OWS: FDIC To Cover Losses On $75 Trillion Bank of America Derivative Bets

[Engineer]

And then they acquired Merrill and Countrywide. That's the source of all their problems.

They were a shitty company well before then....maybe they had better financials but they were a shitty company.

 

[Nebor]

We could also avoid this problem by fixing it at its roots: stopping crony capitalism. End corporate sponsorships of politicians.

I don't think that's really the root. The root is democracy, a weak, indecisive, outdated system that has seen it's heyday come and go.

 

[yhelothar]

thread title doesn't make sense please change it.

How does it not make sense? It's straightforward. BofA made $75T worth of risky derivative bets and is pushing for the FDIC to insure them.

 

[yhelothar]

I don't think that's really the root. The root is democracy, a weak, indecisive, outdated system that has seen it's heyday come and go.

The problem wouldn't be nearly as bad as if it was actually a democracy. The government isn't serving the people. It's serving the corporations that buy out the politicians. Everyone knows this is going on. Everyone knows that these practices are fucking the general population over.

Now people are fed up and are protesting against it. But certain people like to believe that this whole movement is just about some loser hippies whining that the government isn't taking care of them.

 

[Nebor]

The problem wouldn't be nearly as bad as if it was actually a democracy. The government isn't serving the people. It's serving the corporations that buy out the politicians. Everyone knows this is going on. Everyone knows that these practices are fucking the general population over.

Now people are fed up and are protesting against it. But certain people like to believe that this whole movement is just about some loser hippies whining that the government isn't taking care of them.

The people should be serving the government, and the government should be protecting the people. As it is, people are serving themselves, corporations are taking advantage of the situation while manipulating the government, and the government is basically sucking it's thumb in a corner.

 

[RampantAndroid]

Not being one to understand this...can someone explain it in laymans terms? What is a derivative here?

 

[Jhhnn]

I wonder why the Teapublicans aren't raising hell about this??

Because Rush, Hannity, O'Reilly & the rest of the Faux News/ Talk Radio/ Rightwing echo chamber haven't told them to, silly.

They charge in whatever direction they're told to charge.

 

[LegendKiller]

How does it not make sense? It's straightforward. BofA made $75T worth of risky derivative bets and is pushing for the FDIC to insure them.

How do you know they made $75TR of "risky" derivatives bets? Prove what the VAR on those "risky bets" are. Now.

Otherwise, STFU and quit spreading FUDD.

 

[LegendKiller]

Not being one to understand this...can someone explain it in laymans terms? What is a derivative here?

A derivative is a contract between two parties to exchange something. For example, farmers use derivatives to hedge their crop production. They know what their costs are today and they want to hedge what their revenue from the sale of those crops will be in 12 months. Instead of taking a risk that in 9 months they can only sell it for X, they lock in price Y. In 12 months they deliver the crop and get their price.

That's the most basic form of a derivative.

 

[Jhhnn]

A derivative is a contract between two parties to exchange something. For example, farmers use derivatives to hedge their crop production. They know what their costs are today and they want to hedge what their revenue from the sale of those crops will be in 12 months. Instead of taking a risk that in 9 months they can only sell it for X, they lock in price Y. In 12 months they deliver the crop and get their price.

That's the most basic form of a derivative.

And those are exchange traded derivatives, with lots of rules about exposure by all the parties and about the structure of the instruments themselves. There are always underlying assets, as well- no exchange traded derivatives are purely synthetic. No such rules exist in the realm of OTC derivatives.

 

[LegendKiller]

And those are exchange traded derivatives, with lots of rules about exposure by all the parties and about the structure of the instruments themselves. There are always underlying assets, as well- no exchange traded derivatives are purely synthetic. No such rules exist in the realm of OTC derivatives.

Many OTC derivatives aren't all that exotic and almost all of them are governed by a standard ISDA with collateral posting/margin requirements for mark to market, many times based upon credit rating. Many OTCs outside of the CME would be uncommon rate swaps or the like.

