Bank of America's Death Rattle

[Lars77]

Run time: 06:50 https://www.youtube.com/watch?v=3NYTtfQVw1c   Posted on YouTube: October 29, 2011 By YouTube Member: TheRealNews Views on YouTube: 305   Posted on DU: October 29, 2011 By DU Member: Lars77 Views on DU: 2748

 

[banned from Kos]

1. Black or Warren Buffett? I'll go with the guy with the track record and $5 billion

on the line over the guy pumping his book.

[ingac70]

2. Buffett has screwed up before. He isn't a prophet. n/t

[banned from Kos]

4. He is the closest thing in finance to a prophet. This $75 trillion story is garbage. Why?

1- Bloomberg reports that Merrill moved $22 trillion in derivatives to the BHC meaning the bulk were already there.

2- It was already consolidated.

3- The $50 trillion at the top of the holding company (BHC) was enough to do any damage the doomers fear now.

4- the likely reason for the move was to clean up Merrill for a sale (which the Fed would want)

5- BAC can jettison their liability (Countrywide) anytime they want.

So, the little nitwits over at ZeroHedege will get burned on their short and Buffett will win again.

[prairierose]

3. Obviously, you do not know who William Black is...

I would suggest that you look up what he has done before condemning him based on a stereotype. How old are you? I find young people often have a tendency to jump at hasty generalizations.

[Mumblefratz]

5. This is not all that it's made out to be ...

First a couple of points.

The repeal of Glass-Steagall was absolutely horrendous, right up there with the Citizens United SCOTUS decision.

Moving derivative exposure from a holding company to the primary FDIC insured entity is criminal behavior and should be prosecuted as such.

However with that said Bank of America's credit rating has been downgraded from A2 to Baa1 which is still investment grade (http://www.huffingtonpost.com/2011/09/21/moodys-downgrades-bofas-credit-rating_n_974077.html). That is hardly "chopped".

Also the derivative exposure of BoA is somewhat exaggerated and taken entirely out of context (see link below). In reality the BoA derivative exposure is about $53 Trillion dollars. While this is still a *huge* number you need to consider that much of it is "hedged" i.e. insured by betting on both sides of the bet just like a bookie laying off the odds. Also what exposure is not completely hedged within BoA itself is effectively hedged within the industry. In other words if BoA lost substantially then others in the industry would win.

I'm not trying to condone this behavior, what I'm trying to do is to explain it. As I implied above my choice would be to reinstate Glass-Steagall and totally separate the banking function from the gambling function.

The other point about this is that this $75 trillion, which is really *only* $53 trillion, is that it's discussed as if it is a totally new and unique development. It's not.

The current world wide derivative exposure is $250 Trillion which is primarily held by 4 banks/casinos. In actuality BoA is only 3rd on the list with JP Morgan leading the list at $78.1 trillion, Citibank with $56 trillion, Bank of America with $53 trillion and Goldman Sachs with $47.7 trillion (http://www.americanpendulum.com/2011/09/five-banks-account-for-96-of-the-250-trillion-in-outstanding-us-derivative-exposure/).

Also as I mentioned this is nothing new. While the total derivative exposure has certainly been rising it's not like 2011's $250 trillion is a gigantic jump over the $210 trillion in 2010 and $200 trillion in 2009 (http://jessescrossroadscafe.blogspot.com/2010/04/derivatives-exposure-among-us.html).

The bottom line is should this kind of behavior be allowed to continue? No. We need to reenact Glass-Steagall to separate the supposedly "safe" banking industry from the casino tactics of so called "investment" banking. Also we need a *lot* more government regulation to protect *people* from the excesses of corporate greed.

However with all of this said the sky is *not* falling. And the demise of a company like Bank of America is nothing for anyone to celebrate because it's demise would hurt millions of *people*.

[thesquanderer]

6. Not a gigantic jump?

While the total derivative exposure has certainly been rising it's not like 2011's $250 trillion is a gigantic jump over the $210 trillion in 2010 and $200 trillion in 2009

A 25% increase in exposure in two years is not a gigantic jump? And this is all in a two year period where supposedly procedures were being put in place to try to put limit on these kinds of things, where conditions of bailouts were supposed to include assurances of more responsible behavior?

[Mumblefratz]

8. My point is ...

that whatever the percentage increase is, this is still nothing new and that if BoA is such a risk then why haven't we heard anything about JP Morgan's and Citibank's even greater risk? Why pick out the company that's 3rd on the list and let the other three skate free? If this is the death knell of BoA then why isn't it the death knell of JP Morgan, Citibank and Goldman Sachs?

