Click amount to donate direct to CounterPunch
  • $25
  • $50
  • $100
  • $500
  • $other
  • use PayPal
Keep CounterPunch ad free. Support our annual fund drive today!

Is Bank of America Headed for the Glue Factory?


Why is Bank of America moving derivatives from Merrill Lynch to an insured subsidiary? Is it because the derivatives could blow up at any time leaving Merrill with gigantic, unsustainable losses? If that’s the case, then it would make perfect sense to shift them into a depository institution that’s covered by the FDIC. That way, the taxpayers would wind up paying for the damage and no one would be the wiser. It’s like a stealth bailout, right? The only problem is that Bloomberg let the cat out of the bag, so now everyone knows what’s going on. And that’s going to be a very big problem for B Of A.  Here’s a clip from the Bloomberg article:

“Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

“The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. 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.

“Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC-insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.” (“BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit”, Bloomberg)

There are two things worth noting in this article. First, according to Bloomberg, “the transfers (of derivatives) are being requested by counterparties.” Well, how do you like that? In other words, the investors on the other side of these contracts want Merrill to put them under an insurance umbrella provided by the FDIC.

Now, why would that be? The only reason I can come up with, is that they know that a lot of these complex instruments are undercapitalized and ready to implode, so they want to make sure they get their money back any way possible. That means they need to latch on to Uncle Sam without anyone knowing about it. But, like we said, the cat is out of the bag.

The other thing worth noting is that the Fed and the FDIC are at loggerheads over the matter. (“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.”) Now, that’s not good at all, in fact, it’s a big red flag that suggests the Fed trying to pull a fast one on the American people. One does not have to look too far for other examples of Fed misbehavior; the endless bailouts (TARP, QE1 and 2, Operation Twist, ZIRP, etc) In fact, the Fed’s history is a tedious chronicle of one shifty deal after another. This is just more of the same; another gift to big finance at the public’s expense.

It’s ironic that the B Of A flap is taking place at the same time the non-partisan Government Accountability Office (GAO)  just released its report on conflicts of interest in the Fed. It helps to put the Fed’s dubious behavior into context. This is a summary of the report from Washington’s Blog:

“The GAO detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves….

“The corporate affiliations of Fed directors from such banking and industry giants as General Electric, JP Morgan Chase, and Lehman Brothers pose ‘reputational risks’ to the Federal Reserve System, the report said. Giving the banking industry the power to both elect and serve as Fed directors creates ‘an appearance of a conflict of interest,’ the report added….

Joseph Stiglitz – former head economist at the World Bank and a Nobel-prize winner – said yesterday that the very structure of the Federal Reserve system is so fraught with conflicts that it is ‘corrupt’ and undermines democracy.

Stiglitz said,  ‘If we [i.e. the World Bank] had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure.’” (“Non-Partisan Government Report: Federal Reserve Is Riddled with Corruption and Conflicts of Interest,” Washington’s Blog)

So, no one should be surprised that the Fed is involved in another sketchy deal. Even so, this particular maneuver really seems to have hit a nerve with some prominent and usually even-tempered, financial bloggers, like Yves Smith over at Naked Capitalism. Here’s Smith’s take on the Fed’s subterfuge:

“This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositories pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario…..This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.” (Naked Capitalism)

“Just plain evil.” Maybe that should be the Fed’s byline?

Anyway, Smith is not alone in her contempt for the Fed, but there are those who feel she may be off-base in her assessment of what is going on vis a vis the derivatives dump. Bank analyst Christopher Whalen at Reuters thinks that the transfer could be a sign that B of A is getting ready to throw in the towel. Here’s an excerpt from the article:

  “…. the move to put the derivatives exposures of Merrill Lynch under the lead bank could be preparatory to a Chapter 11 filing by the parent company. The move by Fannie Mae to take a large junk of loans out of BAC, the efforts to integrate parts of Merrill Lynch into the bank units earlier this year, and now the wholesale shift of derivatives exposure all suggest a larger agenda.

“I don’t have any access to inside skinny, but what I see suggests to this investment banker that a restructuring may impend at Bank of America.” (“Is Bank of America planning for a Chapter 11”, Reuters)

“Restructuring”? So is B of A headed for the glue factory?

No one knows for sure, but the banking behemoth has been laying off workers by the thousands, slashing expenses, and raising fees while its stock has dropped 49 per cent in a year. These are hardly signs of a thriving business.

