Thanks so much for this, David. I just stumbled upon an article written in a more excitable way about this which caused my “Eeeeeeek” meter to go off.

Here’s a sample:

“Bank of America didn’t get regulatory approval to do this, they just did it at the request of frightened counterparties.  Now the Fed and the FDIC are fighting as to whether this was sound.  The Fed wants to “give relief” to the bank holding company, which is under heavy pressure.
. . .
“What this means for you is that when Europe finally implodes and banks fail, U.S. taxpayers will hold the bag for trillions in CDS insurance contracts sold by Bank of America and JP Morgan.  Even worse, the total exposure is unknown because Wall Street successfully lobbied during Dodd-Frank passage so that no central exchange would exist keeping track of net derivative exposure.”

now that’s some savvy business deal.

this is very weird.

If this is as bad as it sounds, we need to figure out how to write it slogan style and get it out to the OWS followers. The story is a little confusing. How about, “Wall Street is about to do it gain! Bank of America has new scheme to force US taxpayers to bail them out for 75 trillion!”

I’m just wondering about how we might be coming up to a nexus of events here in the next two months. What if the Super Crapper Committee/trigger event happened to coincide with the breakup of the Euro which happened to coincide with Euro bank failures which happened to expose US bank derivatives insured by the taxpayers and calling for a bailout in an amount greater than all the money in the world…

No better President to bear the blame than Mr. Sellout Himself. What kind of great poetic ironic justice to see the guy who blew the opportunity to fix the financial system get hit with the disaster that results from not doing so? Might even revive my faith in a higher power. (Well, maybe.)

I don’t understand this. FDIC ensures the regular deposits. If the bank goes belly up, those deposits are protected up to the FDIC limits. If the holding company transfers a bunch of derivative to that bank, that doesn’t make the derivatives insured by FDIC. But it probably does make the bank more risky and prone to possible failure if the derivatives go bad. so it increases the risks FDIC will have to step in to cover the depositors.

Keeping risky derivatives unrelated to the bank’s core business separate from the depository function is, I thought, the core feature of the Volcker rule. this appears to be a blatant violation of that principle, so no wonder FDIC is opposed. But what does the Fed think it’s doing? and why?

HOLY BAILOUT – Federal Reserve Now Backstopping $75 Trillion Of Bank Of America’s Derivatives Trades

http://dailybail.com/home/holy-bailout-federal-reserve-now-backstopping-75-trillion-of.html

Yves is up with her post on the subject: “Bank of America Deathwatch: Moves Risky Derivatives from Holding Company to Taxpayer-Backstopped Depositors”

Looking at those astronomical numbers for B of A’s “transactions” should tell us one thing:

The corporations have already supplanted governments as the powers that be.

Now that Obama has rolled for them, all that’s left is for the facade to be dropped. Maybe they’ll dig out the infamous “Mission Accomplished” sign and hang it on the White House fence for the 2012 election.

thanks. got it. What matters is who has first claim on the bank’s assets in the even of a default. And this would apparently displace the depsitors. Now how did that get to be legal, when the the FDIC has taken on the risk of insurance. “The banks own this place.”

This from the nakedcapitalism piece helps explain:

http://www.nakedcapitalism.com/2011/10/bank-of-america-deathwatch-moves-risky-derivatives-from-holding-company-to-taxpayer-backstopped-depositors.html

This changes the picture completely. This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. 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. Lehman failed over a weekend after JP Morgan grabbed collateral.

The big boys always make sure they are at the head of the line. That’s what buying off both political parties gets you…

I saw this today and could not motherfreakin believe it. What is this GD total surreality. Off to read Yves.

So I guess we know where are SS and Medicare cut money is going to end up how much are BOA executives going to get in bonuses?

If the derivatives market now needs FDIC protection then shouldn’t the GOP Presidential candidates all be screaming Socialism?:)

What ever happened to free markets being able to regulate themselves? What ever happened to free enterprize not needing government help?
Reagan said the scariest words in the english language were we are here from the government and we are here to help.
On this I believe Reagan.

