I love this place; I no sooner check naked capitalism than I find that the story has already been diaried, a couple of times.
VERY IMPORTANT REC LIST DIARY
BAC has no shame
However, neither diary seems to me to have reported accurately some of the most important facts, nor accurately represented the potential implications. More below the sigil.
At issue is the fact that Bank of America has moved @$75 Trillion (That's Right, with a Capital "T") of derivatives into their FDIC insured unit.
Correction: As point out by mll below, BoA has moved an unspecified amount of their derivatives. See the Bloomberg article, already linked. Thanks for the correction!
Here's Yves Smith's take:
Now you would expect this move to be driven by adverse selection, that it, that BofA would move its WORST derivatives, that is, the ones that were riskiest or otherwise had high collateral posting requirements, to the sub. Bill Black confirmed that even though the details were sketchy, this is precisely what took place.
The reason that commentators like Chris Whalen were relatively sanguine about Bank of America likely becoming insolvent as a result of eventual mortgage and other litigation losses is that it would be a holding company bankruptcy. The operating units, most importantly, the banks, would not be affected and could be spun out to a new entity or sold. . . .
This changes the picture completely. ... 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. [Bold in original, italics mine]
The key take away here is this: The FDIC does not insure the pay-off on the CDS's. The FDIC insures the depositors, i.e., people with checking and savings accounts, etc., on deposit with B of A's banking unit, up to $250k. The really "evil" aspect of this move is that, under the Bankruptcy Reform Act of 2005, derivatives counterparties - the guys who hold the CDS's (think Goldman Sachs) - have priority, and "get to grab assets first." So depositors get stiffed, and the FDIC has to step in.
The crux of the matter can be gleaned from the following from Bloomberg:
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.
As Yves Smith points out, that means that the Derivatives Counterparties (funny how that abbreviates as D.C.) will be able to snatch that $1.04 Trillion (or the lion's share thereof), and then the FDIC would be on the hook (allegedly) for paying off the depositor's, up to the $250k cap - and if the FDIC doesn't have the funds on hand, they're going to have to get more money from Congress, and probably raise fees on the entire banking industry to build up the FDIC reserves. In other words, a bailout of BoA BoA depositors that would be larger than the original TARP program.
Now, that leaves open a number of implications:
1) Would this Congress bailout BoA depositors? What wil Rick Santelli say, and how will the Media handle that aspect of it?
2) What would be the implication for the OWS demonstrations, and for a renewed push to regulate the industry, of such a bailout, or conversely the failure to bail the depositors out (thus undermining the FDIC - another "quaint" holdover of the New Deal)?
3) How many people will suddenly find that their automatically deposited paychecks are being stolen to pay the DC'ers, and that all of their bills are due and they have no money? How will they pay their mortgages, and how will that affect the mortgage industry, the real estate market, the chances of a recession? Runs on other banks? Another Black Tuesday?
4) ???????? Feel free to add your own in the comments.
A lot of people have been predicting that all the "reforms" and actions taken since the 2008 financial meltdown only kicked the can down the road. Looks like the end of the road may be in sight.
2:08 PM PT: WooHoo! Obligatory Wreck List Thank You's to all youse who recced it!
And an additional clarification: The DC'ers would be able to "grab assets first" as Yves Smith puts (his take is really worth the read), but it's far from clear how much they would be able to grab. The key take on that point is that BoA had $1.04 Trillion in deposits, which is what the FDIC is nominally on the hook for (and which is why they are screaming about the move). That does not reflect either 1) What all of BoA's assets are (hence, how much the DC'ers will be able to recover) (also leaving out how to value those assets - since they're not really doing that whole pesky mark-to-market thing anymore), or 2) How much the FDIC might be forced to cover, which could very easily be less, and even substantially less, than the $1.04 Trillion. But it's still feasible to assume that it could be in the billions, or tens of billions. Hundreds of Billions? Not sure, but still very feasible. They'd have to have 400,000 insurable accounts with balances of $250,000 in deposits to hit that mark, or a much larger number of smaller accounts; but then, we know that they've got $1.04 Trillion in deposits, so it's a question of how many of those accounts would be a) insured by the FDIC, and b) more than $250,000. I don't have those answers.
2:34 PM PT: Just wanted to note that fellow Kossack "That Korean Guy" linked this diary in an update in his own, which I appreciate. Those of you who tossed donuts at him might want to consider taking them back. Or not. It's up to you. But it's important to moderate ourselves, and TKG's tried to do the right thing, the way I see it.
4:16 PM PT: Thanks to all who've read/commented. I'm going to go bring dinner to my lovely bride, who's down with a cold like all the rest of the fam.
And yes, I know, Yves is a femme. Thanks for reminding me. ;) Night, all.