So, consider this: If you were in Fed chairman Ben Bernanke’s shoes, what would you do?

Let’s say the second biggest bank in the country is starting to teeter because it’s loaded with all manner of dodgy (toxic?) derivatives that could blow up at any minute and take down the entire global financial system. Would you (a) Wait until the bombshell exploded knowing that the only choice you would then have would be to further expand the Fed’s balance sheet by another couple trillion dollars or (b) Try to sleaze the whole thing off on Uncle Sam and let the taxpayers pick up the tab?

I’m not sure, but I think Bernanke may have chosen (b).

Mike Whitney lives in Washington state. He can be reached at

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

More articles by:

2016 Fund Drive
Smart. Fierce. Uncompromised. Support CounterPunch Now!

  • cp-store
  • donate paypal

CounterPunch Magazine


October 20, 2016
Eric Draitser
Syria and the Left: Time to Break the Silence
Jeffrey St. Clair
Extreme Unction: Illusions of Democracy in Vegas
Binoy Kampmark
Digital Information Warfare: WikiLeaks, Assange and the US Presidential Elections
Jonathan Cook
Israel’s Bogus History Lesson
Bruce Mastron
Killing the Messenger, Again
Anthony DiMaggio
Lesser Evil Voting and Prospects for a Progressive Third Party
Ramzy Baroud
The Many ‘Truths’ on Syria: How Our Rivalry Has Destroyed a Country
David Rosen
Was Bill Clinton the Most Sexist President?
Laura Carlsen
Plan Colombia, Permanent War and the No Vote
Aidan O'Brien
Mao: Monster or Model?
David Swanson
Barbara Nimri Aziz
Less Than Two Weeks
Victor Grossman
Suicides and Hopes and Fears
October 19, 2016
Dan Schiller – Shinjoung Yeo
The Silicon Valley Candidate
Mike Whitney
Trump Unchained
Paul Buhle
Criminalizing the Struggle: Incarceration and the Rise of the Neoliberal State
Linn Washington Jr.
Abusing the Abused: Philly Police Abuse Case Typifies All-Too-Common Misconduct by US Prosecutors
Terry Tempest Williams - Brooke Williams
Rejected by the BLM
Binoy Kampmark
Neither War Nor Peace: Shimon Peres, Israel and History
Patrick Cockburn
This Battle for Mosul Will Not Be the Last
Joyce Nelson
Trudeau Bullying on Trade Deal
Thomas Mountain
Revolutionary Islam and Regime Change in Ethiopia
Serge Halimi – Benoît Bréville
The Limits of Eloquence: the Failures of Barack Obama
Mel Gurtov
America’s Dangerous Moment
Jerry Kroth
Questions for Obama Before Leaving Office
Michael Garrity
America is a Nation of Laws: Collaboration and Its Discontents
October 18, 2016
Srećko Horvat
The Cyber-War on Wikileaks
Zoltan Grossman
Stop the Next President From Waging the Next War
Jim Kavanagh
Hillary’s Hide-and-Seek
Robert Fisk
After Mosul Falls, ISIS will Flee to Syria. Then What?
Ted Rall
The 4 Things Hillary Could Do To Close the Deal Against Trump
Pepe Escobar
Why Hillary Clinton is a Bigger Concern for China than Donald Trump
Colin Todhunter
World Wide Fund for Nature: Stop Greenwashing Capitalism, Start Holding Corporations to Account
David Macaray
Whiskey Workers Go on Strike: I’ll Drink to That
James A Haught
After the Election, Back to Important Things
Arturo Desimone
How a Selective Boycott Can Boost External Support for Palestinians
Russell Mokhiber
If Chris Wallace Asks About Street Crime He Should Also Ask About Corporate Crime
Mark Kernan
Moloch in Paris: on the Anniversary of COP21
Carol Dansereau
The Hillary Push: Manipulation You Can Believe In
Andre Vltchek
Will They Really Try to Kill the President of the Philippines?
Sean Joseph Clancy
The Wreckage of Matthew: Cuba and Haiti
October 17, 2016
Paul Street
Pick Your Poison? Presidential Politics and Planetary Prospects
Patrick Cockburn
US Allies are Funding ISIS (and Hillary Knew All Along)
David Swanson
What Hillary Clinton Privately Told Goldman Sachs
Fran Shor
A Rigged System?