On top of this the FED opened a window for swaps from troubled EU banks so they can get hold of US dollars, and we get the toxic euro virtually worthless paper representing theit “assets”. Now they have traded their worthless paper for our taxpayer dollars. Does Firedoglake have people in the OWS crowd handing out literature containing this type of information. Details of the unfolding situation are being exposed daily as the failing institutions crash and thrash around moving their junk from one acronym to another, and since someone took the lid of Pandora’s box a while ago, I believe it was Representative Darrell Issa, and supoenaed the list of the recipients of one of the big payouts from the NY FED, it is common knowledge that the FED is propping up the major players banks so that their interests are protected. During the past couple days there have been at least three well regarded economists who have published articles worldwide that state that the GLASS STEAGALL STANDARD should be reinstated. This would serve to draw the line, and the debts would be separated into two catagories, A. Legitimate debt and B. Gambling debts.
Obviously the gambling debts, once isolated, will be set to one side, and the bankrupt banking institutions which will not longer enjoy the privilege of having all their debt covered by the FDIC meaning the US Taxpayers, will be forced to eat their own crows. Obviously, even if the bailouts are declared null and void through Glass Steagall standards, there will not remain enough in the kitty to get going with again. So having passed THE RETURN TO PRUDENT BANKING ACT introduced by Marcy Kaptur D Ohio to reinstate Glass Steagall, Congress could pass the NEED ACT OF 2011 introduced by Denis Kucinich which would enable the US to return to it’s sovregin currency mandate, Article 1 Section 8 of the Constitution, the Alexander Hamilton Credit System to replace the current monetarist system of the FED which represents the Oligarchs, the Jacob Rothschild banking cartel known now as the Inter Alpha Banking Group, which includes the Royal Bank of Scotland and the Bank of Santander and extends from the City of London all the way to Brazil. You think that Greece is a problem, think who is carrying Greek debt? Germany, France, Italy Spain……perhaps, so if Greece defaults then the ECB would have to come with money to prop up these countries, and they are already stretched out carrying Ireland and Portugal. The IMF is rather quiet…………….
Christine laGarde hasn’t said anything consequential since her appointment.
Timothy Geithner’s suggestion to leverage the ECB reserve fund to cover the potential requirements that are looming to save the euro was pooh poohed in Poland, but now the ECB is looking to implement something akin to leverage right away, without getting votes from the EU parliaments for permission to bend the EU rules once more.
Robert Reich tells it like it is, the GOP agenda of the campaigners is meager, and President Obama’s ideas are too small to have any real and lasting effect on the crisis. That leads to another question………….
Who is lobbying for the downfall of the entire monetarist system………… and then, Why?

So how many hundreds of trillions of this “derivatives” bullshit have these fucks devised?

And they presume every nickel of this fraud shall be actually be paid out of your and my literal hide?

We’ve written repeatedly about credit default swaps, which have virtually no legitimate economic uses (no one was complaining about the illiquidity of corporate bonds prior to the introduction of CDS; this was not a perceived need among investors). They are an inherently defective product, since there is no way to margin adequately for “jump to default” risk and have the product be viable economically

http://www.nakedcapitalism.com/2011/10/bank-of-america-deathwatch-moves-risky-derivatives-from-holding-company-to-taxpayer-backstopped-depositors.html

My bold so they have credit default swaps $75 Trillion just at Bank Of America thats more money than is on the entire planet by the way so if just $5 trillion goes bad just where is the FDIC suppose to get the money from?

Just a bit of accounting trickery so that the MOTU at BofA can get one last bonus before the bank fails.

Investment banking risks borne by depositor protection of FDIC insurance to $75 trillion. Where is the senate banking committee in this?

Hiding, as usual, I’m sure.

