Professor Michael Hudson Speaks About OWS

from Phil's Stock world and 

Ilene.typepad.com

10/08/2011

Occupy Wall St – Systemic Change Please

Michael Hudson explains why the OWSers are not making specific, piecemeal-demands. He also discusses a public option in banking as a structural answer to the power of finance.  Wild guess - many here may agree with some of Michael's assessments, but take issue with his public option proposal. ~ Ilene 

Occupy Wall St. to a Bank in the Public Interest

Courtesy of Michael Hudson

More at The Real News

Michael discusses the growing Occupy Wall St movement and the opportunities for banking reform. 

Excerpt (paraphrasing Michael Hudson slightly):

I think it’s a very strong point that they haven’t made specific demands...  Their worry is that if they make specific demands, then the media and other people will make these particular demands the issue. That’s not the issue. The sense is that the financial system is dysfunctional as a system. That means that you can’t make a technocratic demand like “fix this,” or give a consumer protection law, or appoint Elizabeth Warren to the commission. 

It’s much bigger than that. There’s an awareness that the whole financial system is dysfunctional... The government is in the hands of the financial lobbyists. That’s why it’s called Occupy Wall Street, because [Wall Street] essentially bought the electoral campaigns and bought the Obama administration. And I can tell you that there was an absolute disgust yesterday and today after Mr. Obama’s attempt to hijack the Occupy Wall Street demonstration by saying “here’s what I’m trying to do to help,” and then he gave a couple of lobbying statements written by his Wall Street financial lobbies...

They’re disgusted with the Obama administration, they’re disgusted with the Bush administration and the republicans, they’re disgusted with politics being for sale to the highest lobbyists. And they’re disgusted with the debt overhead... The system doesn’t work, and they don’t want to reduce this to a set of technocratic little fix its and paste-its.

(http://eye-on-washington.blogspot.com)

Meltdown: The Men Who Crashed the World

The men who crashed the world from aljazerra

The first of a four-part investigation into a world of greed and recklessness that led to financial collapse. Meltdown Last Modified: 20 Oct 2011 GW Bush, Hank Paulson, Alan Greenspan and the predatory bankstas

In the first episode of Meltdown, we hear about four men who brought down the global economy: a billionaire mortgage-seller who fooled millions; a high-rolling banker with a fatal weakness; a ferocious Wall Street predator; and the power behind the throne.
The crash of September 2008 brought the largest bankruptcies in world history, pushing more than 30 million people into unemployment and bringing many countries to the edge of insolvency. Wall Street turned back the clock to 1929.


But how did it all go so wrong?
Lack of government regulation; easy lending in the US housing market meant anyone could qualify for a home loan with no government regulations in place.
Also, London was competing with New York as the banking capital of the world. Gordon Brown, the British finance minister at the time, introduced 'light touch regulation' - giving bankers a free hand in the marketplace.
All this, and with key players making the wrong financial decisions, saw the world's biggest financial collapse.

From Counterpunch.org

How to Turn Up the Heat on Democrats

Occupy Obama

by JOHN STAUBER 10-21-23-11

President Barack Obama is no longer running unchallenged in all the major primary states, thanks to activists in Iowa who are focusing their Occupy Wall Street activism onto the headquarters of the Obama for President campaign office this Saturday, October 22,  in Des Moines.

The “Occupy Obama” event is being organized in part  by veteran rabble rouser Hugh Espey and his highly effective Iowa Citizens for Community Improvement, a grassroots force that has been fighting for economic and social justice since the 1970s.  CCI members are already participating in Occupy Wall Street actions in nine Iowa towns.  Occupy Obama seems a logical next step to escalate the movement further into national view and create the potential for debate and organizing within the Iowa presidential caucuses in January.

Espey criticized Obama by name in a Des Moines Register guest editorial of October 6, 2011 announcing CCI’s support for Occupy Wall Street actions in Iowa.  “Our political leaders are too busy asking big banks and Wall Street corporations for campaign contributions to push the ‘put people first’ policies that this nation needs,” he wrote.  CCI will march on Obama’s campaign headquarters in Des Moines on Saturday.  This Occupy Obama action could catch fire nationally, especially given the frustration widely voiced that not one prominent Democrat is willing to oppose Obama in the Democratic Party’s primary races.  Occupy Obama could partly fill that void.  “We’ll deliver a simple, powerful message to Obama staffers, and do a speak-out as well.  We want regular folks telling the Obama staffers what they think.  We want Obama to understand that the 99% demand action from him to put communities before corporations and people before profits,” says CCI.

