[Peace-discuss] It is not just TARP it is the Fed's conflict of interest, it is small movements by huge banks / taxpayers are bailing out the still failing banks

[Karen Medina]

[It is not just TARP it is the Fed's conflict of interest, it is small
movements by huge banks / taxpayers are bailing out the still failing
banks

I read parts of this for AWARE on the Air today. It is worth reading. -kem
http://www.counterpunch.org/2011/10/21/is-bank-of-america-headed-for-the-glue-factory/
]

Is Bank of America Headed for the Glue Factory?
by MIKE WHITNEY

Why is Bank of America moving derivatives from Merrill Lynch to an
insured subsidiary? Is it because the derivatives could blow up at any
time leaving Merrill with gigantic, unsustainable losses? If that’s
the case, then it would make perfect sense to shift them into a
depository institution that’s covered by the FDIC. That way, the
taxpayers would wind up paying for the damage and no one would be the
wiser. It’s like a stealth bailout, right? The only problem is that
Bloomberg let the cat out of the bag, so now everyone knows what’s
going on. And that’s going to be a very big problem for B Of A.
Here’s a clip from the Bloomberg article:

“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.” (“BofA Said to Split Regulators Over Moving
Merrill Derivatives to Bank Unit”, Bloomberg)

There are two things worth noting in this article. First, according to
Bloomberg, “the transfers (of derivatives) are being requested by
counterparties.” Well, how do you like that? In other words, the
investors on the other side of these contracts want Merrill to put
them under an insurance umbrella provided by the FDIC.

Now, why would that be? The only reason I can come up with, is that
they know that a lot of these complex instruments are undercapitalized
and ready to implode, so they want to make sure they get their money
back any way possible. That means they need to latch on to Uncle Sam
without anyone knowing about it. But, like we said, the cat is out of
the bag.

The other thing worth noting is that the Fed and the FDIC are at
loggerheads over the matter. (“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.”) Now, that’s not good at all, in fact,
it’s a big red flag that suggests the Fed trying to pull a fast one on
the American people. One does not have to look too far for other
examples of Fed misbehavior; the endless bailouts (TARP, QE1 and 2,
Operation Twist, ZIRP, etc) In fact, the Fed’s history is a tedious
chronicle of one shifty deal after another. This is just more of the
same; another gift to big finance at the public’s expense.

It’s ironic that the B Of A flap is taking place at the same time the
non-partisan Government Accountability Office (GAO)  just released its
report on conflicts of interest in the Fed. It helps to put the Fed’s
dubious behavior into context. This is a summary of the report from
Washington’s Blog:

“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.

Stiglitz said,  ‘If we [i.e. the World Bank] had seen a governance
structure that corresponds to our Federal Reserve system, we would
have been yelling and screaming and saying that country does not
deserve any assistance, this is a corrupt governing structure.’”
(“Non-Partisan Government Report: Federal Reserve Is Riddled with
Corruption and Conflicts of Interest,” Washington’s Blog)

So, no one should be surprised that the Fed is involved in another
sketchy deal. Even so, this particular maneuver really seems to have
hit a nerve with some prominent and usually even-tempered, financial
bloggers, like Yves Smith over at Naked Capitalism. Here’s Smith’s
take on the Fed’s subterfuge:

“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 depositories
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. 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…..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.” (Naked Capitalism)

“Just plain evil.” Maybe that should be the Fed’s byline?

Anyway, Smith is not alone in her contempt for the Fed, but there are
those who feel she may be off-base in her assessment of what is going
on vis a vis the derivatives dump. Bank analyst Christopher Whalen at
Reuters thinks that the transfer could be a sign that B of A is
getting ready to throw in the towel. Here’s an excerpt from the
article:

  “…. 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. The move by Fannie Mae to take a large junk of loans
out of BAC, the efforts to integrate parts of Merrill Lynch into the
bank units earlier this year, and now the wholesale shift of
derivatives exposure all suggest a larger agenda.

“I don’t have any access to inside skinny, but what I see suggests to
this investment banker that a restructuring may impend at Bank of
America.” (“Is Bank of America planning for a Chapter 11″, Reuters)

“Restructuring”? So is B of A headed for the glue factory?

No one knows for sure, but the banking behemoth has been laying off
workers by the thousands, slashing expenses, and raising fees while
its stock has dropped 49 per cent in a year. These are hardly signs of
a thriving business.

So, consider this: If you were in Fed chairman Ben Bernanke’s shoes,
what would you do?

Let’s say the second biggest bank in the country is starting to teeter
because it’s loaded with all manner of dodgy (toxic?) derivatives that
could blow up at any minute and take down the entire global financial
system. Would you (a) Wait until the bombshell exploded knowing that
the only choice you would then have would be to further expand the
Fed’s balance sheet by another couple trillion dollars or (b) Try to
sleaze the whole thing off on Uncle Sam and let the taxpayers pick up
the tab?

I’m not sure, but I think Bernanke may have chosen (b).