Is Bank of America Transferring Its Losses to Us?

It certainly looks that way. Bloomberg reports that BofA has moved derivatives from Merrill Lynch to another subsidiary that just happens to have its deposits insured by us. It is unlikely that they have moved their very best derivatives (assuming such exist); the chances are very strong they have moved those that will go belly up quickest and with the biggest cost to us. Ben Bernanke and the Fed think this transfer is fine; Sheila Bair and the FDIC disagree strongly.

Bill Black and Yves Smith mince no words in condemning BofA's actions. Black, in particular, questions whether BofA did any real due diligence in acquiring Countrywide; he concludes they couldn't have based on their considerable experience in acquiring companies. And, BofA operated similarly in acquiring Merrill, which had a huge portfolio of CDOs. Black does not think highly of Kenneth Lewis or Brian Moynihan. He comes very close to calling them thieves.

As for the Fed, here's what Black has to say:

"BAC’s request to transfer the problem derivatives to B of A was a no brainer – unfortunately, it was apparently addressed to officials at the Fed who meet that description.  Any competent regulator would have said: “No, Hell NO!”  Indeed, any competent regulator would have developed two related, acute concerns immediately upon receiving the request.  First, the holding company’s controlling managers are a severe problem because they are seeking to exploit the insured institution.  Second, the senior managers of B of A acceded to the transfer, apparently without protest, even though the transfer poses a severe threat to B of A’s survival.  Their failure to act to prevent the transfer contravenes both their fiduciary duties of loyalty and care and should lead to their resignations."

 Black appeared on Tom Ashbrook's "On Point" today. You should listen to it. His comparisons of the government's action in the S&L scandal versus its actions today are particularly disturbing. Where the government indicted 1,000 S&L participants, it's indicted less than 100 of today's fraudsters - and the current situation is about 70 times more expensive than the S&L.