If the banks get in trouble with Derivatives then they will have to get more money or go under lots of home loan debt held by hedge funds was bought by hedgefunds who then used the cash as collateral to get loans from the very same banks.
Since the value of those home loans is nowhere near what it used to be the banks should have been asking the hedge funds for more collateral for their loans…but they did not.
Imagine what happens if hedgefunds who are maxed out on debt already all have to cough up more cash at the same time?
Either the banks accept over valued stock instead of cash and try to find buyers in this market or the hedgefunds try and sell their stock all at the same time in this market.
Either way you get a stock market crash and the GOP talking point about government regulation becomes a joke as the banks and hedgefunds scream bailout.
Lets say America fixes its problem but Greece.Italy, Dubai etc do not any one of those countries defaulting, another middle east war, a terror attack etc could cause all by itself a sell off of stocks that could trigger a banking crisis.
And no even all our SS and Medicare will not be enough to bail them out.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

Tight restrictions????? How about one regulation, “You can’t fucking do it”

Excellent catch of fin-news item that may have gotten past a lesser analyst – such as this commenter.

I’m guessing that the rather palty sum of ~$6BB is only a test. If BofA succeeds in moving the “assets”, expect the flood gates to open.

Even though the global derivatives market value “dipped” from an estimated high of $650,000,000,000,000 to $560,000,000,000,000 from 2007 to 2010. I understand its value has crested the $600 trillion mark. Given the trend, if I’m correct in conveying it, now’s the time to dump any junk you have – especially if the buyer’s backed by a sovereign bank.

I’m convinced of, though not unconvertible from, the assessment that the US if not the world’s major banks and financial institutions are insolvent. Having written that in light of the news dday posted at the top, I’m going back to review my heavily marked up copy of Bookstaber’s “A Demon of Our Own Design”.

Thanks for finding and posting this news.

Great post.

We had that. It was called the Glass Steagall Act. Worked great for 60 years. Then DLC tool Clinton supported repeal, and DLC tool Obama didn’t bother to reinstate it.

In a bankruptcy holders of derivatives would get first claim on ALL the bank’s assets. The law was changed in the 2005 ‘reform’. The insured depositors would have no assets to pick over. They would depend 100% on the broke FDIC. Want to place a bet on whether a Republican House will vote to approve a massive bailout of the FDIC if it happens in the next year?

“Where is the senate banking committee in this?”

Probably on a Bank of America junket in the South Seas………….

exactly.

this money doesnt actually exist. its all made up. no one needs to be on the hook for it.

And if BoA has 75 T then you know you can tack on a few more Ts from Chase etc.

I just did a quick google and one quesstiment is that if you collect all the cash in the US its only about 9 trillion. Another guess is there is only around 45 trillion in the world as a whole.

Yves seems determined to not become educated about derivatives – but then that seems the case for Bloomberg’s writer also.

This a $3 billion avoidance of an additional capital requirement caused by the downgrade in BofA’s credit rating. It is nothing more.

The “Notional” amount used in the calculations for a derivative have no financial meaning. But I guess screaming about trillions makes for a bigger paycheck for the writer.

The law permits the transfer if the value transfered is the value that the Fed puts on the asset. The comment that the FDIC can stop the transfer if the FDIC wishes is wrong – only the Fed has a vote.

I won’t go into risk management, risk offsets, or how stupid it sounds to hear someone say JPM has more “notional” but it is different from BofA becomes it does a business “clearing” contracts. It would be nice if the writers attended a seminar on what it means to “clear” a derivative contract, or on how meaningless the “notional value” of a derivative contract is. Perhaps a bit of knowledge was hinted at by the comment that JPM has mostly FX derivative contracts to “clear” – as this means there may actually be a way to find an exact offset that “clears” the liability.

