October262011
Bloomberg had a story, a couple of days ago, about BofA moving Merrill Lynch derivatives to its retail-banking subsidiary. The story was quite long and hard to follow: there were lots of detours into explanations of what a derivative is, or explorations of what the BAC stock price was doing that day. So let me try to cut away the fat.
Bank of America is being hit with downgrades. And as we saw with AIG, when a derivatives counterparty gets hit with downgrades, it has to post lots more collateral. In BofAâs case, the numbers are very large indeed:
Bank of America estimated in an August regulatory filing that a two-level downgrade by all ratings companies would have required that it post $3.3 billion in additional collateral and termination payments, based on over-the-counter derivatives and other trading agreements as of June 30. The figure doesnt include possible collateral payments due to Âvariable interest entities, which the firm is evaluating, it said in the filing.
On the other hand, retail banks are much safer, because theyâre protected by the FDIC. If a retail bank is a derivatives counterparty, then it doesnât need to post nearly as much collateral. The derivatives arenât themselves insured by the FDIC, but they have extremely senior status, which means that the bank can use its deposit base to pay off derivatives counter parties. And then if there isnât enough money left to pay depositors, the FDIC will step in and make those depositors whole.
So Bank of America decided to move some unknown quantity of derivatives from Merill Lynch â which doesnât have an FDIC-insured deposit base â over to its Bank of America retail subsidiary, which does.
The FDIC was not happy about this â it makes it more likely that they will have to pay out in the event that Bank of America runs into trouble. And when the FDIC pays out, thatâs a hit to taxpayers, the letter of the law notwithstanding. Jon Weil explains:
The market harbors serious doubts about whether Bank of America has enough capitalÂ
Dodd-Frank lets the FDIC borrow money from the Treasury to finance a seized companyÂs operations for as long as five years. While the law says the FDIC is supposed to tap the banking industry to pay for any eventual losses, itÂs hard to imagine the agency could ever charge enough to cover the costs from a failure at a company with $2.2 trillion of assets
Now itâs worth pointing out here that other big derivatives houses, most notably JP Morgan, have used their retail-banking subsidiary as their derivatives counterparty for years. Now that Merrill is part of BofA, thereâs no obvious reason why it should be worse off than JP Morgan is with access to Chase. But Yves Smith makes the case that the two are in fact significantly different:
JPM runs a massive derivatives clearing operation, and a lot of its exposure relates to that. This and the businesses of the other large banks have been supervised by the regulators for some time (you can argue the supervision was not so hot, but at least they have a dim idea of what is going on and gather data). By contrast, no one was supervising the derivatives book at Merrill. The Fed long ago gave up supervising Treasury dealers, and the SEC does not do any meaningful oversight of derivatives. And Chris Whalen confirms that Merrill was and is the cowboy among derivatives dealers.
Iâm not entirely convinced by this. I donât think that JP Morganâs derivatives operations are particularly assiduously regulated â certainly not to the point that would make the FDIC happy. But I also hate the âeverybodyâs doing itâ defense. The whole point of the Volcker Rule was to stop banks with retail-banking privileges from abusing those privileges in their risky investment-banking operations. And thatâs exactly whatâs going on here. And as Bill Black points out, the whole thing is dubiously legal in any case:
I would bet large amounts of money that I do not have that neither B of AÂs CEO nor the Fed even thought about whether the transfer was consistent with the CEOÂs fiduciary duties to B of A (v. BAC).
The point here is that regulators care much more about Bank of America, the retail-banking subsidiary which holds depositorsâ money, than they do about BAC, the holding company which owns Merrill Lynch. And the senior executives at Bank of America have a fiduciary duty to Bank of America â never mind the fact that their shareholdings are in BAC. The Fed, in allowing and indeed encouraging this transfer to go ahead, is placing the health of BAC above the health of Bank of America. And thatâs just wrong. Holdcos can come and go â itâs the retail-banking subsidiaries which we have to be concerned about. The Fed should not ever let risk get transferred gratuitously from one part of the BAC empire into the retail sub unless thereâs a very good reason. And I see no such reason here.
