Big Banks Shift Their Derivatives Exposure Onto U.S. Taxpayers

By:  Bob Adelmann
10/26/2011
       
Big Banks Shift Their Derivatives Exposure Onto U.S. Taxpayers

When Bank of America announced that it was moving its derivatives-laden portfolio at its subsidiary Merrill Lynch over to its bank holding company, it said it was merely responding to pressure from some of its partners to take advantage of the holding company’s higher credit rating. It would also reduce the need for the bank to post an additional $3.3 billion in collateral because of the recent downgrade it suffered at the hands of Moody’s last month.

But the real reason, according to Bloomberg, is that the FDIC insures the bank but not Merrill Lynch, and in the event of a failure in its derivatives holdings, the FDIC, courtesy of the U.S. taxpayer, would pay off depositors who suffered losses.

Bloomberg notes, "Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates." But since the early 1990s banks have more and more moved to the “speculation” part of the equation, generating an estimated $35 billion in trading profits annually.

When Bank of America announced that it was moving its derivatives-laden portfolio at its subsidiary Merrill Lynch over to its bank holding company, it said it was merely responding to pressure from some of its partners to take advantage of the holding company’s higher credit rating. It would also reduce the need for the bank to post an additional $3.3 billion in collateral because of the recent downgrade it suffered at the hands of Moody’s last month.

But the real reason, according to Bloomberg, is that the FDIC insures the bank but not Merrill Lynch, and in the event of a failure in its derivatives holdings, the FDIC, courtesy of the U.S. taxpayer, would pay off depositors who suffered losses.

Bloomberg notes, "Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates." But since the early 1990s banks have more and more moved to the “speculation” part of the equation, generating an estimated $35 billion in trading profits annually.

Click here to read the entire article.

Photo: Bank of America Corporate Center, located in Charlotte, North Carolina

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