In any case the story is (1) that BofA avoided a need for an additional $3 billion of capital via a move that was approved by the only entity that had to approve it – the Fed, and (2) that bank derivative moves prove the need for the derivative exchange that Barney wanted but which was shot down by the Congress, and finally (3), that while the Fed can do more than was ever done under Glass- Steagall, we all would slept better if G-S was back and we did not have to depend on the wisdom of the Fed for asset safety in deposit taking organizations.

It would be a really helpful bit of disclosure if you’d start your comment like this: “Hi, I’m alicewolf and I’m with the LaRouche people. On top of this the FED opened a…”

What about the credit unions the bank jokers have trashed for billions?

Right now we don’t understand and are concerned to learn that our credit union mortgage company suddenly posts an unidentifiable new address to make payments to.. turns out it is Chase.. and reassurance that it is only a processing center for them and nothing else? Now why would credit unions and their stead do that? What unholy alliance is developing- anyone know?

Want to place a bet on whether a Republican House will vote to approve a massive bailout of the FDIC if it happens in the next year?

Sucker’s bet, there’s no need to bail out the FDIC. As of this past January, Treasury is on the hook directly for all FDIC obligations. Of course if things go south, Treasury is going to blow past the debt ceiling in spectacular fashion (good thing we hashed out the 14th Amendment and platinum coin options this summer). :o)

Because the majority rules that the FDIC is not a NAFI, the United States is now directly liable for the FDIC’s contractual commitments. Mr. Slattery and future plaintiffs like him can now sue the United States in the Court of Federal Claims… The FDIC, however, has no statutory obligation to reimburse the government for any damages paid out of the Judgment Fund. Accordingly, from this date forth, taxpayers, not the FDIC, shall bear the burden of the FDIC’s contractual commitments… the majority has by judicial fiat created a more direct bailout than the 1989 Congressional bailout of the savings and loan industry…
http://caselaw.findlaw.com/us-federal-circuit/1554058.html

Great update beowulf.

sounds like you hit it. Will steal and twitter it

Me too. but hate to think about what its going to look like

How is this possible? Even with the American People OUT IN THE FUCKING STREETS the thievery continues. This is nothing more than another means to shift bank losses to the American People (via the FDIC). Where is Congress? Where is the fucking president?!

I can’t see this see how this is even legal. And I can’t even believe that the Fed thinks this is ok. How unbelievably corrupt!

Thank you defogger. Congress thinks it can still firewall the Executive Branch between the Administration and the various independent agencies but the courts aren’t having it. As I’ve mentioned before, Team Scalia keeps pushing the unitary executive theory of the presidency and it seems apparent the Supreme Court will, sooner or later, rule that independent agencies are, well, independent of the Constitution (see In Re Aiken County, Kavanaugh’s concurring opinion). To be fair, the Framers of the Constitution would probably agree with them.

Taking a different yet related angle of attack, the Slattery Court’s holding that Tsy is on the hook for all FDIC obligations is so broad (I’ll copy it below) that arguably it means the financial accounts of EVERY independent federal agency (including the Federal Reserve) are also Tsy obligations; therefore the creditors of any agency could sue Tsy directly under the Tucker Act. That current law now stick the President’s (incumbent or future) Administration with the debts of “independent agencies” at the same time it denies the elected President supervision and control of these same agencies is not a tenable situation, politically or legally.

On this en banc review, we hold that (1) when a government agency is asserted to have breached an express or implied contract that it entered on behalf of the United States, there is Tucker Act jurisdiction of the cause unless such jurisdiction was explicitly withheld or withdrawn by statute, and (2) the jurisdictional foundation of the Tucker Act is not limited by the appropriation status of the agency’s funds or the source of funds by which any judgment may be paid.

Didn’t bother? Hell, the WH fought it as they fought any meaningful reform, and left all the ‘potential’ regs concerning to regulators. Shoot, that purported ‘clearing house’ that would be oh, so helpful…they built caveat after caveat into it about end-users of this or that sort nulliying the regs.