The $75TR is a bullshit number for total exposure if you're even 1% logical.

 

[halik]

Of course- but that would be an exercise in futility, and banks don't do that. They play large amounts at very small spreads in a variety of contracts with a plethora of counterparties. Nobody is perfectly hedged. They're all exposed when the values of the underlying assets move against their position, and suffer counterparty risk as well.

It's like chasing small change in front of a steamroller. Witness Dexia in my earlier links, or AIG, or LTCM in 1998.

Depository institutions in the US have to hold risk capital against the actual exposure and all swaps are priced nightly with collateral calls if needed. It's a problem with highly levered institution plays in that field with no capital to back tail events, not that derivatives are a problem in general.

What really needs to happen is have the insurance model where SEC has the authority to take over institutions that don't have Tier1 based on SEC's models.

 

[yhelothar]

How do you know they made $75TR of "risky" derivatives bets? Prove what the VAR on those "risky bets" are. Now.

Otherwise, STFU and quit spreading FUDD.

Derivatives are bets, and all bets carry risk by its very nature of being a bet. When the risks are put upon the taxpayer due to the fact that it's FDIC insured, that is fundamentally wrong that someone is allowed to gamble with taxpayer money. If their bets goes as planned, the American people does not benefit. But if it goes south, taxpayers have to take the loss.

As I mentioned, I'm not an expert in finance. I don't know about the details about this. However, given that the 2008 derivative bet flop created the 2008 great recession, and Bank of America is going through a financial crisis right now with new bailouts, credit downgrades, and their stock value continues to plummet over these past few months, it seems glaring to me that what they're doing now is RISKY to the american taxpayer.

I apologize if I can't spread the news as objectively as a finance expert could. Although I felt it was important enough to warrant a discussion here.

 

[LegendKiller]

Derivatives are bets, and all bets carry risk by its very nature of being a bet. When the risks are put upon the taxpayer due to the fact that it's FDIC insured, that is fundamentally wrong that someone is allowed to gamble with taxpayer money. If their bets goes as planned, the American people does not benefit. But if it goes south, taxpayers have to take the loss.

As I mentioned, I'm not an expert in finance. I don't know about the details about this. However, given that the 2008 derivative bet flop created the 2008 great recession, and Bank of America is going through a financial crisis right now with new bailouts, credit downgrades, and their stock value continues to plummet over these past few months, it seems glaring to me that what they're doing now is RISKY to the american taxpayer.

I apologize if I can't spread the news as objectively as a finance expert could. Although I felt it was important enough to warrant a discussion here.

Not all derivatives are "bets" just like not all bets are derivatives, especially when they are hedged well and managed. Further, the $75TR is *NOT* the actual amount at risk, as discussed. American people DO benefit from the derivatives, as many of the derivatives are for the direct benefit of the taxpayers, especially when funding consumer assets. Taxpayers don't necessarily take a loss.

I know you're not a financial expert. You are something far more dangerous, you spread FUDD and froth everybody up into a hysteria. It wasn't derivatives of this nature, especially not notional value ones, that caused 2008.

Knowledge is power in a discussion and you are powerless. Spread what you want but it's still ignorance no matter how you cut it.

 

[yhelothar]

OK so given your financial expertise, you would not say that what Bank of America is doing in this case is perfectly acceptable and does not hurt the taxpayer?

So you imply that that the FUDD that I'm spreading is not justified, that my lack of knowledge on the issue is misleading people into hysteria that is unwarranted.

So you disagree that there is stake here that should concern the average american taxpayer?

