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One frequent sign at OWS rallies and marches is “Restore Glass-Steagall.”*  (Or “Repeal Gramm-Leach-Bliley” or “Repeal The Financial Services Modernization Act.)  Equally important would be the repeal of the Commodity Futures Modernization Act.

Democratic Party high-muckety-mucks have been telling the hoi-polloi that Dodd-Frank is as good as restoring Glass-Steagall.  However, the dead-of-night transfer of BofA's Merrill Lynch unit's derivatives to a federally insured deposit subsidiary is proof that it isn't so.  Before explicating this move, let's review what it was like in the bad old days of financial regulation.

1) Investment brokers didn't sit on huge piles of unregulated derivatives for the simple reason that they didn't exist much outside commodity markets (Chicago Board of Trade).  High risk stuff. (Anybody remember Paul Erdman and cocoa futures trading?) The Commodity Futures Modernization Act opened the floodgates on not so vanilla flavored derivatives that coincidentally are more difficult to quantify and therefore, less amendable to risk analysis.  (As Elizabeth Warren has said, “LTCM should have been a warning.”)

2) Commercial banks, with their federally insured deposit accounts, were separate from investment banks thanks to the Glass-Steagall Act.  So, there were no investment banks that could shift a bunch of high-risk crap to a sister commercial bank.  

Back to BofA and today.  A key revelation as reported by Bloomberg is:

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.

The key word is COUNTERPARTIES.  Remember when that word surfaced in late 2008?  

They were the folks (see AIG for a sample listing) on the other side of the bet with AIG that cashed in their gambling chips.  Only AIG couldn't pay.  So, the US Treasury through TARP and the NY Federal Reserve stepped with tens of billions of dollars.  The Federal Reserve set up Maiden Lane II, LLC and Maiden Lane III, LLC to manage counterparties payoffs.  

Maiden Lane I, LLC protected JPM Chase from assuming Bear Stearns gaming losses when The Fed arranged the sale of the bankrupt latter to the former.  Bank of America's Ken Lewis seems not to have been as savvy as JPM's Jamie Dimon when he arranged to purchase the rapidly disintegrating Merrill Lynch in late 2008 without a Maiden Lane loss slush fund.  Now the same junk that precipitated the credit ratings downgrades of Merrill is leading to BofA downgrades.  (Along with downgrades for Wells Fargo (purchased purchased Wachovia in 2008) and Citigroup (the original “too big to fail” financial conglomerate and principle instigator of the mania).  

We're back to 2008, with the trading partners – counterparties – threatening a run on the bank.  Unless the bank can “show them the money.”  

The “genius” of Bernanke and Geithner appears to be that they kicked part of what they called a liquidity crisis can down the road and into the FDIC house.  Now, instead of TARP II and/or more FED bailouts, the FDIC will be the insurer and loss-payer.  That spreads the costs of the risk right down into the pockets of every federally insured customer of a financial institution.  How that works is the FDIC  raises its rates to it's members and they in turn pass along the increased costs to customers.  

It's been a capital crisis since the housing bubble began to pop.  A question that nobody wanted answered was how deep the hole was.  A second question was how to stick it to the 99%.  A question we should be asking is why the credit rating bureaus waited until now to downgrade and the counterparties silently bided their time.  It's not as if those derivatives are significantly more impaired today than they were last year.  Is it too ludicrous to mention that last year there were two women familiar to dKos readers standing in the way of more dead-of-night deals for the 1%?  Elizabeth Warren and Sheila Bair, Chairperson of the FDIC until July 8, 2011.  The wrong two people were most definitely let go.  

* Couldn't find a clear picture of one of these signs/placards/posters that wasn't being pitched by groups that I prefer not to link to.

Originally posted to Marie on Wed Oct 19, 2011 at 05:10 PM PDT.

Also republished by Community Spotlight.

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