There are 2 articles posted, and it is important you read both.  One is from Bloomberg explaining what is being done and by whom etc.  The second is written by an attorney who specializes in securities law and according to him, BOA is moving these bad assets(derivatives) to their FDIC insured unit which will make the American people responsible for the loses on these bad investments (who will bail us out when the dollar goes by the way side over things like this?).  We need to let these folks go down.  We need to stop them from trying to steal money from the American people to cover for their bad investments.  When we make bad investments, we lose our money and so should Bank of America.  No one should be too big to fail................let them fail.

Seeking Alpha reports:

Bloomberg reports that Bank of America (BAC) has shifted about $22 trillion worth of derivative obligations from Merrill Lynch and the BAC holding company to the FDIC insured retail deposit division. Along with this information came the revelation that the FDIC insured unit was already stuffed with $53 trillion worth of these potentially toxic obligations, making a total of $75 trillion.

Derivatives are highly volatile financial instruments that are occasionally used to hedge risk, but mostly used for speculation. They are bets upon the value of stocks, bonds, mortgages, other loans, currencies, commodities, volatility of financial indexes, and even weather changes. Many big banks, including Bank of America, issue derivatives because, if they are not triggered, they are highly profitable to the issuer, and result in big bonus payments to the executives who administer them. If they are triggered, of course, the obligations fall upon the corporate entity, not the executives involved. Ultimately, by allowing existing gambling bets to remain in insured retail banks, and endorsing the shift of additional bets into the insured retail division, the obligation falls upon the U.S. taxpayers and dollar-denominated savers.

Even if we net out the notional value of the derivatives involved, down to the net potential obligation, the amount is so large that the United States could not hope to pay it off without a major dollar devaluation, if a major contingency actually occurred and a large part of the derivatives were triggered. But, if such an event ever occurs, Bank of America's derivatives counter-parties will, as usual, be made whole, while the American people suffer. This all has the blessing of the Federal Reserve, which approved the transfer of derivatives from Merrill Lynch to the insured retail unit of BAC before it was done.

Contrary to popular belief, which blames the global financial crisis on subprime borrowers, it was the derivatives, based upon the likelihood that those borrowers would pay their debts, that were the primary catalyst triggering the global economic crisis of 2008. Back then, the derivative obligations of AIG (AIG) imploded the insurer. Under the pressure of fear-mongering from the Federal Reserve and the financial industry, the U.S. government committed hundreds of billions of dollars to bail out AIG's counter-parties, including the biggest banks of Europe and America. Had the government not stepped in, virtually all the banks on Wall Street would have gone bankrupt. A host of European and Asian banks would have followed.

AIG was not FDIC insured. It could have been allowed to fail, and should have been allowed to fail. All the banks on Wall Street that would have failed should have failed. Their speculator counter-parties should have been bankrupted, and their retail depositors should have been made whole. The retail divisions could have been temporarily nationalized and sold off as soon as possible to more prudent management. Had this occurred, America would have experienced a deep but very temporary economic downturn, and, by now, the downturn would be over. But, with derivatives obligations tied intimately with FDIC insured depositary units, the debt will need to be paid by the government, as a matter of law. We will have no legal choice except to default, or pay them off.

In 2008, politicians in Washington D.C., and Trojan horse operatives within the financial organs of our government, bailed out imprudent managements of big casino-banks. Bank executives not only didn't need to go bankrupt, as they should have, but collected huge bonuses. Later, in response to the abuse, Congress passed the Dodd-Frank legislation

and the Volcker rule. These were supposed to insure that such bailouts were not needed in the future. Supposedly, this would prevent further abuse of the American taxpayer.

The most recent abuse-event, involving BAC, illustrates the uselessness of such laws. Bank of America NA is FDIC insured, and has the blessing of the Federal Reserve, in spite of such a transaction being prohibited by Section 23A of the Federal Reserve Act. Specifically, the section reads in relevant part:

"A member bank and its subsidiaries may engage in a covered transaction with an affiliate only if--

1. in the case of any affiliate, the aggregate amount of covered transactions of the member bank and its subsidiaries will not exceed 10 per centum of the capital stock and surplus of the member bank; and

2. in the case of all affiliates, the aggregate amount of covered transactions of the member bank and its subsidiaries will not exceed 20 per centum of the capital stock and surplus of the member bank ..."

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.

But, the Act also provides that:

For purposes of applying this section and section 23B, and notwithstanding subsection (b)(2) of this section or section 23B(d)(1), a financial subsidiary of a bank--

1. shall be deemed to be an affiliate of the bank; and

2. shall not be deemed to be a subsidiary of the bank.

 

So, Merrill Lynch is clearly an affiliate of Bank of America, and the Federal Reserve is clearly violating the law by approving this particular transaction. But, here is the kicker. Congress has given ultimate power to the Federal Reserve to ignore its own enabling Act legislation. The law also reads:

The Board may, at its discretion, by regulation or order exempt transactions or relationships from the requirements of this section if it finds such exemptions to be in the public interest

 

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, the bottom line is this: When something bad happens, and the derivative obligations are triggered, the FDIC will be on the hook, thanks to the Federal Reserve. The counter-parties of Bank of America, both inside America and elsewhere around the world, will be safely bailed out by the full faith and credit of the USA. Meanwhile, the taxpayers and dollar denominated savers will be fleeced again. This latest example of misconduct illustrates the error of allowing a bank-controlled entity, like the Federal Reserve, complete power over the nation's monetary system. The so-called "reforms" enacted by Congress, in the wake of the 2008 crash, have vested more, and not less, power in the Federal Reserve, and supplied us with more, rather than less instability and problems.

