Friday, October 28, 2011

Get Ready for Another Big Bailout

Here is a bit from a post by Matt Taibbi in his Rolling Stone blog:
... when it comes to commercial banking, Bank of America is as bad as it gets.

The markets, of course, have lately come to agree, as B of A has lately been downgraded again to just above junk status. The only reason the bank is not rated even lower than that is that it is Too Big To Fail. The whole world knows that if Bank of America implodes – whether because of the vast number of fraud suits it faces for mortgage securitization practices, or because of the time bomb of toxic assets on its balance sheets – the U.S. government will probably step in to one degree or another and save it.

The government’s patronage of the bank was never clearer than in recent weeks, when B of A quietly decided to move trillions of dollars (trillions, not billions) in risky Merrill Lynch derivatives contracts off Merrill’s books and onto the books of the parent/retail arm, Bank of America.

This decision was done at the behest of counterparties to those transactions, who wanted those contracts placed under the aegis of Bank of America, whose deposits are insured by the FDIC. The move was made, according to reports, so that Bank of America could avoid posting $3.3 billion in collateral to satisfy the company’s creditors. In other words, Bank of America just got You the Taxpayer to co-sign as much as $53 trillion worth of dicey derivative contracts.

The FDIC wasn’t pleased by the move, but the Fed apparently encouraged it. Bloomberg, citing people with “direct knowledge” of the deals, reported that,
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.
So the primary regulator of the banking industry is encouraging a functionally insolvent megabank to respond to a credit downgrade by pushing its most explosively risky holdings onto the laps of the taxpayer.


A series of lawmakers on the Hill, including most notably Sherrod Brown, Carl Levin, and Bernie Sanders, are trying to figure out if there’s any way to stop this transaction, but of course there is not. Upstate NY congressman Maurice Hinchey put it best. "What Bank of America is doing is perfectly legal – and that's the problem,” he said.

This is exactly why the Glass-Steagall Act needs to be reinstated: without a separation of Investment Banks and Commercial Banks, what we end up getting is taxpayer-guaranteed gambling. Instead of encouraging prudence and savings by insuring deposits in commercial banks, the FDIC is now being turned into a vehicle for socializing speculative losses.

So our government is not only no longer encouraging fiscal conservatism, it is doing exactly the opposite, i.e. encouraging speculation and risk-taking. That this is happening in the fever of the OWS movement, and at a time when top politicians from Barack Obama on down are paying lip service to public complaints against Wall Street, should tell you everything you need to know about whether or not we can expect this government to voluntarily enact real changes, and stop making the taxpayer eat Wall Street’s pain.
This is criminal. The FDIC should refuse. But obviously the Obama administration is backing the Federal Reserve and allowing this abomination to go ahead. Shame on Barack Obama!

No comments: