The Bank of America's holding company, BAC, has directed the transfer of a large number of "troubled' financial derivatives from its Merrill Lynch subsidiary to the federally insured Bank of America. Even worse, the Federal Reserve has supported this transfer even though the Federal Deposit Insurance Corporation (FDIC) opposed it.
Yves Smith of NakedCapitalism has written an appropriately blistering attack on this outrageous action, which puts the public at substantially increased risk of loss.
As it turns out, massive fraud was inherent in almost all aspects of B of A's acquisition of Countywide Home Loans. This article explores the defrauding of shareholders, the fraud inherent in B of A's acquisition of collateralized debt obligations (CDOs), and the many conflicts of interest that prevailed.
BAC's request to transfer these problem-derivatives (CDOs) to the FDIC-insured B of A was a no brainer -- unfortunately the request was addressed to officials at the Fed who meet that description: no brainers. Either that or they are totally corrupt. Any competent regulator with integrity would have said,"No, Hell NO!" Indeed, any competent regulator with integrity would have had two related and acute concerns immediately upon receiving the request. First, the holding company's controlling managers pose a severe problem because they are seeking to improperly exploit their FDIC-insured institution, B of A. Second, the senior managers of B of A acceded to the transfer, apparently without protest, even though the transfer poses a severe threat to B of A's survival. So what exactly do these clowns have in mind? Their failure to act to prevent the transfer contravenes both their fiduciary duties of loyalty and care, and should lead to their immediate resignations. But that's not the worst of it!
Here's the really bad news. First, this transfer is a superb "natural experiment" that tests one of the most important questions central to the health of our financial system: Is the central purpose of the Fed to represent and vigorously protect the interests of the people of the U.S., or is it to protect the systemically dangerous institutions (SDIs) -- the largest 20 banks? Very few Americans will be surprised to learn that the Fed represents the interests of the SDIs even though they are, in this case, directly contrary to the interests of the nation.
Second, it is extremely likely that neither B of A's CEO nor the Fed even thought about whether the transfer was consistent with the CEO's fiduciary duties to the B of A.
Third, reread the Bloomberg column and try to wrap your mind around the size of Merrill Lynch's derivatives positions.
Fourth, consider that Merrill is only one shrinking player in the derivatives game.
Fifth, reread Yves' column in Naked Capitalism where she explains that many derivatives cannot be used safely. Add to that the point about how they can be used to create a "sure thing" of record fictional profits, record compensation -- and catastrophic losses.
Finally, if you're struggling to grasp or digest all this, and want to better understand the previous few paragraphs, watch this short Thom Hartmann video clip. Thom explains it all in simple terms.