Obama’s social and economic justice rhetoric, and his opposition to the war in Iraq, won him the 2008 Democratic nomination and the presidency.  Millions of independents, young and ethnically diverse voters found him a compelling agent for the “Change” and “Hope” he extolled as a mantra.  But the failure of Obama’s policies to adhere to his campaign rhetoric should not really be surprising.   Candidate Obama in 2008 beat every other Democrat in collecting the most campaign contributions from the wealthiest funders of the Democratic Party, the 1% as opposed to the 99%, aka Wall Street.  He has announced his goal for 2012 of raising one billion dollars which again will require the firm support of the very wealthiest Democratic Party interests.

President Obama has been a huge disappointment on issues across the board, yet he was running unchallenged in the primaries until CCI announced its Occupy Obama action.  Don’t be surprised if this Des Moines event is the start of a successful nation-wide Occupy Obama movement.  In Iowa an Occupy Obama movement has real potential because it could choose to become a player in the Iowa caucuses in a way that is much more than symbolic.  Occupy Obama activists could show up at the caucus meetings in January, for instance, and organize support for an Uncommitted slate of  Occupy Obama convention activists.  These Uncommitted delegates could provide a critical voice on the floor of the Obama convention in the summer of 2012.

Some Obama supporters and interest groups have advocated using the Occupy Wall Street cause to help elect Obama and other Democrats, coopting the movement.  However, an Occupy Obama movement could turn that scenario on its head.  A growing Occupy Obama movement could directly confront the failures of the Democratic Party to represent most people.

If Occupy Obama takes off, 2012 might feel a bit like 1968.  Back then the Guns And Butter policies of Lyndon Johnson were destroying not just Vietnam, where millions eventually died, but also killing Johnson’s own domestic social programs, his Great Society reforms.  The rapidly growing anti-war movement in 1968 rallied behind two Democratic Party primary challengers, Senators Gene McCarthy and Robert F. Kennedy.  It forced the resignation of Johnson, but the bosses of the Democratic Party handed the nomination to Johnson’s Vice President Hubert Humphrey, who lost to Richard Nixon.

While an Occupy Obama movement would be very unlikely to prevent his renomination, it could make him and his Party’s shortcomings a front and center issue.  It could ignite a  Democratic Party reform movement, as 1968 did, leading to some take back of the corporate Democratic Party by grassroots activists.  It could also lead to the support and emergence of other parties more representative of the people, as opposed to helping Wall Street and giant corporations.

2012′s interwoven crises of failing empire, economic desperation, corporate corruption, corporate control of government and bought elections, might have created a political turning point if the Occupy movement can keep upping the ante and building its numbers.  Iowa Citizens for Community Improvement could well be firing a shot heard round the nation, if an Occupy Obama movement emerges to pressure the Democrats, utilizing the 2012 election to pursue this goal.  Occupy Obama 2012 may be coming soon to an Obama Campaign or Democratic Party office near you!

JOHN STAUBER is the co-author of six books including Iraq: Weapons of Mass Deception and The Best War Ever. His anti-war activism began in high school in the 1960s opposing the war in Vietnam. The opinions in this article are his alone. His email address is: john.stauber@gmail.com

Occupy Wall Street---The Mega Predatory Banks Need To Be Broken Up

(Our economy has been hiijacked by economic financial predators and want to steal wealth and Treasury funds at any cost, even it continues to transfer wealth to the upper 20% of the income brackets. They have no guilt knowing they have transferred monies away from the real economy to the non-productive economy called the financial sector. This must end and become 100% transparent along with transaction fees for every single transaction that is not held longer than some predetermined amount of days.)

Why Aren’t They Be Broken Up? from Washingtonsblog.com

So what is the real reason that the TBTFs aren’t being broken up?

Certainly, there is regulatory capture, cowardice and corruption:

• Joseph Stiglitz (the Nobel prize winning economist) said recently that the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action

• Economic historian Niall Ferguson asks:

Guess which institutions are among the biggest lobbyists and campaign-finance contributors? Surprise! None other than the TBTFs [too big to fails].

• Manhattan Institute senior fellow Nicole Gelinas agrees:
  

  The too-big-to-fail financial industry has been good to elected officials and former elected officials of both parties over its 25-year life span

• Investment analyst and financial writer Yves Smith says:
  

  Major financial players [have gained] control over the all-important over-the-counter debt markets…It is pretty hard to regulate someone who has a knife at your throat.

