Government Bailouts By Design

One question surrounding the Occupy Wall Street (OWS) protest is “Why now?” In part, the “corruption” is complex and hard to articulate. Here’s one valiant attempt:

OWS Protest Sign
This was a real sign seen recently at the OWS protests…

“In some ways,” President Obama boldly stated to ABC newsmen yesterday, “they’re not that different from some of the protests that we saw coming from the Tea Party. Both on the left and the right, I think people feel separated from their government. They feel that their institutions aren’t looking out for them.”

Duh.

Wait until they get a load of what Bank of America has just done.

With the blessing of the Federal Reserve, Bank of America moved the derivatives book off the balance sheet of Merrill Lynch and put them on the books of its own commercial banking unit. The result means yet another increase in liabilities for the U.S. taxpayer.

Again, let’s follow the bread crumbs:

This morning’s derivatives transfer announcement was initiated by a Moody’s downgrade of Merrill Lynch on Sept. 21. Merrill customers got jittery, perhaps rightly so.

Merrill Lynch can’t borrow from the Fed’s discount window. Nor is it backed by FDIC deposit insurance. But Bank of America’s commercial banking unit has both of those benefits.

Following a sketchy late-night deal on Sept. 14, 2007, covered in Andrew Sorkin’s book Too Big to Fail (now an HBO film), Bank of America owns Merrill outright.

Now with the transfer, derivative bets placed by formerly reckless Merrill traders are available for taxpayer bailout money… without all the nuisance of political debate in Congress.

Easy, peasy. Government bailouts by design. Love it.

How much money are taxpayers on the hook for? Well, we don’t know. What little we do know is courtesy of anonymous sources who leaked the news to Bloomberg.

Here are some figures:

  • Derivatives held by Bank of America’s commercial banking arm before this shift: $53.2 trillion
  • Total derivatives held by all units of Bank of America: $74.8 trillion
  • Total deposits in Bank of America’s commercial banking arm backed by FDIC insurance: $1.04 trillion
  • Amount of FDIC’s deposit insurance fund: $3.9 billion.

One assumes a sizeable portion of the derivatives are credit default swaps on eurozone government debt.

Recall that most of the big European banks are larded down with the sovereign debt of the nigh-insolvent PIIGS countries.

Recall, too, that to guard against the possibility of default, those European banks took out credit default swaps as a sort of insurance policy.

And recall thricely that U.S. banks happily wrote those policies, figuring the possibility of default was so remote it was like free money.

Dave Gonigam
for The Daily Reckoning

The Daily Reckoning