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View Diary: Lawmakers Probe $75T Derivatives Dump by Bank of America (238 comments)

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  •  I don't think you're going to get anywhere (5+ / 0-)

    trying to correct people on this topic.  They have political and institutional incentives to misunderstand the subject at hand.

    •  Even with the correct numbers, BoA is still (4+ / 0-)

      a bunch of shitbags looking to screw our nation even further.

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      by The Dead Man on Tue Nov 01, 2011 at 04:26:51 AM PDT

      [ Parent ]

      •  eh. (8+ / 0-)

        The most common theory being hurled around here is that if BOA goes under, the derivatives counterparties will be paid first.

        This is false.

        Under Dodd-Frank, the FDIC can block seizures of collateral, effectively sending the counterparty to the back of the line, who will be paid only after the depositors are paid.

        They probably are scumbags, but there could be less sinister motives (alea, a supersmart finance blogger, for example, suggested that this was more just to match the books).

        •  So wait... (9+ / 0-)

          Dodd-Frank actually does something...good?

          You mean that bill that the Democrats passed against ferocious Republican opposition?

          It did something GOOD?

          Wow, I thought they were all the same...these D's and R's...

          Wait, wait, you mean Dodd-Frank puts the depositor class AHEAD of the investor class in this situation? You mean it doesn't favor the big institution over the average guy?

          But I thought that the administration was firmly in the pocket of Wall St....

          What am I missing here?

        •  Dodd-Frank (0+ / 0-)

          Didn't some Republican candidate just say that Dodd and Frank need to be in jail?

          -5.38 -4.72 T. Atlas shrugged. Jesus wept.

          by trevzb on Tue Nov 01, 2011 at 08:51:10 AM PDT

          [ Parent ]

        •  "This is false." (1+ / 0-)
          Recommended by:
          happymisanthropy

          Please provide some citation for this. I have read multiple articles on the subject and have yet to see a reference to the FDIC's discretion in this matter - in fact, the assumption of most commenters is the opposite, that the FDIC is exposed big time to collateral calls by derivatives counter-parties.

          I'm happy to be wrong about this. Please cite the source of your information.

          Courage is contagious. - Daniel Ellsberg

          by semiot on Tue Nov 01, 2011 at 09:49:55 AM PDT

          [ Parent ]

          •  You can look at the bill yourself. (0+ / 0-)

            It's the section on setoffs.  Here's a summary.

            •  Explain to me, if you please, how the following (0+ / 0-)

              nullifies the rights of derivative contract holders at the discretion of the FDIC:

              Setoff.  The Dodd-Frank Act specifically empowers the FDIC as receiver to transfer assets of a financial company “free and clear of the setoff rights of any third party,” but grants a preferred recovery right to the claim of a creditor based on the loss of an otherwise valid right of setoff due to such transfer.  As did the NPR, the Final Rule provides that such claim is to be paid at a level of priority immediately prior to all other general unsecured creditors, but below administrative expenses of the receiver, amounts owed to the United States and certain employee-related claims.  However, in a change from the NPR, the Final Rule makes clear that the priority given to creditors who have lost setoff rights as a result of the exercise by the FDIC of its right to transfer assets does not affect the provisions of the Dodd-Frank Act relating to qualified financial contracts.

              It seems to me to open the possibility that in fact, holders of  "qualified financial contracts" will enjoy a

              preferred recovery right to the claim of a creditor based on the loss of an otherwise valid right of setoff due to such transfer [of claims to the FDIC].

              Furthermore:

              [T]he Final Rule provides that such claim is to be paid at a level of priority immediately prior to all other general unsecured creditors, but below administrative expenses of the receiver, amounts owed to the United States and certain employee-related claims.

              I see no clear mention whatsoever of FDIC insured deposits in the link you provide. Perhaps you might advance the discussion by pointing out how it is that this Final Rule - as interpreted by your source - gives the FDIC the legal right to liquidate without challenge a bankrupt bank and pay off depositors up to the statutory guarantee, leaving derivative contract holders without recourse should the payoff of insured deposits exhaust the remaining assets.

