Bank of America Doomed? Puts taxpayers on the hook for Merrill’s derivatives

[jimmy olsen]

Seeing a lot of chatter out there that Bank of
America's about to go down and tank the economy. Minsky, please tell us they're wrong.

http://blog.chron.com/lorensteffy/2011/10/bank-of-americas-latest-bailout-bigger-than-ever/

http://www.reuters.com/article/2011/10/20/idUS347712244020111020

[HisMajestyBOB]

Its their business plan - provide bad service, piss off all your customers, get bailed out by Congress, rinse and repeat.

[Tonitrus]

[grumbler]

If BoA's troubles mean we are going to be flooded here with shitty and unfunny cartoons, I favor the bailout.

[The Minsky Moment]

?
Impossible to tell without knowing more details about ML's trading book.

[MadImmortalMan]

IMO, BAC is a walking corpse.

[grumbler]

IMO, BAC is a walking corpse.

We can hope... though, if BoA just gets snapped up by an even larger, and therefor even more incompetent, bank, this process will just repeat itself.

[KRonn]

Too fail to be so big....   

[Zanza]

IMO, BAC is a walking corpse.

We can hope... though, if BoA just gets snapped up by an even larger, and therefor even more incompetent, bank, this process will just repeat itself.

As there is no larger bank (in America) it's unlikely to happen.

[Martim Silva]

Getting ML in 2008 (under severe pressure from the Administration) merely delayed the problem that Merrill was in as bad a shape as Lehman's.

Besides, the problems in Europe means that BoA's portfolio can get even more toxic.

It his highly likely that the FDIC and the Fed will have to make a bailout. The exact amount depends on what we get going on Greece (the prospects are not good), but it will be in the trillions of dollars - which is why Bernanke is pushing for QE3 ASAP.

That said, and even if BoA is incredibly worrying, the situation in  Europe is even moreso. Greece's bondholders will have to take a rather large haricut, and that will prompt us to recapitalize most of the european banking system. We need to find 2-3 trillion euro to stabilize things, and we don't have that money. The ECB could create it, but everybody knows it ultimately relies on the finances of Europes' major economies. That means ratings cuts for everyone, and deepening austerity that will considerably aggravate the economic situation.

Best case scenario, we get into a recession for 10 years and the US banks will also ask Washington for additional aid, which will baloon the US national debt.

Worst case scenario... you REALLY don't want to think about it.

[The Minsky Moment]

Fellas, hold your horses.

Moody's downgrade had nothing to do with BoA's operations.  Rather it had to do with Moody's finally waking up to the fact that Congress in Dodd-Frank foolishly tied the hands of the Fed and Treasury in the event a future crisis to occur, thus prompting them to downgrade the 3 biggest banks - BOA, Citi and Wells.

If I had to take a wild guess at what happened next - it would go something like this:
The downgrade dropped the BOA retail bank from a AA rating to A2, which isn't cause for celebration, but still is a respectable rating these days.
But the holding company got kicked down from A2 (upper mid investment grade) to Baa1, which is in the lowest investment grade category.

As a brokerage firm, Merrill routinely takes the other side of trades requested by its customers; if they are operating properly (and there is no particular reason to think they aren't right now) - those exposures should be offset by either other customers on the other side, or Merrill will enter the market itself to offload the net exposure.  But the Lehman fiasco revealed a hidden risk in this scenario - if Merrill as the counterparty goes under along with the BOA holding company that guarantees them, the customers may have to scramble to collect.

What may be happening is that certain customers have guidelines or even requirements that they can only enter into derivatives transactions with counterparties that enjoy least an "A" rating.  If that is so, then the the Moody's downgrade could have had the effect of forcing liquidation of those positions, *unless* the responsibility could be transferred to the retail unit, which still retains an A2.  Under this scenario, BoA comes crying to the Fed, which cuts them some slack and grants the exemption to move some of the trade exposures over to the retail bank. 

This then pisses off someone at FDIC, who leaks the story to Bloomberg, and voila here we are.

[Jacob]

Isn't the crux of the matter whether that someone at the FDIC is correct to be pissed off?

[DGuller]

Don't all those credit rating triggers make a mockery of the rating system?  It's supposed to have gradations, but it seems like a move down just one notch in rating can trigger a liquidity crunch for the company.  Even a AAA company can go bankrupt overnight just by becoming a AA+ company.

[The Minsky Moment]

Isn't the crux of the matter whether that someone at the FDIC is correct to be pissed off?

They are correct to be pissed off, and yet the Fed was also correct in pissing them off.
Life is complicated sometimes.

[grumbler]

As there is no larger bank (in America) it's unlikely to happen.

There certainly could be bigger banks than BoA is, and if BoA is acquired by, say, Citigroup or Wells Fargo, the result would be significantly larger than BoA is now.