Beyond The Pale

288
Wed, Oct 19, 2011 - 10:27am

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:

https://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html

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:

https://www.zerohedge.com/contributed/federal-reserve-and-bank-america-initiate-coup-dump-hundreds-billions-dollars-losses-ame

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

About the Author

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turd [at] tfmetalsreport [dot] com ()

  288 Comments

LividDebtormanShow
Oct 19, 2011 - 11:04am

The last rule of Monopoly

"If the Bank runs out of money, the banker may issue as much as needed by writing on any ordinary piece of paper." Sound familiar?

Fortinbras
Oct 19, 2011 - 11:09am

@ Shill re: RWM

Hey Shill - how do you play your inverses, straight up or with options? Also, do you choose RWM over TWM because of the leveraging?

I have played with SKF, TWM and EEV a LOT over the last few months.

Thanks.

RaptorKarl
Oct 19, 2011 - 11:18am

FDIC = Funded by insurance paid by other banks

Not trying to say the whole mess above isn't ridiculous, it is. But let's be intellectually honest about where this bailout will come from.

Chumbawamba taoJones
Oct 19, 2011 - 11:21am

May I offer some constructive

May I offer some constructive criticism? You have a page entitled, "What is Meaford Money?" That page then proceeds to not answer that question.

[ Meant in reply to https://www.tfmetalsreport.com/comment/45137#comment-45137 ]

-Chumblez.

Green Lantern
Oct 19, 2011 - 11:21am

@taojones

Good work! That's really trying to bring change. You are courageous ahead of your time. Not only protecting yourself, but helping others. That's being a real Turd:) Someday soon the people of Meaford will realize it!

exiledbear
Oct 19, 2011 - 11:21am

Print, Baby, Print

That's all I have to say.

R man J
Oct 19, 2011 - 11:22am

Dr G?

I do remember reading somewhere that Blythe had a lot to do with unleashing CDSs on an unsuspecting world. Let me join in on the hyperbole and ask what kind of paranormal forces are assisting her?

TPaine
Oct 19, 2011 - 11:25am

F U BoA. DIAF

F U BoA. DIAF

ewc58
Oct 19, 2011 - 11:28am

Ok, now 3 for 3

On scooping Big Hat on the monster JPM, Citi, and BOA stories in the past week.

Dude, very nice background. On a story that was posted in Town yesterday. You might consider a shout out now and then to any who try to help you get key info out to your readers so that you don't also have to worry about that, too.

Early delivery of the most important and impactful stories here is one of the things that helps distinguish your Brand.

You're the Straw That Stirs the Drink here, no doubt about it. Just don't overlook the role ice cubes play in making it the truly superior cocktail it is.

artaud23
Oct 19, 2011 - 11:29am

Kudos!

This is one of the scariest financial stories I have heard lately. People need to be aware of this blatent scam. Thanks for posting this. I hope more people will see it!

The FDIC has about $60b... what happens if they get hosed with this? Answer, nationwide bank runs.

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