the derivatives market. Interest Rate Swaps and Currency Swaps make up a much larger piece of the pie and are traded in significantly larger notional amounts.

Second, this is really really not new news. It may be new reporting issue. Any counterparty worth their salt who had trades on with a Merrill entity (there were several--Merrill was one of the most confusing counterparties on the street to deal with from a counterparty exposure standpoint because they had so many specialized entities which traded specific products) insisted on a guarantee being added to their Master ISDA agreement soon after the BofA/Merrill merger. So BofA was on the hook for the guaranteed amounts already. (And this was actually a worse position for BofA and consequently, the taxpayer/depositor to be in. In the case of a default, it gives the creditor two bites at the apple. They have a claim against the trading entity as well as a guarantee claim against the bank holding company. The double dip reduces the size of the overall estate for depositors. If you look at Lehman as a real life example, their swap claims trade for about 40 cents on the dollar, while their senior debt trades for about 20 cents on the dollar because there was a guarantee in place between the holding company and the swaps entity.)

Swaps (and credit default swaps) are such a red herring. The real issue is short term liquidity. In other words, overnight Repo. Banks need short term financing to make their day to day operations. When short term liquidity dries up, they run into huge problems.

Look, in my opinion BofA is the worst of the big banks. They are generally horrible to deal with both on a customer and institutional level. It permeates their organization. But, in my opinion, this issue barely merits a blip on the radar.

[sterlingice]

Anyone really want to try and argue that the derivatives even need to exist? Isn't it basically who can play the best arbitrage game?

SI

[lcjjdnh]

Anyone really want to try and argue that the derivatives even need to exist? Isn't it basically who can play the best arbitrage game?

SI

Although I support stronger financial regulation, a flat ban on "derivatives" seems a bit extreme. At the most basic level, proponents would argue they essentially function as insurance (and likewise, insurance is essentially a derivative-its value is derived from some underlying asset and/or event). Industrial companies engage in all sorts of derivative contracts not to bet or arbitrage, but merely to hedge their risk. Ford, for instance, might buy a derivative based on the price of plastic to limit their exposure to higher plastic prices in the future. Might end up saving them money, might end up being more expensive. But I don't think you'd really consider it reckless gambling or speculation--they're really just trying to lock-in a price for long-term planning.

Of course, that's not to say they shouldn't be regulated or that they're not used for speculation or that certain forms of derivatives might be so socially detrimental that they should be banned. I'm merely pointing out they do serve some socially useful purpose.

[DanGarion]

Eh, it's only only in the trillions. Call me when it's in the quadrillions!

[Logan]

Listen to digamma.

[Warhammer]

With pollution the government (sovereign immunity) is the problem a lot of the time. Do as I say not as I do...

Environment | Libertarian Party (http://www.lp.org/issues/environment)

Yep. The worst incident I can think of locally was TVA spills.

[sterlingice]

How is that even a fair argument, tho? The government has quite a few functions that are unique, toxic, and, frankly, should not be in the hands of private entities: weapons and the military, scientific testing that only the government can do, a lot of energy production, anything involving the space program, etc

It's kindof akin to saying: "well, the government is the worst at establishing public safety"- yes, because in most cases, they are the only arbitrator.

SI

[Warhammer]

The problem I have with environmental regulations is when the government is over-zealous in their enforcement in places where it makes no sense.

I've been to plants where the WTP for the plant has to return water back to the environment back at a cleaner state then when it was taken in.

I've been to a steel mill that couldn't expand their plant due to EPA regulations and definition of wetlands. The "wetlands" in this case was the median of I-95.

[DaddyTorgo]

Listen to digamma.

I disagree.

Then again - as the article points out, it's not like BoA is alone in doing this. JPM actually has more in there...PLUS they have the largest exposure of any US banks to the contagion that is growing in France.

[Ronnie Dobbs2]

I disagree.


How so? You can't just say that...you've got to give specifics.

[SteveMax58]

I disagree.

Then again - as the article points out, it's not like BoA is alone in doing this. JPM actually has more in there...PLUS they have the largest exposure of any US banks to the contagion that is growing in France.

BoA may not always be alone in any shady actions...but they are always a participant.

I have completely sworn them off as ever (purposely) giving them money. Whether that be a bank account, ATM, loan, or buying a f'n hotdog from them...this company is just a prime example of too big to fail continuing to feed an unsustainable corporate structure which continues to try & do things both legal & illegal(or at the least, shady).

[Toddzilla]

Someone at work told me that if you cancel your account at BoA, they keep your auto-bill pay accounts active unless you specifically cancel them, too. What happens is you cancel your account and take out all your money and BoA pays your bill and hits you with an overdraft fee since you have no money.

Sounds dubious, but I thought I'd pile on anyway

[tarcone]

We left them a few years ago. I didnt like their impersonal service. Seemed like all you were to them was dollar signs. And they dont give to the communities they are in. At least in my community they didnt. No donations, no supporting the sports teams, nothing. I found that sad.
We went to a local bank with my wifes account. I quit them when they were Boatmens bank. I went to a credit union.

[dawgfan]

While this particular article may or may not constitute a reason to hate on BoA, I think most of us can agree that they have done enough recently to merit a tremendous amount of skepticism and scorn. And like everyone else, I implore you - if you feel upset with BoA and have an account with them - move it. Move it to a local bank or credit union. If you have a problem with how the massive banks in this country have behaved in the last decade or so, move your money.

I've been a credit union person for nearly 20 years now, and I've never seen a reason to not be. Better rates, better service, not feeding the Wall Street monster.

