Bank Of America Derivatives Timebomb Shows System Is Corrupt To The Core

The Federal Reserve recently allowed Bank of America to move its massive derivative positions from the bank holding company to its banking subsidiary which is an FDIC insured depository institution.  By allowing this transfer, the Federal Reserve has allowed Bank of America to shift the risk of loss on speculative derivative contracts from the non-bank affiliate.  A failure of Bank of America could result in huge losses for the FDIC which would ultimately be passed on to the taxpayers.

The most noteworthy aspects of this remarkable event include the following:

  • The disclosure of the derivatives transfer to Bank of America’s FDIC insured depository was apparently leaked by the FDIC which opposed the move due to the huge amount of risk being transfered to the FDIC and bank depositors.
  • In allowing the transfer, the Federal Reserve apparently violated Section 23A of the Federal Reserve Act which was supposed to keep the risks of investment banking activities at the bank holding company level.
  • The notional value of the Bank of America derivative contracts is $75 trillion.  The request for the derivatives transfer was initiated by counterparties of the contracts with Bank of America who were alarmed over the credit downgrade of Bank of America.
  • The transfer of the derivatives from Bank of America’s holding company to the FDIC insured depository institution has received remarkably little mainstream press coverage.  The quick approval by regulators at the Federal Reserve to protect the bank holding company indicates that the Federal Reserve is corrupt to the core and more interested in protecting the banks than the American public.

Bill Black, a former banking regulator, who exposed the corruption of banks and politicians during the savings and loan crisis, harshly criticizes the Fed’s actions in his recent article “Bank of America’s Death Rattle“.

Now here’s the really bad news.  First, this transfer is a superb “natural experiment” that tests one of the most important questions central to the health of our financial system.  Does the Fed represent and vigorously protect the interests of the people or the systemically dangerous institutions (SDIs) – the largest 20 banks?  We have run a real world test.  The sad fact is that very few Americans will be surprised that the Fed represented the interests of the SDIs even though they were directly contrary to the interests of the nation.  The Fed’s constant demands for (and celebration of) “independence” from democratic government, combined with slavish dependence on and service to the CEOs of the SDIs has gone beyond scandal to the point of farce.  I suggest organized “laugh ins” whenever Fed spokespersons prate about their “independence.”

If regulators were doing their jobs properly, banks would not be allowed to engage in massive speculation through derivatives trading.  The near meltdown of the financial system in 2008 has resulted in thousands of pages of new regulations but has done nothing to reign in “too big to fail banks” or reduce systemic risk in the financial system.



  1. This will go down in history as one of the reasons why the entire banking system imploded. At this point it’s looking like a controlled demolition. The banksters know where it’s going to fall and get out of the way, while the ordinary citizens get crunched.

  2. Let us recall that the government practically forced B of A to acquire Merrill Lynch so more power to them if they can shove some of that CRAP back onto the government.

    Sounds fair to me!

  3. seems the shareholder owners of BAC having taken from the top, a 95 percent loss of income and a 95 percent loss of asset value, that perhaps the jokers called help, paid toward hundreds of millions decieve that they were forced to issue buy these 75 trillion dollars worth of bogus paper by government, the best and brightest and most highly self worthed paid looters of others moneys on both sides of the deal, to protect the shareholders..??????????????gobblygoop untrusted..?????????profitable spoken horsesheet???????????/

  4. Somebody get a rope.

  5. I find this transfer very confusing. I don’t understand how it could make the FDIC responsible for those liabilities. Derivatives are not checking accounts. I’m trying to do research on this, but not yet finding an easy to understand explanation.

  6. I’m glad that I can now access my IRA, to diversify away from the US dollar. This type of action by the FED/BOA is non-sustainable. The portion of our “portfolio” once comprised of stocks are now in tangibles, and that proportion is increasing weekly. Wood stove, long term food, manual well pump, water filter, precious metals, etc. I’m not surprised to see limited news coverage of this risk transfer. It is apparent who runs the country.

