Merrill Lynch moving derivatives to BofA FDIC insured bank unit

October 19, 2011 by · Leave a Comment
Filed under: Industry News 

Utter garbage.  How can we sit back and let a bank move a massive load of liabilities to a banking unit that has deposits and is backed by the U.S. taxpayers via the FDIC?  No surprise the Federal Reserve didn’t see a problem because they would not be first in line to make that banking unit whole again if something went wrong and trigger the CDS and whatever, other exotic contracts Merrill Lynch may have.  We are just increasing the risk on this massive institution.

We need to quit using this line of global uncompetitiveness as a reason why our deposit institutions need to act like investment banks and take those type of risks.   If it is that important to Bank of America or any other bank (not to single them out), they just need to make BofA Investments or whatever so they can run that operation off their own capital and investors so they can take that risk so try and increase profits.  Our banks just need to be competitive in our home market, America.

If other countries allow their “safest” banks jump off a cliff, should we compete to let ours?  Even William K. Black is mentioned in the article and he thinks we should have tight runs against this type of practice.   Just so people know, I am not against banks or banking, personally I find them fascinating companies and I love their history, but what we have these days is nothing like the old days.  When I say that, I mean the sense of duty and prudence is not their and that is a loss for the industry as a whole.

Bloomberg (Bob Ivry, Hugh Son and Christine Harper): 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.”

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