This is all so hideous I was sick when I read it last night a Yves’ house.

Is this the next shoe dropping? Will the public even know? Damn, get the word out is right…get millions out into the streets.

I agree; thanks for that, beowulf. I’m clipping that and filing it.

Does anyone actually deny that our economic and political system is corrupt and broken?

Does anyone deny that our government is controlled by the interests of too big to fail, multi national corporate monopolies?

The question, then, is: what is being done about it? Constitutional amendment for public campaign financing? Term limits (self imposed or mandatory)? Lobbying regulations? Anti trust regulations? The return of Glass Stegal?

I don’t know people, it seems that the more we talk about the problems, the more they seem to become almost acceptable.

I think it is time for focused demands on the leaders of our representative democracy. The largest, root cause of our corrupt system has been identified: “Too big to fail is too big to exist.”

Corporations can not be allowed to control our government.
The revolving doors must be closed.
Constitutional amendments to restrict the influence of too big to fail corporations.
Restrictions on corporate control of the media.
Return of Glass Steagal and stronger regulations…

According to CNN Money, these are the 10 largest corporations in the world for 2010:
http://money.cnn.com/magazines/fortune/global500/2010/

Wal-Mart Stores
Royal Dutch Shell
Exxon Mobil
BP
Toyota Motor
Japan Post Holdings
Sinopec
State Grid
AXA
China National Petroleum

It looks like three of them are Chinese are companies, Sinopec, State Grid and China National Petroleum.

Another question I have: What is the difference between the Chinese multi national corporate monopolies, that are controlled by the Chinese government, and American multi national corporate monopolies that control our government?

The law permits the transfer if the value transferred is the value that the Fed puts on the asset. The comment that the FDIC can stop the transfer if the FDIC wishes is wrong – only the Fed has a vote.

Until it doesn’t…
The FDIC has backup enforcement authority over a depository institution holding company (“DIHC”) if the conduct or threatened conduct of the DIHC poses a risk to the Deposit Insurance Fund (“DIF”), provided that such authority may not be used with respect to a DIHC that is in generally sound condition and whose conduct does not pose a foreseeable and material risk of loss to the DIF.
http://www.fdic.gov/regulations/reform/summary.html#_Toc267493751

If the FDIC wants to (as Richard Armitage once put it) “dismount, kill the horses and fight on foot”, it could always stop it by going to court under its “backup enforcement authority” to seek an injunction.

Does this help answer your ?….http://moneymorning.com/2011/10/12/derivatives-the-600-trillion-time-bomb-thats-set-to-explode/

——————————————————————————–

That article is really misleading and shows a deep lack of understanding of derivatives.

While the article correctly points out that the notional amount can represent a leveraged position, most of the time notional amount has very little to do with the amount that can actually be lost. For example, if you buy a bond future for $1 to buy $100 notional amount of a certain bond at a strike price of $$99, the only amount that can be lost is $1.

As for the $75 trillion notional amount number, it is cited in a deeply misleading and misinformed waay.

(1) For example, on an interest rate or currency swap, for $100 of notional amount, the amount that can be lost or gained over the term of the swap is generally pennies on the dollar. $100 is the notional amount, but not the amount that can be gained or lost. To imply that the notional amount is the amount that can be lost is simiply deceptive. That’s different from a credit default swap, where the entire notional amount is at risk.

(2) On a true swap, the payout is a zero sum game. For every penny lost, someone earns a penny, and you don’t know which way that penny is going to flow. That’s different from a credit default swap where all of the losses are borne by one party.

(3) One of the reasons the notional amount is so large is becuase parties to swaps hedge by selling the samw swap that they buy. That doubles the notional amount, but on a net basis reduces the risk of a loss, and may even reduce the amount that can be lost to zero.

(4) Many swaps simply expire worthless, with no payment going either way. Because many derivatives are insurance against a bad event, if that bad event never happens, no payment is made. Without knowing what portion of that $75 trillion is in or out of the money, it is close to a meaningless number.

