Via Quentin at Eschaton and Yves, Bloomberg’s Bob Ivry, Hugh So, and Christine Harper tell us that Bank of America is attempting to stick the American taxpayer with the tab for their recklessness:
Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.
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.
As Yves says:
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.
Abrupt insolvency = financial crisis. FDIC insurance is rag-thin now, and having a bank go down and making the FDIC insolvent could easily trigger a crisis of public confidence.
Mercury Rising 鳯女 