BofA’s Fed-Approved Shell Game

10/28/2011 11:04 am EST

Focus: MARKETS

Igor Greenwald

Chief Investment Strategist, MLP Profits

The megabank’s shuffle of derivatives from Merrill Lynch to its parent company’s deposit-laden books showcases the failures of Frank-Dodd, writes MoneyShow.com senior editor Igor Greenwald.

Not that Europe’s any less beholden to its banks than we are to ours, but it was an instructive contrast all the same.

Faced with the necessity of cutting Greece’s debt to salvage the European financial system and currency, the leaders of Germany and France called in the bankers’ representative into the summit room sometime after midnight, and told him to fall in line, or else. Accept a “voluntary” 50% haircut on your Greek debt, or suffer a mandatory 100% default, the lenders were told.

Properly incentivized, the banks seized a deal they’d been resisting for months, allowing official Europe to pretend that Greece is fixable despite its austerity-induced depression.

Meanwhile, when Bank of America (BAC) had its credit rating downgraded a month ago, some of the counterparties doing business with its Merrill Lynch subsidiary decided that a lot if its gambling chits—sorry, derivatives contracts—would look safer on the books of its parent bank, closer to B of A’s $1 trillion in (mostly) insured deposits.

The Federal Deposit Insurance Corp. objected. As is, it’s safeguarding the integrity of the entire banking system with a reserve fund that has only recently poked its head out of the red, a Treasury credit line and the assumed recourse to US taxpayers.

But B of A’s friends at the Federal Reserve had no such qualms. By all means, move more of your derivatives (with nominal value of $74 trillion) under the same shell as your federally-insured consumer banking business, they suggested.

So B of A did. And now that the move has drawn political heat, the bank’s defense is disarmingly simple. Our competitors have been parking nearly all their derivatives on banking books forever, came the cry.

Besides, “this is permissible in the current regulatory environment, and it is not expected to significantly change with the implementation of Dodd-Frank” financial reform, a spokesman informed Bloomberg.

Which was rubbing salt into many people’s wounds, because it’s become increasingly obvious that the hundreds of pages of new ruled necessitated by Dodd-Frank are riddled with a multitude of loopholes and exceptions secured by banking lobbyists.

And it was certainly never meant to restore the old Glass-Steagall firewall between consumer banking and the riskier financial engineering, as former Federal Reserve Chairman Paul Volcker and many other critics of the system have advocated.

If Bank of America were to ever to fail, God forbid, under the new regime, it would inevitably become the financial responsibility of the taxpayers once again, along with all those notional trillions in derivatives. Liquidation would require years under the government’s wing.

Not that this is in any way deterring B of A from dispensing millions as parting gifts to booted executives.

This is crony capitalism at its most blatant, a big reason protesters are occupying parks and plazas from coast to coast. When Europe looks less craven than you are, you’ve got a problem. It’s called the Federal Reserve, not Preserve.

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