What part of “Stop Stealing!” is hard to understand?
Posted: October 30, 2011 Filed under: Banksters, financial institutions 13 CommentsBank of America has now jumped the shark, gone right over the top, past the frozen limit, and exposed themselves.
This ought to be unbelievable. It only makes sense if the bank robbers are running the bank. Bank of America has transferred assets it acquired during its takeover of the Merrill Lynch brokerage to its deposit-taking arm.
Let me unpack that a bit. 
Banks, officially, put people’s savings into safe investments. The FDIC insures those savings in case the banks fail, but to prevent that outcome there are strict regulations about how banks can only put that money in safe investments.
Brokerages, officially, exist to broker any transactions on any market. Those can be the staidest of riskfree investments, like Treasury bonds, or interesting things like ultrashort inverse contracts derived from the SP 500 basket of stocks. “Derivatives” may be two, three, four, or even more meta levels above the real underlying things they represent, such as a stock or tanker load of oil. With some derivatives, you can make many times the amount of your own money that’s tied up in the trade, or, likewise, you can lose more than everything you own. That means (duh, right?) they’re risky. They have legitimate functions, such as hedging other risks or providing a way to bet on being right, but nobody ever pretends they’re safe.
Nor is there any universe in which it is up to the FDIC (=taxpayers) to make them safe by writing blank checks to cover them.
So what does BofA do? It takes bets made by Merrill Lynch — bets which were fine for a brokerage — and makes them part of the regular bank assets that are covered by the FDIC. By the magic of modern accounting, the taxpayer gets to cover wild stock market gambles that didn’t pan out.
There’s another wrinkle here. In the old high-flying days, financial institutions would sell derivatives to customers, e.g. one expecting price to go up, and then the institutions would, for their own account, buy the opposite derivative! There are two betrayals. It’s their fiduciary responsibility to tell their customers that the firm is itself investing in a fall in price. And it’s wrong to rake in money from customer commissions as well as customer losses on those same trades. It’s called a conflict of interest. It’s a big no-no.
After the crash, when it became clear that betting against the customer was fairly common in the financial industry, regulations were put in place against what’s called “proprietary trades.”
So what is BofA’s excuse for what it’s done?
Bank of America spokesman Jerry Dubrowski said the bank’s derivatives trades are subject to risk-management controls and are client-driven, not proprietary trades – meaning the bank is not betting with its own money.
In other words, it’s okay to stick taxpayers with the bill for somebody else’s failed stock market gamble because the gamble itself was not a criminal breach of ethics.
Hello? It’s the gambling that is not insured. We don’t really care who did it. And the fact that it wasn’t criminal gambling only makes it one of the few things for which BofA won’t need a lawyer.
The scariest part is that for all I know, the gross rip-off may be legal. Most of the laws for banks were written before they could turn themselves into FDIC-insured gamblers.
Bank of America posted a third quarter profit — i.e. just for the months of July, August, and September — of $5.9 billion.
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Carissa
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quixote
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Mona (aka Wonk the Vote)
Sky Dancing 
Damn, just shaking my head in utter disgust…these banks are blatant with their criminal greed.
Well, criminal is the wrong word, if all this theft is twisted and manipulated into loophole legal as you imply…. and the thing that gets me, is when there is an obvious illegal action, the banks just use their paid political protection to get immunity. (As we are seeing with that AG immunity plan that is floating around for all the illegal foreclosures.)
Quixote, I saw this yesterday…about Citibank, Did You Hear the One About the Bankers? – NYTimes.com
Here is another link in connection with the immunity plan, h/t Yves: The Multistate Settlement Lottery: Bupkis – Credit Slips
makes me sick. 😦
It should make everyone sick. In fact, how anyonw can defend this sort of monstrous duplicity is beyond me. If anything, it underscores the fact that these banksters own the political process. With BOA, I read that several ‘large’ clients threatened to take their business elsewhere because of the exposure that BOA had.
So, whatta ya do? Just as quixote indicates–strap the risk to the backs of the taxpayer. This is a prime example of privatized gain, socialized risks. All these financial institutions have done it and continue to do it with the nod of politicians who depend on continued funding coming in. It’s a vicious circle and there are few pols and/or public servants willing to stick their necks out to throw a wrench in the gears.