SF gate mentions that they do not know the details about the derivatives as well, but they just know that it's making the FDIC upset. Compound this with the financial crisis that BofA is going through now, that does not raise hysteria for you? Is sfgate and the numerous other articles linked in this thread spreading FUDD as well, and are being dangerous with their ignorance?

http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/10/20/bloomberg_articlesLTBZHS1A1I4J.DTL

By the way, part of the reason I created this thread for discussion so that I can gain more knowledge in an area that I'm not well acquainted in. There's a difference between someone who is ignorant and someone who is just not knowledgable. The former is connotative of a lack of will to educate oneself. I appreciate the input you have given in this thread, I have learned a lot about derivatives from you.

Also for the record, the title of this thread is a straight copy and paste of the title the second article I linked.

 

[bfdd]

FDIC is/was a bad idea anyways. banks and their customers would be far more careful if it didn't exist. should have just let the failures fail instead of pushing them on boa. anyone who thought not going through with bailouts would have crushed us is silly, letting our financial institutions fail would have been what wenneeded to enact real change to he system. oh well.

 

[Jhhnn]

Well, gentlemen, if all of this were as well conceived & managed as you claim, then 2008 wouldn't have been the big deal that it was, where risk mitigation turned into the reality of systemic risk & near collapse. The whole proposition called for enormous amounts of liquidity that simply weren't available. Even if my positions actually balanced out, I'd have to both pay and receive enormous sums in cash & collateral to achieve those ends.

We really don't know at this point what kind of derivatives are involved, but if the FDIC isn't happy, it means they think the deal compromises their ability to do their job, to protect depositors' interests, something they've done admirably well for decades.

While it's an assumption, it seems highly unlikely that BOA would even bother doing this if those "assets" didn't pose substantial (enormous?) risk to the parent corp in their present location. They know things about their own positions that they're not telling, and that the FRB isn't telling, which would lead any reasonable outsider to view the whole affair with a great deal of skepticism.

 

[Jhhnn]

FDIC is/was a bad idea anyways. banks and their customers would be far more careful if it didn't exist. should have just let the failures fail instead of pushing them on boa. anyone who thought not going through with bailouts would have crushed us is silly, letting our financial institutions fail would have been what wenneeded to enact real change to he system. oh well.

Yeh- What we need are Bank Runs! Just the ticket for a society that depends on banking more than they ever did in 1932, the last time such a thing happened .

 

[Jaskalas]

Thanks, that's what I was looking for. Looks to me like BoA is in the process of screwing the taxpayer out of a lot of money.

Only the government screws the taxpayer.

 

[YoungGun21]

http://www.investopedia.com/articles/stocks/04/122204.asp#axzz1blcnItEK

This helps explain a little about why they might have some of this.

 

[rchiu]

OK so given your financial expertise, you would not say that what Bank of America is doing in this case is perfectly acceptable and does not hurt the taxpayer?

So you imply that that the FUDD that I'm spreading is not justified, that my lack of knowledge on the issue is misleading people into hysteria that is unwarranted.

So you disagree that there is stake here that should concern the average american taxpayer?

SF gate mentions that they do not know the details about the derivatives as well, but they just know that it's making the FDIC upset. Compound this with the financial crisis that BofA is going through now, that does not raise hysteria for you? Is sfgate and the numerous other articles linked in this thread spreading FUDD as well, and are being dangerous with their ignorance?

http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/10/20/bloomberg_articlesLTBZHS1A1I4J.DTL

By the way, part of the reason I created this thread for discussion so that I can gain more knowledge in an area that I'm not well acquainted in. There's a difference between someone who is ignorant and someone who is just not knowledgable. The former is connotative of a lack of will to educate oneself. I appreciate the input you have given in this thread, I have learned a lot about derivatives from you.

Also for the record, the title of this thread is a straight copy and paste of the title the second article I linked.

lol, I am sure our media never run sensationalistic journalism and our journalists are all man and woman with principals, integrity and only write based on fact and not what their paying customers want to hear.

We all know that there is hysteria regarding the 99% vs 1% and against the bankers. Wall St. is the easy target here.

