I was going to write about this yesterday but got sidetracked by the CFTC stuff. I could not wait any longer to post it because, frankly, this story is far more important.
First, a little background. In 2008, Bank of America (which was already struggling based upon its nonsensical purchase of Countrywide Financial) was coerced by The Fed into purchasing Merrill Lynch. Merrill, that bastion of U.S. investment banking, private banking and retail financial services had been essentially run into the ground by its previous CEO, Stan O'Neal, and its current CEO, John Thain. Merrill's potential derivative and Credit Default Swap (CDS) losses were staggeringly high and the firm was on the verge of imploding.
{CDS Primer: A credit default swap is exactly as the name implies. It's an insurance policy that a creditor purchases against the default risk of the debtor. For example, Party A carried default risk of Party B because Party A owns some of Party B's bonds. To insure against default of Party B, Party A buys a CDS from Merrill Lynch at a price that isn't even close to reflecting the true risk being passed on to Merrill. If Party A has $100,000,000 in Party B's bonds and then B defaults, A loses its $100MM. However, Merrill is so confident of B's financial strength that they take on the entire $100MM in potential liability, often for just a paltry 2-3% premium. So, Party A pays $3MM to insure their default risk through an unregulated insurance policy, issued by Merrill Lynch. Merrill now is on the hook for the entire $100MM should Party B default.}
In walk The Bernank, Paulson and Geithner with a plan: Have BoA buy Merrill! It should have been clear to everyone paying attention at the time that this would never work. TPTB were only trying to buy time in a desperate attempt at holding the current system together. Well....time is up!
The counterparties to Merrill's $53,000,000,000,000 (yes, that's $53T!) in CDS are getting antsy that they'll never get paid for their side of the "bets". So, to shore up the impression that BoA will be able to pay off any of the losing CDS bets, BoA has transferred the liability of the CDS from their Merrill subsidiary to their regular, U.S. banking subsidiary. By doing this, BoA has essentially pledged as collateral the $1,000,000,000,000 (yes, that's $1T!) in retail deposits it currently has on its books.
So, if just 2% of Merrill's CDS exposure gets "exposed", the $1T in regular, average Joe savings accounts that BoA holds will get wiped out. Of course, all banking accounts at BoA are "insured" by the FDIC. And just who is the FDIC? The federal government. And how will the federal government come up with $1T in new money to reimburse the BoA depositors? Well, I think you know the answer to that one. (By all means, listen to that fool Gartman and sell all of your gold and silver right now!)
That this blatant criminal action is allowed by the Fed should come as no surprise. It was their idea for BoA to buy Merrill in the first place! Of course they're going to look the other way and stick the taxpayer with the bill. What would you expect them to do?
So, first up, here's a link to the Bloomberg summary from yesterday. Written with the usual, MSM flair:
For a more complete summary, I defer to the "George Washington Blog" that you can find through ZH. I don't subscribe to all of "George's" theories and often I find his posts to be a bit hyperbolic. Not is this case, however:
The current financial system and, by extension, global geo-political stability hangs by a thread. Sadly, it no longer seems a question of "IF". It has become a matter of "WHEN". Please continue to prepare as the process of the coming "reset" is wholly unpredictable and dangerous. An ancient Chinese proverb suggests "may you be blessed to live in interesting times". Some blessing. In the end, we'll find that the true blessing had been to live in peace and solitude, instead. TF
