October 20th, 2011

molly-braceforimpact

oh this is not good at all

If I'm reading this right - and I reserve the possibility of not understanding something, since a lot of people are declining to release details - THIS IS VERY BAD. Crossing-the-streams bad.

I was trying to find time to make another econ post, but if I understand what's going on, this is an "everyone should know about this" event - not because of the Dead Bank Walking (Bank of America), but because of the way they're trying to backstop their derivatives losses and transfer those losses to you.

Basically, they're moving all their CDS and similar instruments over from Merrill Lynch (the investment bank) to the deposit bank's books. What this does is makes their Merrill Lynch holding look technically better, by using their own retail banking as a "bad bank" to hold the liabilities. Normally when this is done, the "bad bank" is intended to die. Keep that in mind.

Also, it uses all deposits - insured deposits - as backstop for the overall corporation's derivatives. If Europe implodes, BoA retail now falls over dead unless bailed out again. By taking those deposits out with them, they're either 1) putting a lot more pressure on the US to bail them out again if they fall over, and 2) transferring their Merrill Lynch CDS losses to the FDIC!

The numbers are more than large enough to bankrupt the FDIC. Of course, the FDIC will have to be backstopped by the US government to prevent total panic, which is to say, these losses will again be picked up by you, the taxpayer.

The FDIC is saying "fuck you, no!" while the Fed is saying "sure, go ahead," which shows you yet again how completely the Fed is owned by the agents they are supposed to regulate.

Here's the article that got me started; follow the links to Bloomberg to see their coverage as well.