A couple days ago Bloomberg posted an important mortgage industry-related news: Bank of America has moved derivatives from Merrill Lynch to an insured subsidiary. The move comes after Bank of America was pressed by its counterparties, because they want their money insured.
However, the is a small problem with this move that already took place, so you as a taxpayer can’t do anything: the institution that received those derivatives is covered by the FDIC. And guess who is going to pay if the bank fails? Of course, the taxpayers. The taxpayers always pay.
Another interesting fact related to this move: while the Fed was for moving those derivatives, to give relief to the bank holding company, the FDIC which would have to pay off depositors in the event of a failure is against the move, people familiar with the matter said to Bloomberg.
“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,” Bloomberg notes in its article.
So what is really happening here? This information leak lead us to think about the Fed’s role in the mortgage industry. First, we must note how “charitable” is the Fed by offering Bank of America relief with this move. Secondly: the Fed is playing charitable on your money, dear taxpayer. And this isn’t the first occasion, just think about the endless bailouts: TARP, QE1, QE2, Operation Twist, ZIRP, etc. In other words: the Fed is making gifts at the taxpayer’s expense.
And this is just the top of the iceberg. A recent report issued by the Government Accountability Office (GAO) highlight serious problems that undermine democracy: conflicts of interest in the Fed. A few lines from this report might help you understand the Fed’s dubious behavior.
“The GAO detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves….
“The corporate affiliations of Fed directors from such banking and industry giants as General Electric, JP Morgan Chase, and Lehman Brothers pose ‘reputational risks’ to the Federal Reserve System, the report said. Giving the banking industry the power to both elect and serve as Fed directors creates ‘an appearance of a conflict of interest,’ the report added….
Joseph Stiglitz – former head economist at the World Bank and a Nobel-prize winner – said yesterday that the very structure of the Federal Reserve system is so fraught with conflicts that it is ‘corrupt’ and undermines democracy.”
This explains why the Fed is so generous with its offers to banks. But remaining at the derivatives issue: according to a Christopher Whalen, bank analyst at Reuters “the move to put the derivatives exposures of Merrill Lynch under the lead bank could be preparatory to a Chapter 11 filing by the parent company.”
Thursday 27 October 2011
Is Bank of America preparing its Chapter 11 filing? - Texas Foreclosure Defense Network | Texas Foreclosure Defense Network
