Bank of America’s latest bailout bigger than ever | Loren Steffy | a blog

Is that a withdrawal or is he shoring up the derivatives fund? (AP)

What, you thought the big banks were done leaning on taxpayers? Sure, Bank of America may have repaid the $45 billion it borrowed under the Troubled Asset Relief Program, but it’s a long way from standing on its own.

Last month, the bank’s Merrill Lynch unit was hit by a credit downgrade. Moody’s Investors Service cut its rating to Baa1, three notches above junk status. Apparently, this concerned the counterparties for Merrill’s derivatives, who worried their collateral could be compromised if Merrill’s credit rating fell more. So, Bank of America shifted a portion — or perhaps all — of its  $53 trillion in derivatives holdings to its retail bank.

That way, the derivatives can be backstopped by the bank’s $1 trillion in deposits — deposits that are insured by the Federal Deposit Insurance Corp. The FDIC, of course, has objected to the move because it would be on the hook if something went wrong. The Federal Reserve, which is concerned with bank soundness rather than depositor exposure, supports the move.

The problem underscores the point that I made in my Sunday column: We need a smaller Wall Street because taxpayers are still ultimately responsible for its risky deals. The FDIC can’t possibly pay out on $53 trillion worth of derivatives, which leaves taxpayers holding the bag.

via Bank of America’s latest bailout bigger than ever | Loren Steffy | a blog.

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