Saturday, November 26, 2011

Federal Reserve Puts Tax Payers on the Hook for $75 Trillion of BofA Toxic Derivatives

From Bloomberg: B of A Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit This is old news (October 18, 2011) but it never got half the press it deserved. What has also not been well publicized is American banks are no where near out of the woods. While they may have payed off the so called TARP loans, they still have not disposed of the trillions of toxic mortgage derivatives (Credit Default Swaps) that they still show as assets. But the day of reckoning is coming due as Moody continues to down grade these banks, so B of A wants to move these worthless instruments from their investment side, Merrill Lynch to their FDIC insured banking side.

B of A, 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.
However, this is completely illegal.

Keeping such deals separate from FDIC-insured savings has been a cornerstone of U.S. regulation for decades, including last year’s Dodd-Frank overhaul of Wall Street regulation.

But, to no ones surprise, the Federal reserve is all in favor of this,

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.
The issue here is the Fed is a private organization who's board members include those that run B of A and Merrill Lynch! In a blog called Seeking Alpha Avery Goodman explains,

The Federal Reserve is an institution largely controlled by those who are probably the counter-parties to the Merrill Lynch derivatives. No doubt, its approval of the transaction, in spite of the prohibitions of section 23A arise out of a claim that Merrill is not a "bank" as defined under the Act, and, therefore, not an affiliate.

And while this transfer is obviously illegal,

Congress has given ultimate power to the Federal Reserve to ignore its own enabling Act legislation...The FDIC opposed the move, but there is nothing the FDIC can do, except file a petition for a writ of mandamus in court, against the Federal Reserve, seeking a declaration that the approval was illegal. But, the FDIC would lose, because Congress has given the Federal Reserve Board ultimate power to do whatever it wishes.

So there is no stopping this form of thievery unless we abolish or severely restrict the Federal Reserve. This has got to stop!

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