October182011
“Monmouth University is the perfect location for this outstanding collection,” university president Paul Gaffney said in a statement.”Students and faculty from Monmouth University, especially our music industry students, will benefit greatly from having access to these documents. I hope it will also serve as a valuable resource for members of the academic community,” Gaffney added.The collection, formerly housed at the Asbury Park Public Library, contains nearly 15,000 documents from 44 countries chronicling New Jersey native Springsteen’s career that began as far back as the late 1960s.Springsteen, 62, and his band released their debut album “Greetings from Asbury Park, N.J.” in 1973, but it was two years later with the album “Born to Run” that the group hit the top 10 of U.S. music charts and launched into stardom.The move of Springsteen’s memorabilia caps a four-year search for a new site in New Jersey that allowed for public access and had room for expansion to include recordings, oral histories and film footage.Christopher Phillips, editor and publisher of Backstreets and president of the Friends of the Bruce Springsteen Special Collection, said that the partnership between Monmouth University and fans “offers a great opportunity.”“At the university, the collection will be publicly accessible to all who have a serious interest in Bruce Springsteen’s life and career,” Phillips said, citing students, scholars and journalists.Viewing of the documents at the West Long Branch, N.J. university will be available by appointment.Robert Santelli, executive director of the GRAMMY Museum in Los Angeles and a Monmouth alumnus, helped secure the collection for the school.
October162011
* Tehran denies planning to assassinate Saudi ambassador in
WashingtonDUBAI, Oct 16 (Reuters) - Saudi Arabia has taken a first
step to have Iran reported to the United Nations Security
Council, a move that could lead to new sanctions, over an
alleged plot to assassinate its ambassador in Washington,
Saudi-owned newspapers reported on Sunday.”Saudi Arabia’s permanent mission to the United Nations…
formally requested the United Nations Secretary General notify
the Security Council of the heinous conspiracy,” the Asharq
al-Awsat newspaper reported, citing a statement from the
kingdom’s U.N. mission.The U.S. on Tuesday said it had uncovered a plot by two men
with links to Iran’s security forces to assassinate Adel
al-Jubeir by planting a bomb in a Washington restaurant.One of the men, who had allegedly paid a U.S. undercover
agent posing as a Mexican drug cartel hitman to carry out the
assassination, has been arrested while the other is in Iran, the
United States said.Tehran has denied the charges.The Saudi step follows remarks by U.S. President Barack
Obama that he would press for “the toughest possible sanctions”
against Iran over the alleged plot and vowed not to take any
options off the table - a phrase commonly used to mean the
possibility of using force.Saudi Foreign Minister Prince Saud al-Faisal said on
Wednesday in Vienna that Iran “was responsible” for the alleged
plot and insisted the kingdom would adopt a “measured response”.Tensions between Shi’ite Muslim Iran and Sunni Saudi Arabia
have risen in recent months as Arab uprisings have altered the
balance of power in the Middle East.Saudi Arabia earlier this month appeared to blame Iran,
without naming it, for instigating clashes between members of
the kingdom’s Shi’ite minority and security forces on Oct 3 in
which 14 people were injured.
October142011
* No comment on reports of Sony taking 100 pct controlSTOCKHOLM, Oct 14 (Reuters) - Mobile handset maker Sony
Ericsson said on Friday it would in future focus entirely on the
fast-growing smartphone market as it posted in-line quarterly
profits, making no reference to a report electronics giant Sony
would take full ownership.Pretax profit at the company, currently owned jointly by
Sony and mobile network gear maker Ericsson, was 31 million euros ($42 million), just higher than
the mean forecast of 27 million euros in a Reuters poll and a
swing back from a loss of 42 million in the previous quarter.Last week, a source with direct knowledge of the matter told
Reuters that Sony is in talks to buy Ericsson’s 50 percent stake
in the joint venture.Sony Ericsson, facing strong competition from Apple’s iPhone
as well as the likes of Samsung and HTC, has been losing market
share — and money — for a while. A recent focus on smartphones
based on Google’s Android platform has been gaining traction,
pulling the company back into the black.The company, which stuck to its outlook for modest growth in
the handset market this year, said that it would shift all its
production to smartphones during 2012.”Android-based Xperia(TM) smartphone sales now account for
more than 80 percent of sales and we have shipped 22 million
Xperia smartphones to date,” the company said in a statement.”We will continue to invest in the smartphone market,
shifting the entire portfolio to smartphones during 2012.”
