My brother just shared with me this too-amazing-to-believe letter he received from Bank of America. It was apparently sent to all depositors to its bank subsidiary that now has derivatives sitting on its books, which, if they go "bad", could result in the depositors' $1 trillion in FDIC-insured money being seized by the counterparties to these derivatives contracts, requiring a 13-figure bailout of the FDIC to get depositors their money back.
B. of A. provided footnotes in their letter, which I have found and put as links into the text, for your reference. Here's the letter:
Dear [Redacted]:
You may have heard that Bank of America Corporation recently shifted trillions in derivatives onto the books of our bank subsidiary, thereby putting the money you have deposited there at riskif those derivatives required payouts to the counterparties who hold them.
This is true, however we are contacting you directly to get you all the facts and reassure you so will continue your relationship of 12 years with Bank of America.
[Rest of letter below the fold]
Here is the background: When the holding company where these derivatives had been held got downgraded recently by the credit ratings agency Moody's, we were in a position of having to post at least $3.3 billion in additional collateralper the terms of these derivatives conttracts - something we didn't want to do.
Instead, we negotiated another solution with the counterparties, which was to let them select the contracts at most risk of having to be paid out and then put them against the bank part of our business and its $1.04 trillion in bank deposits from our wonderful customers like you. This money serves as collateral that these counterparties have access to in the event there is a need for Bank of America to pay out on these contracts.
But please don't worry. Since your deposits are entirely insured by the Federal Deposit Insurance Corporation (FDIC), we believe you should have confidence that any of your deposits taken by counterparties would be paid back - at some point. It is true that in the event that the entire $1.04 trillion of insured deposits was taken as collateral by our counterparties that the $3.9 billion that FDIC has on had would be less than 1% needed to pay back insured depositors right away, and that it would take Congress to pass legislation to appropriate a cool trillion to pay back everyone in full. That's a lot of money, but considering they passed bailouts of the banks not too long ago, you've got to think they would have to do it for the FDIC when it's grandma's medication money on the line, right?
We wish that this had been kept secret, and news of this hadn't been leaked - probably by someone at the FDIC (siding with taxpayers over us) or perhaps a rogue employee at the Fed (who is always in our corner).
Now that it's gone public, though, we recognize that despite our reassurance we offer, you may be thinking of moving your money elsewhere. Perhaps there's a credit union or local bank which doesn't dabble in derivatives where you could put your money, but we hope you will be sufficiently dissuaded from moving your money because, well, leaving your money where it is is so much more convenient than trying to go through the process of closing an account at our bank.
Plus, if you pull your money out, we would have to raise billions in collateral, further eroding our share price and reducing our bonuses. You don't want us to go Galt on you, now do you?
Snarkily Yours,
Bank of America
UPDATE:
Just saw this from Matt Taibbi, at Rolling Stone and I like how he puts it (emphasis added):
Bank of America is shifting a huge collection of Merrill Lynch derivatives contracts onto its own federally-insured balance sheet. This move of risky instruments off the uninsured Merrill balance sheet onto the commercial bank's balance sheet was done to prevent Bank of America's creditors from attacking the firm with collateral calls and other sorties. Essentially, an irresponsible debtor, B of A, is keeping a loan shark from breaking his legs by getting his rich parents to co-sign his loan. The parents in this metaphor would be the FDIC.