Did you even *know* about the $250 Trillion world derivative exposure until I mentioned it? Doubtful because there's been virtually no news about it. However there certainly has been plenty of news about BoA's $53 trillion of it which certainly caused me some concern until I discovered that BoA is hardly the only culprit and that a 25% jump in two years notwithstanding this has been going on for years. None of which I realized until all the recent fuss about BoA caused me to look into it.

I agree that we need both separation of traditional banks and "investment" banks as well as tighter government control of *all* corporate excesses, not just the derivatives market. I just don't see the need to scare people into thinking this is the end of the world as we know it.

[girl gone mad]

13. You're comparing apples to oranges.

The derivatives at Citi and JP Morgan are plain vanilla, mostly swaps. They aren't in the same league as the exotic junk BOA just dumped on its retail unit.

[Jack Rabbit]

7. Thank you for your explanation

Perhaps you can explain to me in kindergarten language what a derivative is. I used to do computer programming for a small futures trading company, and I understand the futures market. However, in a futures market, there is a commodity and if you are holding the contract when it matures, you own it. It's easy to understand if the investor made or lost money on the deal. I'm trying to figure out where in a derivative there is a concrete commodity.

It seems unfair to gamblers to compare Wall Street to a casino. If a casino in Las Vegas could influence the outcome like a Wall Street investment firm can, would the Nevada state gaming commission shut it down?

Finally, I agree that the failure of Bank of America would be nothing to celebrate, but how much money would be lost and how many people would be hurt if it continues to behave criminally?

[Mumblefratz]

9. A derivative is a bet ...

with no intrinsic value in it whatsoever.

If I had my druthers I ban them all just like Italy, France, Spain and Belgium banned short selling (http://www.huffingtonpost.com/2011/08/11/short-sales-ban-italy-france-spain-belgium_n_924585.html). However last time I looked it was not within my power to do so. If however we could get it on the ballot I'd be first in line to vote for their banning.

But again why the focus exclusively on BoA? JP Morgan, Citibank and Goldman Sachs are at least as culpable. My point is not that BoA doesn't deserve censure. It's why are we only hearing about 1/5th of the issue when there are three other companies with a total of 4 times BoA's exposure?

If 25% is "gigantic" what then is 200%?


{edit}

"how much money would be lost and how many people would be hurt if it continues to behave criminally?"

I don't recall suggesting that BoA (or any of the other culprits) *should* be allowed to "continue to behave criminally."

{/edit}

[banned from Kos]

10. We won't ban derivatives. It would be a disaster.

Derivatives allow hedging without exiting large positions.

If I have $100 billion worth of XYZ and market conditions turn unfavorable I can buy puts on XYZ, broader index protection, or any number of other instruments that let me keep that $100 billion of XYZ and preserve capital. These are all derivatives.

The alternative is for me dump $100 billion of XYZ (along with others) and create huge gyrations in the market that in turn breaks the bank at many institutions and spread chaos.

[Mumblefratz]

11. You're describing "covered" puts ...

and I agree that "covered" puts and "covered" calls *in moderation* are actually good things in that they *reduce* risk. However the key item is that you need to have a position in the underlying equity (or some other thing with intrinsic value) *and* use the put/call appropriately to your investment.

The "naked" versions of these along with many other derivatives *are* just bets as I mentioned above. Not only that but they are "margined" which means the actual money placed with the "bet" represents only a potential down payment on the results of the bet. BoA has hardly put $53 trillion dollars into derivatives, what they do have is $1 Trillion dollars in derivatives that most folks *estimate* to potentially represent a shortfall, if every single one of them not only loses but loses to it's maximum potential, of $53 trillion (or whatever). That's why, depending on where you read it, I've seen BoA's derivative risk *estimated* at $75 trillion, $63 trillion and $53 trillion. Which is right is anybody's guess and the likelihood of *all* of these bets going the wrong way is infinitesimal, particular when many of these bets are hedged one against the other. The issue is that the number is so large that even breaking 49% right could potentially represent a *real* loss of $1 trillion which is still huge money.

Yes, banning derivatives and all sorts of other bets is being simplistic but all of this does highlight the fact that we need far more governmental oversight on this kind of behavior, *not* less.

[Douglas Carpenter]

12. knr