              In my opinion, your source, as I read it, gives no clear support to your categorical assertion that "It is false" that derivative contract holders can expect no priority in a bank liquidation.

              Courage is contagious. - Daniel Ellsberg

              by semiot on Wed Nov 02, 2011 at 04:59:33 AM PDT

              [ Parent ]

        •  Really? Under Dodd-Frank the FDIC *can* (0+ / 0-)

          block seizures. Will it?

          That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power. -- Franklin D. Roosevelt --

          by enhydra lutris on Tue Nov 01, 2011 at 03:59:18 PM PDT

          [ Parent ]

    •  So explain to us, please, why BoA transferred (0+ / 0-)

      the liabilities to its retail banking unit.

      Courage is contagious. - Daniel Ellsberg

      by semiot on Tue Nov 01, 2011 at 04:59:14 AM PDT

      [ Parent ]

      •  Wouldn't you like to know how much? (10+ / 0-)

        Whatever the reason they did this, aren't you the least bit curious as to how much liability they actually transferred, if they did indeed transfer such liability?

        The banks will nickel and dime over a $2 transaction fee, so the amount to them isn't the issue.  

        The point is that headlines like this simply make people who know anything about finance not want to read or participate because the diarist and everyone who comments approvingly are simply announcing that they know nothing about the topic and are militantly ignorant about it.  I mean, it doesn't even meet the common sense test.

        The diary says that the amount of derivative liability is bigger than world GDP.  If you think that a derivative is like a bond -- that the nominal amount is the amount actually paid and owed, don't you realize that this means that for the last year the entire global economy was devoted to buying derivatives from Bank of America.  No food crops were grown, no cars manufactured, no electricity generated, no computer chips printed, no trees cut for lumber, no medical services provided -- you get the picture.

        Can anyone explain how common sense is consistent with the entire GDP being devoted to buying derivatives from Bank of America?

        •  I may not know as much about (2+ / 0-)
          Recommended by:
          Catte Nappe, gramofsam1

          finance and economics as some, but this

          I mean, it doesn't even meet the common sense test.

          says it all.

        •  I read the linked article. Do you dispute the (3+ / 0-)

          facts in the linked article? Link?

          Facts:

          1. Bank of America doesn't hold derivatives in its deposit-taking arm to the degree that major competitors do, said Dubrowski. The firm held about $53 trillion, or 71 percent of the company's total derivatives, in a deposit unit as of June 30, according to data compiled by the Comptroller of the Currency. That compares with a JPMorgan Chase & Co. deposit- taking entity, which contained 99 percent of the New York-based firm's $79 trillion of notional derivatives.

          2. Eighteen lawmakers signed onto letters from Representative Brad Miller and Senator Sherrod Brown seeking information about whether agencies consulted on the transfer considered the potential impact on the bank's health and customer accounts.

          "Because of the favored treatment of derivative contracts in receivership, it appears highly likely that losses on derivatives would result in losses to insured deposits ultimately borne by taxpayers," Miller wrote in his letter, which was signed by eight House Democrats.

          You dodged my question. Why would banks do this?

          As to this:

          If you think that a derivative is like a bond -- that the nominal amount is the amount actually paid and owed, don't you realize that this means that for the last year the entire global economy was devoted to buying derivatives from Bank of America.  No food crops were grown, no cars manufactured, no electricity generated, no computer chips printed, no trees cut for lumber, no medical services provided -- you get the picture.

          This is mere foolishness. Many derivatives are less like bonds, as far as I can tell, and more like wagers on risk. What sets the limits on the value of derivatives? In what ways are they connected to actual goods and services?

          I am curious to know. Really. You and wurster ought to, IMHO, help us out here, since you seem to know all about this.

          Courage is contagious. - Daniel Ellsberg

          by semiot on Tue Nov 01, 2011 at 08:27:48 AM PDT

          [ Parent ]

          •  "less like bonds, as far as I can tell," (1+ / 0-)
            Recommended by:
            johnny wurster

            If you don't know exactly what they are and only know "as far as you can tell" maybe you shouldn't be writing hysterical diaries based on RT ("Russia Today") reporting.

            I explained one kind of derivative upthread, but there are many kinds.

