If you have any doubt that Bank of America is going down, this development should settle it …. Both [professor of economics and law, and former head S&L prosecutor] Bill Black (who I interviewed just now) and I see this as a desperate move by Bank of America’s management, a de facto admission that they know the bank is in serious trouble.
The short form via Bloomberg:
Bank of America Corp. (BAC), hit by a credit downgrade last month, hasmoved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…
Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.
That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.
Now you would expect this move to be driven by adverse selection, that it, that BofA would move its WORST derivatives, that is, the ones that were riskiest or otherwise had high collateral posting requirements, to the sub. Bill Black confirmed that even though the details were sketchy, this is precisely what took place.
And remember, as we have indicated, there are some “derivatives” that should be eliminated, period. We’ve written repeatedly about credit default swaps, which have virtually no legitimate economic uses (no one was complaining about the illiquidity of corporate bonds prior to the introduction of CDS; this was not a perceived need among investors). They are an inherently defective product, since there is no way to margin adequately for “jump to default” risk and have the product be viable economically. CDS are systematically underpriced insurance, with insurers guaranteed to go bust periodically, as AIG and the monolines demonstrated. [Background.]
The reason that commentators like Chris Whalen were relatively sanguine about Bank of America likely becoming insolvent as a result of eventual mortgage and other litigation losses is that it would be a holding company bankruptcy. The operating units, most importantly, the banks, would not be affected and could be spun out to a new entity or sold. Shareholders would be wiped out and holding company creditors (most important, bondholders) would take a hit by having their debt haircut and partly converted to equity.
This changes the picture completely. 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 depositaries 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. [Background.] 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. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.
But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. 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.
The FDIC is understandably ripshit. Again from Bloomberg:
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.
Well OF COURSE BofA is gonna try to take the position this is kosher, but the FDIC can and must reject this brazen move. But this is a bit of a fait accompli,and I have NO doubt BofA and the craven, corrupt Fed will argue that moving the derivatives back will upset the markets. Well too bad, maybe it’s time banks learn they can no longer run roughshod over regulators. And if BofA is at that much risk that it can’t survive undoing this brazen move, that would seem to be prima facie evidence that a Dodd Frank resolution is in order.
Bill Black said that the Bloomberg editors toned down his remarks considerably. He said, “Any competent regulator would respond: “No, Hell NO!” It’s time that the public also say no, and loudly, to this new scheme to loot taxpayers and save a criminally destructive bank.
Professor Black provided a “bottom line” summary in a separate email:
1.The bank holding company (BAC) is moving troubled assets held by an entity not insured by the public (Merrill Lynch) to the Bank of America, which is insured by the public
2. The banking rules are designed to prevent that because they are designed to protect the FDIC insurance fund (which the Treasury guarantees)
3. Any marginally competent regulator would say “No, Hell NO!”
4. The Fed, reportedly, is saying “Sure, no worries” by allowing the sale of an affiliate’s troubled assets to B of A
5. This is a really good “natural experiment” that allows us to test whether the Fed is protects the public or the uninsured and systemically dangerous institutions (the bank holding companies (BHCs))
6. We are all shocked, shocked [sarcasm] that Bernanke responded to the experiment by choosing to protect the BHC at the expense of the public.
No good news to deliver so far this year on the eurozone. Just this week Slovakia's government became the first in the eurozone to fall over opposition of bailing out indebted economies after the country's parliament voted down approval for enhancing the zone's rescue fund. Also this week, Jean Claude Trichet, European Central Bank President, warned that Europe's financial crisis has reached "a systemic dimension." Greece has continued to dominate the headlines and is facing a fifth successive year of recession and a possible sovereign default. Italy, Spain, Portugal, Ireland and even France have seen their share of headlines. Over the course of the year we have seen several instances where bad news about the euro boosted gold prices. Sovereign balance sheets resemble an overweight diabetic on the verge of a heart attack, wrote Pimco's Bill Gross in his recent letter to investors.
At the beginning of the year many investors were of the point of view that after years of delivering gains, bonds might not be such a great investment idea for 2011 since there is a distinct risk that long-term interest rates might rise, which would spell trouble for bondholders. They were wrong, but they were in good company. The person who took the biggest hit for making the wrong call on bonds is the world's greatest bond trader, Pimco's Bill Gross, who advocated dumping government debt because of low yields. Instead, investors have been pouring their money into U.S. Treasuries all year as a safe haven. Due to Pimco's wrong-way bet, the once leading bond fund is up just 1% this year, trailing the returns of a whopping 84% of its peers. Recently Bill Gross has made a U-turn and has placed a big bet on lower long-term interest rates.
Housing is a key driver of expansion during economic recovery but in January we thought that it looked like home building will remain in a depression with a huge backlog of unsold and vacant homes. Foreclosures will continue with yet more houses dumped into a weak market. That has proved to be the case so far this year. The Standard & Poor's/Case-Shiller 20-city index of prices has fallen back to where it was in 2003. Housing prices in Phoenix are at 2000 levels, and Las Vegas at 1999 levels. Lower prices have made homes more affordable than they've been in a generation. But mostly it's still a vicious cycle of foreclosures and falling prices. There are still many people who have negative equity - they owe more on their mortgages than their homes are worth-- so that millions of more foreclosures are still in the pipelines.
Recently, there has been much talk about where gold is going now. This have pushed silver a little bit to the side, which we don't think is quite fair. Because of that, we devote our today analysis solely to the white metal. We will start the technical part of this essay with the analysis of the silver long-term chart (charts courtesy by http://stockcharts.com.)
In the chart (if you're reading this essay on SunhineProfits.com, you can click the above silver chart to enlarge), very little change was seen this week. Silver's price moved to the 38.2% Fibonacci retracement level based on the 2002-2011 rally. Silver's price pulled back after moving above this level. This is likely insignificant and nothing more than a verification of a move back above the 38.2% level. Such price action is not unusual.
In the short-term SLV ETF chart this week, we see a move of interest as silver's price declined on low volume indicating a period of consolidation. The price level is now close to the 20-day moving average and in the past, such moves following an early part of the rally have typically been meant a reversal to the upside after the bottom was (shortly) reached.
Thursday's price decline is not really of concern, and the situation is not bearish at this time.
In the silver to gold ratio this week, we see a bottom developed after the rising support line was reached. Thursday's close was just under .02 and it appears that a rally from here is likely. The target level is around .022. If gold's price moves sharply higher, silver is likely to increase to a greater extent on a percentage basis.
Summing up, the situation remains positive for silver and the same can be said about gold.
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Thank you for reading. Have a great and profitable week!