Interest rate swaps and currency swaps are by notional amount the largest financial transactions in the world, about $420 trillion dollars, but many of the swaps will esxpire worthless, many offset each other, and in any case only pennies (or fractions of pennies) on the dollar are at stake. As far as I can tell, the interest rate and currency swap markets have not run into any major problems, even in the deepest part of the recession.

Do a little research on interest rate swaps. Work on WS do ya?

So why is BoA doing what they are doing if it is all just “pennies on the dollar”?

FDIC should cancel BOA’s FDIC insured status. Otherwise we all might as well pull all our money out of the banks because, if this stands, there is no FDIC that will make you whole.

I litigate failed swaps. In fact, I have done considerable research on many kinds of swaps. You might say it is what I do for a living.

Because pennies on the dollar over trillions of dollars of notional amount is still a lot of money. It’s just not trillions of dollars.

All your statements prove is that derivatives, whether CDS or whatever have been an enormous scam from the get go. I lost count of the obvious contradictions in your “notional values” explanations. You seem to want use them when they fit your position but dismiss them when they don’t. Abstracts are great in the financial world cause you can create any “model” you want with them. Nicy try though.

Which side do you litigate on? If i may ask?

So if it’s $600T, it is $trillions by your own “pennies on the dollar” it would be $6T. SO yes it is $trillions !!! Give or take depending on the “notional value” which nobody seems to know.

“I don’t understand what you said, so you must be wrong” is not a winning argument. Anything specific quibbles? Or even citation of an obvious contraction? Can you explain under what circumstances the whole notional amount of an interest rate swap would be at risk, anad the notional amount of a credit default swap would not? I would be most eager to learn. Can you point out any disruptions in interest rate or currency swap markets? If they are out there, someone on the internet must have noticed.

Here’s a simple test. Explain how the risks of a split strike differ depending upon whether you are long or short on the underlying security, and when the whole notional amount is at risk and when it is not? Can you explain when more than the notional amount is at risk? You may assume a share valued at $100, the purchase of a put at a strike price of $99, and the sale of a call at $101. To simplify, you may ignore counterparty risk. If you can answer a routine question like that, maybe we can get into the specifics of what I said.

None of this depends on modeling. It’s no more than arithmetic, not even algebra, and arithmetic on the trading floor works just like arithmetic everwhere else. You may use modelling to set the strike prices, but the function of the swap does not depend on any modeling.

Oh, I agree that it is a big number, but it is not trillions of dollars. I don’t think I said otherwise.

I have never litigated an interest rate or currency swap, and I have never even heard of one defaulting. I am currentlly defending a large bank that bought a credit default swap from another large bank, and the bank that sold the swap is unhappy about making payments under it.

Interest rate and currency swaps are real swaps in the sense that two streams of payments that are expected to be very close in value are exchanged. They are done by hung-over fraternity boys with bachelor’s degrees in psychology, perhaps 100 times per day. In fact, a huge portion of interest rate and currency rate swaps are made between two different deparments of a large bank (such as the lending department and the foreign exchange department), so that the right cost center is credited for managing foreign exchange or funding properly.

A credit default swap is not really a derivative in the sense that a currency swap is. It is functionally the same as a financial guaranty with one side payng a small fee, and the other side taking all of the risk of loss on the underlying assets. They responds to a whole different set of rules. There is not theoretical price where both sides would enter into it for no fee. In a credit default swap, the seller of credit protection is betting the entire amount of the swap, not just upticks or downticks in interest rates. They are set up by teams of PhD working with sophisticated (and largely worthless) models that are right about 99% of the time, which means they have to potential to catastrophically wrong about once every three months.

Meaning bail out (as in paid off?) for protection of or to make good on the damage??? Does this explain why there have not been lawsuits from Europe and everywhere- since it seems to all point to the criminal American guys in the black hats?