• William K. Black says:
  

  There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well. There have been no prosecutions of the chief executives of the large nonprime lenders that would expose the “epidemic” of fraudulent mortgage lending that drove the crisis. There has been no accountability…

  The Obama administration and Fed Chairman Ben Bernanke have refused to investigate the nature and causes of the crisis. And the administration selected Timothy Geithner, who with then Treasury Secretary Paulson bungled the bailout of A.I.G. and other favored “too big to fail” institutions, to head up Treasury.

  Now Lawrence Summers, head of the White House National Economic Council, and Mr. Geithner argue that no fundamental change in finance is needed. They want to recreate a secondary market in the subprime mortgages that caused trillions of dollars of losses.

  Traditional neo-classical economic theory, particularly “modern finance theory,” has been proven false but economists have failed to replace it. No fundamental reform can be passed when the proponents are pretending that there really is no crisis or need for change.

• Harvard professor of government Jeffry A. Friedensays:
  

  Regulatory agencies are often sympathetic to the industries they regulate. This pattern is so well known among scholars that it has a name: “regulatory capture.” This effect can be due to the political influence of the industry on its regulators; or to the fact that the regulators spend so much time with their charges that they come to accept their world view; or to the prospect of lucrative private-sector jobs when regulators retire or resign.

• Economic consultant Edward Harrison agrees:Regulating Wall Street has become difficult in large part because of regulatory capture.

But there is an even more interesting reason . . .

The number one reason the TBTF’s aren’t being broken up is [drumroll] . . . the ‘ole 80′s playbook is being used.

As the New York Times wrote in February:

In the 1980s, during the height of the Latin American debt crisis, the total risk to the nine money-center banks in New York was estimated at more than three times the capital of those banks. The regulators, analysts say, did not force the banks to value those loans at the fire-sale prices of the moment, helping to avert a disaster in the banking system.

In other words, the nine biggest banks were all insolvent in the 1980s.

Indeed, Richard C. Koo – former economist at the Federal Reserve Bank of New York and doctoral fellow with the Fed’s Board of Governors, and now chief economist for Nomura – confirmed this fact last year in a speech to the Center for Strategic & International Studies. Specifically, Koo said that -after the Latin American crisis hit in 1982 – the New York Fed concluded that 7 out of 8 money center banks were actually “underwater” and “bankrupt”, but that the Fed hid that fact from the American people.

So the government’s failure to break up the insolvent giants – even though virtually all independent experts say that is the only way to save the economy, and even though there is no good reason not to break them up – is nothing new.

William K. Black’s statement that the government’s entire strategy now – as in the S&L crisis – is tocover up how bad things are (“the entire strategy is to keep people from getting the facts”) makes a lot more sense.

Posted in Energy / Environment | Leave a comment

Top Fraud Prosecutor: The Criminals Can Be Forced to Disgorge their Ill-Gotten Gains INCLUDING Bonuses

Posted on October 21, 2011 by WashingtonsBlog

Yes We Can … Recover Fraudulently-Earned Money

Nicholas Taleb said recently that the bankers “hijacked the American economy,” and should not have received $2.2 trillion bonus payouts they did. Taleb lamented:

Unfortunately, we don’t have claw backs in the U.S.

I’ve previously argued that the government could use existing laws to force ill-gotten gains to bedisgorged (see this and this), fraudulent transfers to be voided and – perhaps – even bonuses gained at the expense of taxpayers clawed back.

To find out whether or not Taleb is right, I spoke with the country’s top white collar crime expert – who put over 1,000 top S&L executives in jail for fraud (professor of law and economics Bill Black).

I asked Professor Black what, exactly, current fraud laws allow to be disgorged. For example, I asked Black whether or not bonuses given out based on fraudulent Ponzi schemes and manipulation of a company’s accounting books could be disgorged. And I asked hims to estimate how much could – hypothetically, if prosecutors and judges did their job – collectively be recouped for the American people?

Professor Black informed me that the proceeds of fraud can be recovered, including bonuses earned through fraudulent activity.

He said that the amount which could be recouped could amount to tens of billions of dollars per prosecution, if the evidence of wrongdoing was there.

Ten billion here and ten billion there could add up to some real money. Prosecuting fraud and recovering ill-gotten games could make the giant banks whose very size is ruining the economy (what Black calls “Systemically Dangerous Institutions” or SDIs) a little smaller, and to help pay down our national debt a little bit in the process.