The fact is this 1) nobody knows what the type of derivative we are talking about, 2) the $75 Trillion number is meaningless unless those knowledgeable journalist let us know how much of those are not hedged and 3) the practice is not uncommon for big banks with multiple subsidiaries, and 4) The end goal is to reduce the cost of doing business for BoA, and if you actually want to see BoA continue to operate and not use FDIC money, this move is actually beneficial.

 

[bfdd]

Yeh- What we need are Bank Runs! Just the ticket for a society that depends on banking more than they ever did in 1932, the last time such a thing happened .

with the banks and the banking system we have in play do you really think it would be such a bad thing? this is why I can't take you seriously with the ows thing. you're to afraid to actually do anything about it.

 

[halik]

FDIC is/was a bad idea anyways. banks and their customers would be far more careful if it didn't exist. should have just let the failures fail instead of pushing them on boa. anyone who thought not going through with bailouts would have crushed us is silly, letting our financial institutions fail would have been what wenneeded to enact real change to he system. oh well.

ROFL yeah, we saw how that worked in 1929 onwards
Ayn Rand people are hilarious - literally the same dogmatic position that blindsided Greenspan in 2008 shows up again 3 years later.

 

[simpletron]

While it's an assumption, it seems highly unlikely that BOA would even bother doing this if those "assets" didn't pose substantial (enormous?) risk to the parent corp in their present location. They know things about their own positions that they're not telling, and that the FRB isn't telling, which would lead any reasonable outsider to view the whole affair with a great deal of skepticism.

Apparently you didn't read your bloomberg link. http://www.bloomberg.com/news/2011-...-moving-merrill-derivatives-to-bank-unit.html

Moody’s Investors Service downgraded Bank of America’s long-term credit ratings Sept. 21, cutting both the holding company and the retail bank two notches apiece. The holding company fell to Baa1, the third-lowest investment-grade rank, from A2, while the retail bank declined to A2 from Aa3.

Moody’s Downgrade
The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody’s decision, said a person familiar with the matter.

Bank of America estimated in an August regulatory filing that a two-level downgrade by all ratings companies would have required that it post $3.3 billion in additional collateral and termination payments, based on over-the-counter derivatives and other trading agreements as of June 30. The figure doesn’t include possible collateral payments due to “variable interest entities,” which the firm is evaluating, it said in the filing.

BofA is trying to protect its profits by moving assets from the lower rated part to the higher rated part.

How does it not make sense? It's straightforward. BofA made $75T worth of risky derivative bets and is pushing for the FDIC to insure them.

You really don't understand what the FDIC does. BofA is not pushing for the FDIC to insure the derivatives, and the FDIC will not be insuring or covering any losses of the derivatives because of this transfer. The FDIC just insures the deposit accounts aka checking/savings/CDs. It doesn't insure stocks, bonds, mutual fund, insurance products, annuities, securities or derivatives.

 

[Jhhnn]

Apparently you didn't read your bloomberg link.

BofA is trying to protect its profits by moving assets from the lower rated part to the higher rated part.

They're trying to avoid posting collateral counterparties are demanding. The deposits serve as that collateral in the greater scheme, in the higher credit rating of the subsidiary. And, uhh, they have included "variable interest" deals that they're "evaluating". (Potential evaluation- OMG! We are soo screwed!)

You really don't understand what the FDIC does. BofA is not pushing for the FDIC to insure the derivatives, and the FDIC will not be insuring or covering any losses of the derivatives because of this transfer. The FDIC just insures the deposit accounts aka checking/savings/CDs. It doesn't insure stocks, bonds, mutual fund, insurance products, annuities, securities or derivatives.

Derivative bets are first in line in the event of default, which would transfer deposits to the counterparties, leave the FDIC holding the bag. The subsidiary goes titsup, the parent company sails away into the bright horizon. Ta-ta!

Expect more attacks on BOA by the other big players. They survive, in part, by eating their own.