            The one thing they have in common is that the actual liability and the notional amount are no where near the same -- not even in the same order of magnitude.

            As for BoA depository liability, it's impossible to know what the bank's liability would be.

            I'm sure you probably think corporate personhood is a bad thing, right?  And corporate limited liability, right?

            Well those concepts mean that a bank can transfer liabilities to a subsidiary, hold the stock of that subsidiary and have limited liability for its losses -- ie only up to the value of the stock of the subsidiary.  

            So it's impossible to know what the liability could be.  It might be nothing if the subsidiary is bankruptcy remote.

            •  Speaking of hysteria - you might calm down (0+ / 0-)

              and notice that I didn't write the diary.

              And again, you ducked the question - or perhaps you just don't want to think about or deal with the question of why the banking companies would want to saddle their insured depository units with all this uninsured and unregulated derivative exposure.

              Courage is contagious. - Daniel Ellsberg

              by semiot on Tue Nov 01, 2011 at 09:29:30 AM PDT

              [ Parent ]

              •  He's ducking the question because he has no (1+ / 0-)
                Recommended by:
                semiot

                facts. He "explained" one kind of derivative, an example which maximizes the differential between the nominal value and the risk. Why, when we are currently awash with Credit Default Swaps, is unknown.

                That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power. -- Franklin D. Roosevelt --

                by enhydra lutris on Tue Nov 01, 2011 at 04:56:43 PM PDT

                [ Parent ]

          •  And if you think the paragraph is foolishness... (0+ / 0-)

            then that's a comment on your own diary, because that's exactly how you are treating the notional amount of the derivative.

          •  Go read some secondary literature, (0+ / 0-)

            educate yourself, and then we can discuss this intelligently.  I'm not being paid to teach you.

            •  You are not being paid to comment here at all, (0+ / 0-)

              are you? If not, then why do you lower yourself to participate among the great unwashed at The Daily Kos?

              It is my understanding that we all come here - unless we are paid to shill for some interest - to educate one another. Perhaps you have a different view of our purpose here. If so, I'd like to hear it.

              Courage is contagious. - Daniel Ellsberg

              by semiot on Wed Nov 02, 2011 at 05:04:49 AM PDT

              [ Parent ]

        •  Your assertion would only be true (1+ / 0-)
          Recommended by:
          semiot

          if all the derivative contracts were no more than a year old. That is clearly not the case.

          48forEastAfrica - Donate to Oxfam "Compassion is the radicalism of our time." ~ Tenzin Gyatso, 14th Dalai Lama -7.88, -6.21

          by Siri on Tue Nov 01, 2011 at 09:22:15 AM PDT

          [ Parent ]

          •  most are actually short term (0+ / 0-)

            Even so, doesn't it make your common sense meter twinge just a little to hear that one bank has derivatives equal to global GDP?

            At the start of the crisis in 2008, global savings/debt were $60 trillion.

            Aren't you even a little curious how one bank could have a liability of $74 trillion when that's more than all outstanding global debt in the world for all time as of 2008?

            •  Well, could it be they are really bad at what (1+ / 0-)
              Recommended by:
              semiot

              they do? Nah...

              Could it be that "shadow banking" is essentially unregulated and, fact is, we just dont know what kind of excessive liabilities some banks may have created?

              You make a cse for the $75T not being a real number. Unless Ive missed it, you have not responded as to BoA's reason for moving these liabilities. Im trying to be objective. Help me out here...

              •  I'm not disputing motives (1+ / 0-)
                Recommended by:
                johnny wurster

                They might want to get rid of $75 billion in liabilities or $75 million or $75 thousand.

                I'm just saying that throwing around numbers like $75 trillion automatically disqualifies the diarist from being taken seriously by anyone who knows anything about banking and finance.

                Trust me, Bank of America does not have liabilities equal to the entire global economy's debt, nor the entire global economy's GDP.  

                For that to be true, the only thing produced over the last year would have been BoA derivative -- no food, clothing, shelter, cars, computers, shipping, rail traffic, medical services, dog food, glassware, plastic, oil, electricity, or anything else.

                Yet people read this shit and nod their heads.

