Saturday, October 29, 2011

Bank of America Losses Socialized Again?

On September 21, 2011, Moody's dropped Bank of America’s long-term senior debt two notches to Baa1, placing it three notches above junk status.

The NY Post reported that BAC shifted trillions of dollars of derivatives into their FDIC insured unit. The SF Business Times reports the amount transferred was $55 trillion of risky derivatives. They call this move by BAC unsurprising, since ratings downgrades often trigger calls for more collateral from derivatives holders who want to ensure their counterparties are good for the money if they have to pay up.

The important point here is that the collateral BAC is putting up to back those derivatives is FDIC insured deposits, which again puts taxpayers on the hook. The Post reports that "the derivatives transfer has irked officials at the FDIC". Supposedly the FDIC is reviewing the transfer. If the decision is to let the transfer stand then taxpayers may have to cover the losses incurred by insured depositors (now the collateral) when the derivatives tank. If the decision is reversed in taxpayer favor (I don't hold my breath for that) Bank of America and/or the derivatives counterparties are at risk for huge losses.

Some additional perspective - Bank of America acquired Countrywide in July 2008 and Merrill Lynch in September 2008. BAC now has Countrywide's failing subprime mortgages on its books. With Merrill it acquired trillions of dollars of derivatives.

And to give all this some context here are some astounding figures:

$ 75 Trillion     BAC derivatives
$ 63    "            Global GDP
$ 14.5  "          US GDP
$ 16.2   "         EU GDP
$  5.9    "         China GDP

Source ICC/IMF via Capital Account at

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