Bank 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 [1] 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 [2].