                This is why NO ONE who actually knows about banking and finance actually participates in DK's "economic" diaries.

                •  That is the only value of record. It says nothing (1+ / 0-)
                  Recommended by:
                  semiot

                  about the diarist that they use it and plenty about those who decry it that they claim, baselessly and without presenting any facts or alternatives, that using that number disqualifies the diary from serious consideration.

                  What is the exact amount of that 75K at risk? I have asked variations of this before? What is the exact proportion that are puts, and how much is CDS, and CDSs with regards to which tranches?

                  You have no facts or information, but claim that only you, and your attempt to imply with no factual basis whatsoever should be considered seriously. Then you turn around and use a fallacious argument trying to equate the face value of a bundle of "derivatives", possibly very largely CDSs, with current GDP. Why should you be taken more seriously than the only known measure?

                  That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power. -- Franklin D. Roosevelt --

                  by enhydra lutris on Tue Nov 01, 2011 at 05:02:57 PM PDT

                  [ Parent ]

        •  Got any facts? Got any real information? Is (1+ / 0-)
          Recommended by:
          semiot

          there something you'd like to tell us about the real numbers? What is the composition of the nominal 75T of "derivatives" by type of derivative? Anything at all?

          Didn't think so.

          That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power. -- Franklin D. Roosevelt --

          by enhydra lutris on Tue Nov 01, 2011 at 04:13:32 PM PDT

          [ Parent ]

          •  Seriously? (0+ / 0-)

            It's mostly interest rate swaps.  They have what appears to be a fully hedged CDS book.  

            Pretty basic shit, and you would've saved everyone time if you'd just looked that up yourself.

            •  So far, BA has said: (1+ / 0-)
              Recommended by:
              semiot
              Bank of America spokesman Jerry Dubrowski said the bank's derivatives trades are subject to risk-management controls and are client-driven, not proprietary trades - meaning the bank is not betting with its own money.

              Nothing more. Doesn't sound like "relax, it's just interest rate swaps" from here.

              That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power. -- Franklin D. Roosevelt --

              by enhydra lutris on Tue Nov 01, 2011 at 06:38:24 PM PDT

              [ Parent ]

        •  asdf (1+ / 0-)
          Recommended by:
          semiot
          The diary says that the amount of derivative liability is bigger than world GDP.  If you think that a derivative is like a bond -- that the nominal amount is the amount actually paid and owed, don't you realize that this means that for the last year the entire global economy was devoted to buying derivatives from Bank of America.  No food crops were grown, no cars manufactured, no electricity generated, no computer chips printed, no trees cut for lumber, no medical services provided -- you get the picture.

          No, the diary doesn't say that. You say that, and that is completely false.  Here's how it really works:

          Joe buys a $50K house for $250K nominal price, $100 down 30 years to amortize 100K and a 150K balloon through Countrywide.  Countrywide sells a 200K note backed by this loan to a private investor. The investor gets ML to insure the note for 180K by paying a fee of 20 bucks. 2 years later, when house is "worth" 600K, Joe gets a 300K loan from World to pay off Countrywide and does so.  Countrywide has butchered the paperwork and doesn't pay the private investor. World sells a 280K note backed by this new mortgage to Dryfus .  Dryfus gets ML to insure the note for 265K in exchange for a 25K premium.  A year later Joe loses his job but World doesn't foreclose because the house is only worth 45K on the current market and taxes are in arrears. ML dumps the liability for 180K and the liability for 265K into B/A.  It is absolutely not the case that the 445K liability came out of or went into current GDP.

          That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power. -- Franklin D. Roosevelt --

          by enhydra lutris on Tue Nov 01, 2011 at 04:52:00 PM PDT

          [ Parent ]

    •  Since neither of you have presented any *facts* (0+ / 0-)

      your concern about correcting folks is kind of laughable. If you have some facts, you know, real numbers, supported by something other than wild ass bullshit like pretending that all these "derivatives" are puts, then, by all means, correct everybody by presenting said facts.

      That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power. -- Franklin D. Roosevelt --

      by enhydra lutris on Tue Nov 01, 2011 at 04:10:58 PM PDT

      [ Parent ]

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