One of our favorite robber banksters - BofA - is at it again. They're laying the groundwork for another HUGE taxpayer bailout for more of their gambling debts.
Bloomberg reports that BofA has moved $53 trillion of its toxic derivatives -- over 70% of their holdings so far -- from its bank holding company to its FDIC-ensured depositors. That would be ... US -- you, me, and everyone who has a savings or a checking account. Or rather had an account, since this stunt is specially designed to wipe out deposit holders, just so those oh-so-special bankster gamblers can get paid by the FDIC before anyone else ever has a chance to. You see, when BofA goes belly up, who do you think gets paid out first? Think it's the depositors? Nope. Part of bankruptcy "reform" placed derivatives traders right at the head of the line to be paid out by FDIC. And of course, $53 trillion was the amount as of June -- you can bet they've been busy little bees since then and transferred the rest of their holdings over to us by now.
Another diarist has a front-pager up about what a ginormous middle finger BofA is attempting to give We the People with this stunt. I'd like to add to her excellent analysis. Let's hit the way-back machine and see how we got here in the first place.
Wall Street's FRAUD UTOPIA (their big "FU" to the American people)
During the Depression, we learned that allowing banks to bet with depositors' money was a really, really bad idea. So FDR enacted Glass Steagall, which separated the operations of commercial banks (what we mere mortals think of as banks) from those of investment banks. Wall Street could still invest in the market, but they had to do it with their money and not with the money that the rest of us need for things like groceries and housing.
But then Wall Street decided they needed to generate more fees. So in the middle of the night, led by the likes of Phil Gramm (but unfortunately, aided and abetted by the Clinton administration), Congress repealed it. And Wall Street made sure they would be free to gamble. They didn't just get rid of Glass Steagall, they also passed the Commodity Futures Modernization Act. This behemoth specifically exempted derivatives trading from any sort of oversight. Among other things, this little gem "forbade the states from enforcing anti-gambling laws against those who bought credit protection without owning the underlying reference obligation". Yes, they INTENDED to gamble with our money. And gamble away they did.
Warren Buffett soon discovered how destructive these derivatives could be. He called them "financial weapons of mass destruction". From page 14 of his company's 2002 annual report:
We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Once Wall Street got their all their ducks lined up in a row, they then went on what can only be described as a fraud extravaganza. First up: predatory lending and rampant mortgage industry fraud. Back in 2004, the FBI warned:
Rampant fraud in the mortgage industry has increased so sharply that the FBI warned Friday of an "epidemic" of financial crimes which, if not curtailed, could become "the next S&L crisis."
Assistant FBI Director Chris Swecker said the booming mortgage market, fueled by low interest rates and soaring home values, has attracted unscrupulous professionals and criminal groups whose fraudulent activities could cause multibillion-dollar losses to financial institutions.
"It has the potential to be an epidemic," said Swecker, who heads the Criminal Division at FBI headquarters in Washington. "We think we can prevent a problem that could have as much impact as the S&L crisis," he said.
Next up: securitize those suckers so they could lard on more and more and MORE fees. Why just get paid once per mortgage bond, when you can get paid over and over again by slicing and dicing mortgages up into 100 different pieces, and then bundling those pieces into 100 different securities?
But of course, to make the most money, Wall Street needed VOLUME. They had no time to waste on arcane maneuvers like accurately recording title or conveying ownership properly, not when there's so much money to be made. So, we got MERS (Mortgage Electronic Registration System), a nifty electronic database to handle all those pesky titile transfers. A one-stop, way-out-there in-the-ether, way to just "memorialize the transfer of ownership ... to the securitization trust".
Yves Smith's title pretty much says it all: "Bombshell Admission of Failed Securitization Process in American Home Mortgage Servicing/LPS Lawsuit". Ever wonder why there's a robosigning scandal? Turns out that it was routine practice for Countrywide not to turn over the mortgage note to the investment trusts. So much so that American Home Mortgage actually hired LPS to mass-produce those missing docs.
But that didn't stop Wall Street from selling those securitization suckers to ... those investing suckers. Not for one moment. Here's how the food chain went, back in the bad old days when title was transferred correctly: your local bank took your mortgage note and endorsed it over to the mortgage broker, who then endorsed it over to the Wall Street banker, who then endorsed it over to the trustee to put it into the trust. But that took wayyyy too much time and paperwork - they knew the trustee was supposed to make sure that notes got into the trusts, but really, why bother?
So, with a wink wink and a nod nod, Wall Street turned a blind eye. Trustees failing to perform their fiduciary responsibilities became just a speed bump on the way to bigger and better fees. A simple little case of breach of trust. And selling securities to an investor with full knowledge of non-performance by the trustee - well, what's a little securities fraud if it stands in the way of a fat bonus?
So now we fast forward to the present. To recap, BofA:
a) got bailed out by taxpayers,
b) passes out bonuses like there's no tomorrow,
c) pays less taxes than the poorest Americans,
d) is about to cut 30,000 jobs,
e) just announced they're going to soak debit-card holders with a $5/month fee because they ... "have a right" ... to make a profit,
... now BofA - is about to stick the American people with their $75 trillion worth of gambling debts.
UNLESS WE STOP THEM
CLARIFICATION: If (or as many people think) when BofA goes belly up, the bankster gamblers don't get paid by the FDIC. They'll just be the first in line to claim BofA's assets. Depositors will then have to turn to the FDIC to get their money. BofA has approximately $1.04 trillion in deposits - FDIC only has about $40 billion. Presto change-o: Congress antes up the difference in another "bailout", but this time it will be "for the depositors". So the banksters get OUR trillion dollars to cover their bets, and taxpayers get the bill.
UPDATE: From Pluto's comment below, this is also how Wall Street is going to stick the rest of us with the cost of the current problems in the Eurozone:
This means that the investment bank's European derivatives exposure is now backstopped by U.S. taxpayers.
Bank of America didn't get regulatory approval to do this, they just did it at the request of frightened counterparties.
Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to "give relief" to the bank holding company, which is under heavy pressure.
This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input. Now, JP Morgan is apparently doing the same thing with $79 trillion of notional derivatives guaranteed by the FDIC and Federal Reserve.
UPDATE2: For those people in your network who are visually-oriented or who are diehard tea partiers, here's a satirical video I've done on how We the People are sacrificed in the name of protecting those very, very, Needy Billionaires:
UPDATE 3: Some people are (quite understandably) having a hard time wrapping their heads around just how much risk BofA is now dumping onto We the People. From Yves Smith's post on Naked Capitalism,"Bank of America Deathwatch: Moves Risky Derivatives from Holding Company to Taxpayer-Backstopped Depositary":
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. Shareholders would be wiped out and holding company creditors (most important, bondholders) would take a hit by having their debt haircut and partly converted to equity.
This changes the picture completely. 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 depositaries 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. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.
But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. 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
Exactly - Just. Plain. EVIL.