....lybob Posted October 21, 2011 Share Posted October 21, 2011 Link to comment Share on other sites More sharing options...
3rdnlng Posted October 21, 2011 Share Posted October 21, 2011 And this one should scare all of us. http://www.google.com/imgres?imgurl=http://obama-zone.com/images/11.jpg&imgrefurl=http://obama-zone.com/interesting-facts/&h=480&w=369&sz=87&tbnid=Y3DkKfDL2TWvpM:&tbnh=87&tbnw=67&prev=/search%3Fq%3Dobama%2Bpictures%26tbm%3Disch%26tbo%3Du&zoom=1&q=obama+pictures&docid=6quJVrMwc4CiTM&hl=en&sa=X&ei=VG-hTvCxBYGLsgLrtum0BQ&ved=0CEYQ9QEwAg&dur=5406 Link to comment Share on other sites More sharing options...
RkFast Posted October 21, 2011 Share Posted October 21, 2011 ZING!!!!!!!!!!!!!!!!!!!!! Link to comment Share on other sites More sharing options...
....lybob Posted October 21, 2011 Author Share Posted October 21, 2011 Merrill Lynch engaged in derivatives contracts with foreign parties. These foreign parties are worried that Merrill can't fund its side of the bet, so they are asking Merrill to post additional collateral on their side of the bet. However, Bank of America NA has lots of capital because it has lots of assets, including demand deposit accounts backed by the FDIC. So the counterparties to Merrill's derivatives contracts asked Bank of America the holding company to move the contracts from its Merrill Lynch arm to its Bank of America NA arm. This is good for Bank of America the holding company, because it's cheaper to not have to post the additional collateral at Merrill Lynch. However, it means that Bank of America NA is on the hook if they end up on the losing end of the derivatives bets (which is likely, that's why the counterparties would be worried about Merrill Lynch being able to pay up in the first place.)Now, typically if a bank went bankrupt, all of the creditors would line up and a judge would split up whatever assets were left based on credit seniority, etc. However, in 2005 the bankruptcy code was changed so that derivatives contracts could be executed ahead of all other creditors in a bankruptcy. So currently, if Merrill Lynch goes belly up and the outstanding derivatives contracts are more than the equity available at Merrill, the coutnerparties get all of Merrill Lynch, other Merrill Lynch creditors get nothing, and then the counterparties have some options trying to get the rest of what they're owed from Bank of America the holding company (which would now be just the retail banking arm.) However, if the contracts are transferred to BofA NA, the retail bank arm, and the contracts wipe out a large portion or all of BofA NA's equity to the extent that in bankruptcy they can't pay out what they owe depositors, the FDIC has to step in to make up the difference because the counterparties to the derivatives contracts have first dibs on all assets. This means that Bank of America could feasibly risk all of it's demand deposit accounts on a risky derivatives position knowing that if they failed, the FDIC would bail the depositors out (they have to by law up to $250,000). Essentially, the FDIC is put in a position where it is insuring derivatives counterparty risk. And if that risk is larger than what's available in the DIF (which is likely because it was never meant to cover that kind of exposure) it will be taxpayer funds that refund depositors. So your tax dollars are essentially insuring Merrill Lynch's risky bet with some foreign financial entity. Link to comment Share on other sites More sharing options...
....lybob Posted October 21, 2011 Author Share Posted October 21, 2011 (edited) no response to the topic at hand, oh well, lets just have fun Edited October 21, 2011 by ....lybob Link to comment Share on other sites More sharing options...
Recommended Posts