That’s why I’m holding onto the last shreds of hope when I hear about AGs Eric Schneiderman and Beau Biden, who left the pack and are continuing their investigations and have even brought suit [as in the MERS case]. Or seeing William Black up in NYC, talking to Occupy members. It has to stop. These banks, their high brass and political handmaidens are literally killing the country.
Yeah, Minx, I saw that about Citi. Coming from the Friedster, no less, who’s generally wrong about everything. If even he can see the problem….
The state AGs are the only hope, and that’s pretty thin. I think I saw something on calitics.com that California’s Kamala Harris was also (finally!) coming down on the right side of this. If that’s true, then the banksters have two huge states against them, as well as Delaware, which is where they’re all incorporated. So it could get interesting. Or not. Sigh.
Killing the country. As you say.
They sure ain’t killing us softly. It’s all about making money, regardless how they do it. They don’t give a shit about us, the customers, as long as WE make money for them. They aren’t putting us first, it’s the money that must come first.
Like many of you I too am reading Suskind’s book, and I am learning that for the most part all of them have done, or do the opposite of what they say they do.
Thanks for the clear explanation of this latest mugging. But can I ask an honest but naive question? Why are derivatives necessary? Yes, they help to mitigate risk, but they are in fact a construction to create profit, not value. In a sense they are purely financial and create an atmosphere of gambling instead of investment. I understand why if I buy a stock and the company does well, I make money as the value of that stock goes up. I don’t see how creating all these products like derivatives to ‘bet’ are necessary and do anything but drive up the price to value of products. Just trying to understand your position as you have obviously done way more reading and research on this than I.
There are many kinds of derivatives, and some of them really do seem to be totally useless except as a form of betting. (Personally, I kinda like gambling, so I find that aspect of the market fun. Just like the slots in Vegas though, it rapidly ceases to be fun for anyone if it’s an obsession, or if you bet the farm. The odds are way better than Vegas, interestingly enough, given that it’s generally a rich folks’ sport.)
The classic real use for derivatives, just one example, is as follows. Let’s say you just bought a house in Southern California in 2007. You’re savvy enough to be worried that housing could be close to a top, in which case your house could well lose value. So you buy a real estate derivative equal to the buy price of your house, and that will pay out if the market goes down. (One example is traded under the symbol REK.)
In 2011, you look like a genius. Your house is worth $200,000 less than when you bought it, but your REK is worth $200,000 more. You’re even.
Let’s say you’d been wrong and the market had kept on climbing. Your house might be worth $200,000 more, but your REK would be $200,000 down. You’d still be even, although probably a lot less happy about it.
It’s not usually a perfect one-to-one correspondence, but close enough so that it’s a way of managing the risk that a market will move against you. For it to fulfill that function, the crucial point is that you must own the underlying thing that the derivative is derived from.
The person who takes the other side of the transaction generally has to be a “gambler,” i.e. someone trading without having the underlying stuff. It would be next to impossible to find perfect matches of buyers and sellers, all of whom were also owners of the stuff, half of whom wanted to buy and half to sell. So even the “gamblers” perform some useful function.
Regulation would be useful to limit the volume of various derivatives to some reasonable proportion of the actual underlying stuff whose risk needs managing. Right now, that’s far from the case. Derivatives generally dwarf real stocks, bonds, commodities, whatever, by orders of magnitude. And then the tail can wag the dog which, given the money sunk in that particular dog, is double plus ungood.
What Is Occupy Wall Street About?
(This is spot on with what is happening with the FDIC and Bank of America…continuation of bending, looping the laws to the benefit of a few.)
Good video!
One day I will tell you a funny story about my trip to help out at Occupy Wall Street 😆 Suffice it to say, the young people were great and found ways to keep me busy, and I enjoyed their company. 😆 Hint, ‘Nanna’ meets high techies… 😉 I did know one or two things…laughing so hard I am crying (I thought we were going to make posters… 😆 BB, it was no accident I was quiet about the trip…) still laughing.
I tell you, in the innovation department, our youth rock, they do, and boy can they do all sorts of innovative creations on the fly and artistically amazing, while linking new technologies together. When they (techies) post the clips I will post them here…
(System seems to have eaten my earlier comment. Just wanted to say that’s a great video!)
It was in spam. You can pull spam comments out or put them in with your editor superpowers!! 😉