This is not an isolated instance. JP Morgan Chase (JPM) is being allowed to house its unstable derivative obligations within its FDIC insured retail banking unit. Other big banks do the same. So long as the Federal Reserve exists and/or other financial regulatory agencies continue to be run by a revolving door staff that moves in and out of industry and government, crony capitalism will be alive and well in America. No amount of Dodd-Frank or Volcker rule legislation will ever protect savers, taxpayers or the American people. Profits will continue to be privatized and losses socialized.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

link:  http://seekingalpha.com/article/301260-bank-of-america-dumps-75-tri...

Bloomberg reports:

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.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

Accommodating Clients

Jerry Dubrowski, a spokesman for Charlotte, North Carolina- based Bank of America, declined to comment on the transfers or the firm’s discussions with regulators. The company “continues to accommodate the needs of our clients through each of our multiple trading entities, including Bank of America NA,” he said in an e-mailed statement, referring to the company’s deposit-taking unit.

Barbara Hagenbaugh, a Fed spokeswoman, said she couldn’t discuss supervision of specific institutions. Greg Hernandez, an FDIC spokesman, declined to comment.

Bank of America posted a $6.2 billion third-quarter profit today, compared with a loss of $7.3 billion a year earlier, as credit quality improved and the firm booked one-time accounting gains. The lender rose 7.3 percent to $6.47 at 1:54 p.m. in New York trading, making it the day’s best performer in the Dow Jones Industrial Average. Credit-default swaps on Bank of America eased 10 basis points to a mid-price of 380 as of 11:49 a.m. in New York, according to broker Phoenix Partners Group.

Moody’s Investors Service downgraded Bank of America’s long-term credit ratings Sept. 21, cutting both the holding company and the retail bank two notches apiece. The holding company fell to Baa1, the third-lowest investment-grade rank, from A2, while the retail bank declined to A2 from Aa3.

Moody’s Downgrade

The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody’s decision, said a person familiar with the matter.

Bank of America estimated in an August regulatory filing that a two-level downgrade by all ratings companies would have required that it post $3.3 billion in additional collateral and termination payments, based on over-the-counter derivatives and other trading agreements as of June 30. The figure doesn’t include possible collateral payments due to “variable interest entities,” which the firm is evaluating, it said in the filing.

Dubrowski declined to comment on collateral or termination payments after the downgrade.

‘Be Prepared’

Bank of America’s rating is now four grades below the one Moody’s assigned to JPMorgan Chase & Co. (JPM), the biggest U.S. bank by deposits at midyear, and a level below the rating given to Citigroup Inc. (C), the third-biggest. Bank of America is the only U.S. lender that lacks a rating of A3 or higher among the five firms listed by the Office of the Comptroller of the Currency as having the biggest derivatives books.

“We had worked very hard over the course of the last nine months to be prepared to the extent that we did receive a downgrade, and feel very good about the way that we’ve minimized the potential impact” Bank of America Chief Financial Officer Bruce Thompson said in a conference call today with analysts. “Since the downgrade, we have not seen any change in our global excess liquidity sources.”

Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.

Dodd-Frank Rules

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.

The legislation gave the FDIC, which liquidates failing banks, expanded powers to dismantle large financial institutions in danger of failing. The agency can borrow from the Treasury Department to finance the biggest lenders’ operations to stem bank runs. It’s required to recoup taxpayer money used during the resolution process through fees on the largest firms.

Bank of America benefited from two injections of U.S. bailout funds during the financial crisis. The first, in 2008, included $15 billion for the bank and $10 billion for Merrill, which the bank had agreed to buy. The second round of $20 billion came in January 2009 after Merrill’s losses in its final quarter as an independent firm surpassed $15 billion, raising doubts about the bank’s stability if the takeover proceeded. The U.S. also offered to guarantee $118 billion of assets held by the combined company, mostly at Merrill. The company repaid federal bailout funds in 2009 with interest.

‘The Normal Course’

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.

The moves by Bank of America are part of “the normal course of dealings that we’ve had with counterparties since Merrill Lynch and BofA came together,” Thompson said today.

‘Created a Firewall’

Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.

“Congress doesn’t want a bank’s FDIC insurance and access to the Fed discount window to somehow benefit an affiliate, so they created a firewall,” Omarova said. The discount window has been open to banks as the lender of last resort since 1914.

As a general rule, as long as transactions involve high- quality assets and don’t exceed certain quantitative limitations, they should be allowed under the Federal Reserve Act, Omarova said.

In 2009, the Fed granted Section 23A exemptions to the banking arms of Ally Financial Inc., HSBC Holdings Plc, Fifth Third Bancorp, ING Groep NV, General Electric Co., Northern Trust Corp., CIT Group Inc., Morgan Stanley and Goldman Sachs Group Inc., among others, according to letters posted on the Fed’s website.

The central bank terminated exemptions last year for retail-banking units of JPMorgan, Citigroup, Barclays Plc, Royal Bank of Scotland Plc and Deutsche Bank AG. The Fed also ended an exemption for Bank of America in March 2010 and in September of that year approved a new one.

Section 23A “is among the most important tools that U.S. bank regulators have to protect the safety and soundness of U.S. banks,” Scott Alvarez, the Fed’s general counsel, told Congress in March 2008.

link:  http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulat...#