  7. Thieves are doing it again! #*##!

  8. MF Global had quite a few of the smartest men in the financial industry managing their assets. They also had access to the ultimate insider info, because their CEO, Jon Corzine, was a Federal Reserve Bankster insider. So, how could so many of the nation’s brightest make such boneheaded decisions?

    Once again I want to emphasize that for every loser in the financial derivatives market, there is an equal and opposite winner, making tons of cash.

    Since 70% of the 1500 trillion dollar derivatives market is bets against interest rates going up or down, one would think that the former Chairman of Goldman Sachs would have some kind of clue on what the banksters were doing with interest rates. Some would argue that the loss of $40 billion dollars was a huge mistake. I would argue that there are no mistakes when it comes to the Satanic Psychopaths!

  9. The amazing thing is that in a few hundred (or thousand) years society will do this all over again. 🙁

  10. Bob Loblaw says

    Monetary Reform Act – A Summary(in four paragraphs)This proposed law would require banks to increase their reserves on deposits from the current 10%, to 100%, over a one-year period. This would abolish fractional reserve banking (i.e., money creation by private banks) which depends upon fractional (i.e., partial) reserve lending. To provide the funds for this reserve increase, the US Treasury Department would be authorized to issue new United States Notes (and/or US Note accounts) sufficient in quantity to pay off the entire national debt (and replace all Federal Reserve Notes).The funds required to pay off the national debt are always closely equivalent to the amount of money the banks have created by engaging in fractional lending because the Fed creates 10% of the money the government needs to finance deficit spending (and uses that newly created money to buy US bonds on the open market), then the banks create the other 90% as loans (as is explained on our FAQ page). Thus the national debt closely tracks the combined total of US Treasury debt held by the Fed (10%) and the amount of money created by private banks (90%).Because this two-part action (increasing bank reserves to 100% and paying off the entire national debt) adds no net increase to the money supply (the two actions cancel each other in net effect on the money supply), it would cause neither inflation nor deflation, but would result in monetary stability and the end of the boom-bust pattern of US economic activity caused by our current, inherently unstable system.Thus our entire national debt would be extinguished – thereby dramatically reducing or entirely eliminating the US budget deficit and the need for taxes to pay the $400+ billion interest per year on the national debt – and our economic system would be stabilized, while ending the terrible injustice of private banks being allowed to create over 90% of our money as loans on which they charge us interest. Wealth would cease to be concentrated in fewer and fewer hands as a result of private bank money creation. Thereafter, apart from a regular 3% annual increase (roughly matching population growth), only Congress would have the power to authorize changes in the US money supply – for public use -not private banks increasing only private bankers’ wealth.This is how tax payers can take control!!! Thank you Mr. & Mrs. Freidman

  11. PBL Staff-

    I have a question regarding this transfer. How does it put taxpayers money at risk ? It seems they made the transfer to the actual bank vs the bank holding company that has higher credit rating just to satisfy cosmetic purposes.

    If in the event the bank itself went under, the FDIC would pay off the depositors and the derivatives would evaporate. In the interm the bank may use depositors money as collateral but that’s insured anyway. The report makes it seem like the FDIC is guaranteeing the $75 trillion in derivatives which it does not as the FDIC only insures deposits.

    Even SIPC only guarantees securities not derivatives and that’s only for investors as we’ve seen in MF Global.

    Unless I’m missing something it doesn’t seem to be that big of a deal.

  12. Problem Bank List Staff says

    Derivatives were instrumental in bringing down AIG which resulted in a $140 billion bailout.

    Lehman Brothers, which almost pushed the entire financial system into collapse, still has almost 900,000 derivative contracts outstanding that need to be unwound that have a notional value of $39 trillion. Derivatives don’t “evaporate”, they are contracts that need to be unwound even in bankruptcy.

    If Bank of America winds up getting burned on derivatives and loses hundreds of billions, the FDIC winds up with the loss in order to protect depositors. Unfortunately, the FDIC Deposit Insurance Fund only had a fund balance of $3.9 billion at June 30, 2011.

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