[SteveMax58]

Yeah, they also (in my case) cancel your paperwork loan statements when you make an online bill payment. You don't have to request paperless billing, or even have an online account/login established with BoA for this to be done "for" you.

So what that means, is that if your loan amount changes (i.e. if you escrow...it will of course change over time), they don't send you a notification of this change. If your escrow goes up (as is the case for me), they simply wait for your payment to come in & hit you with a late fee for not making your payment on time. Which...of course you made your last "known" payment but you'll have to navigate the wonderful customer help people (who all treat you like a deadbeat) when you explain this.

Eventually I got it resolved & didnt owe anything above the new payment. They also did send me a letter in case I had this show up on my credit (or wasn't removed in a time period prior to my needing it). But...I will say I was very forceful with them initially and really gave them a solid (but not vulgar) verbal beatdown.

[SirFozzie]

For those who say just use the smaller credit folks, that's great, till they become big enough to be actually useful, then someone jumps in and makes them one of the big four. This is over the last 20 years. It's amazing how many banking outlets there were that just plain got gobbled up into "Too Big To Fail" monoliths:

http://karendecoster.com/wp-content/uploads/2011/10/banks.jpg

[molson]

Bailing out banks (or the auto industry) isn't the issue. It's bailing out companies that willfully put billions of dollars of other peoples money at risk for their reward. If BoA is being a good corporate citizen, then they deserve help. If they're being scumbags, fuck em, let then fail.

I think the issue is also what happens to the banks and companies after the bailout. I think at the very least, if enough legislators think its absolutely necessary to hand out piles of cash to crappy banks in an extreme emergency situation, those banks should definitely be re-structured/taken apart, and no longer ever be "too big to fail", and what's left of the bank should check with the fed before they're allowed to wipe their ass.

[dawgfan]

For those who say just use the smaller credit folks, that's great, till they become big enough to be actually useful, then someone jumps in and makes them one of the big four. This is over the last 20 years. It's amazing how many banking outlets there were that just plain got gobbled up into "Too Big To Fail" monoliths:
Are any of those actually credit unions? Given the nature of credit unions, I'd be pretty surprised if many (any?) have been bought by a bank.

Maybe it's different in more rural areas, but I have a choice of multiple credit unions, so even if something happened to my primary one, I could switch my account to one of the others.

[sterlingice]

I was a vendor onsite at a fairly substantial BofA location a couple of years ago and watched as Merrill pretty quickly started devouring the Bank from the inside. Not sure how that ever played out as we ended up losing our contract mostly due to Merrill's IT taking over the Bank's but it did remind me of this little nugget:

<embed src="http://media.mtvnservices.com/mgid:cms:video:thedailyshow.com:216995" type="application/x-shockwave-flash" allowfullscreen="true" allowscriptaccess="always" base="." flashvars="" height="288" width="512">The Daily Show with Jon Stewart (http://www.thedailyshow.com/watch/wed-january-28-2009/stim-city)
Get More: Daily Show Full Episodes (http://www.thedailyshow.com/full-episodes/),Political Humor & Satire Blog (http://www.indecisionforever.com/),The Daily Show on Facebook (http://www.facebook.com/thedailyshow)



"Is there no greater metaphor for the disfunction of our economy than a $35K toilet you cannot take a shit in?"

SI

[Kodos]

I think bankers are trying to surpass lawyers as the most reviled professionals on the planet.

[Ksyrup]

For me, its more about unwinding from their autobill pay. Thats tough stuff there. I dont get paper statements from almost anyone anymore...

ugh Paypal tie in, etc.

Bingo. We moved from Florida over 5 years ago to a state where BoA doesn't have a presence, but I still have my BoA account and it's the main one I pay bills through and have my paycheck deposited into. We have a local bank account solely for writing local checks and cash.

I didn't move it 5 years ago because of all the work I had done to create the autopay bill stuff. At the time, BoA's service was better than any around here, in that all you had to do was tell them what day your bill was due, and they'd make sure it got paid. The other sites required you to make sure you set a payment date early enough that it got paid by the due date. Maybe 5 years later, the other services have caught up, I don't know. But I can't imagine having to start over with that entire process and not have one or more of my bills not get paid in the transition.

That, and I've essentially got a 12-month interest-free $30K revolving line of credit through BoA that has come in handy at times.

[RainMaker]

It wasn't that hard for me. I just went through all the bill pays and transferred them to the new account. Kept the old one open for a couple months to make sure nothing else went through, pulled out the remaining balance, and sent in my letter stating to close the account.

I just can't support those companies anymore. I don't care what kind of inconvenience it brings.

[Ksyrup]

Does it auto-figure when to make the payment for you based on the due date, or do you have to do it yourself? That's a huge thing for me. I just want to tell it the bill is due on the 18th, not have to figure out that I need to start the process on the 14th to make sure it's paid, plus have the money deducted several days earlier. That's basically how it works with the local bank I currently have.

[RainMaker]

Does it auto-figure when to make the payment for you based on the due date, or do you have to do it yourself? That's a huge thing for me. I just want to tell it the bill is due on the 18th, not have to figure out that I need to start the process on the 14th to make sure it's paid, plus have the money deducted several days earlier. That's basically how it works with the local bank I currently have.

Schwab does. For instance I help my Mom with her insurance every month. So I set to pay her on the 1st and it mails out a check on like the 26th. I think most are like that.

The concept of an online checking account seemed so odd but it's really easy. I barely used my bank anyway and the fact ATM fees are refunded, there is no point.