And because fraud caused the Great Depression and the current economic crisis, and the economy cannot stabilize until the rule of law is restored, and criminal fraud on Wall Street is prosecuted, suing to recoup criminally-gotten gains is the best thing we can do for our economy.

And since rampant inequality leads to unstable economies and depressions, recouping some of the ill-gotten gains from the Wall Street fraudsters will help reduce inequality without raising taxes.

The Federal Reserve and Bank of America Initiate a Coup to Dump Billions of Dollars of Losses on the American Taxpayer

Posted on October 18, 2011 by WashingtonsBlog

The Federal Reserve and Bank of America Initiate a Coup to Dump Billions of Dollars of Losses on the American Taxpayer

Bloomberg reports that Bank of America is dumping derivatives onto a subsidiary which is insured by the government – i.e. taxpayers.

Yves Smith notes:

If you have any doubt that Bank of America is going down, this development should settle it …. Both [professor of economics and law, and former head S&L prosecutor] Bill Black (who I interviewed just now) and I see this as a desperate move by Bank of America’s management, a de facto admission that they know the bank is in serious trouble.

The short form via Bloomberg:

Bank of America Corp. (BAC), hit by a credit downgrade last month, hasmoved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…

Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

Now you would expect this move to be driven by adverse selection, that it, that BofA would move its WORST derivatives, that is, the ones that were riskiest or otherwise had high collateral posting requirements, to the sub. Bill Black confirmed that even though the details were sketchy, this is precisely what took place.

And remember, as we have indicated, there are some “derivatives” that should be eliminated, period. We’ve written repeatedly about credit default swaps, which have virtually no legitimate economic uses (no one was complaining about the illiquidity of corporate bonds prior to the introduction of CDS; this was not a perceived need among investors). They are an inherently defective product, since there is no way to margin adequately for “jump to default” risk and have the product be viable economically. CDS are systematically underpriced insurance, with insurers guaranteed to go bust periodically, as AIG and the monolines demonstrated. [Background.]

The reason that commentators like Chris Whalen were relatively sanguine about Bank of America likely becoming insolvent as a result of eventual mortgage and other litigation losses is that it would be a holding company bankruptcy. The operating units, most importantly, the banks, would not be affected and could be spun out to a new entity or sold. Shareholders would be wiped out and holding company creditors (most important, bondholders) would take a hit by having their debt haircut and partly converted to equity.

This changes the picture completely. This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. [Background.] So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.

But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil. 

The FDIC is understandably ripshit. Again from Bloomberg:

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Well OF COURSE BofA is gonna try to take the position this is kosher, but the FDIC can and must reject this brazen move. But this is a bit of a fait accompli,and I have NO doubt BofA and the craven, corrupt Fed will argue that moving the derivatives back will upset the markets. Well too bad, maybe it’s time banks learn they can no longer run roughshod over regulators. And if BofA is at that much risk that it can’t survive undoing this brazen move, that would seem to be prima facie evidence that a Dodd Frank resolution is in order.

Bill Black said that the Bloomberg editors toned down his remarks considerably. He said, “Any competent regulator would respond: “No, Hell NO!” It’s time that the public also say no, and loudly, to this new scheme to loot taxpayers and save a criminally destructive bank.

Professor Black provided a “bottom line” summary in a separate email:

1.The bank holding company (BAC) is moving troubled assets held by an entity not insured by the public (Merrill Lynch)  to the Bank of America, which is insured by the public
2. The banking rules are designed to prevent that because they are designed to protect the FDIC insurance fund (which the Treasury guarantees)
3. Any marginally competent regulator would say “No, Hell NO!”
4. The Fed, reportedly, is saying “Sure, no worries” by allowing the sale of an affiliate’s troubled assets to B of A
5. This is a really good “natural experiment” that allows us to test whether the Fed is protects the public or the uninsured and systemically dangerous institutions (the bank holding companies (BHCs))
6. We are all shocked, shocked [sarcasm] that Bernanke responded to the experiment by choosing to protect the BHC at the expense of the public.

Karl Denninger writes:

So let’s see what we have here.

Bank customer initiates a swap position with Bank.  In doing so they intentionallyaccept the credit risk of the institution they trade with.

Later they get antsy about perhaps not getting paid.  Bank then shifts that risk to a place where people who deposited their money and had no part of this transaction wind up backstopping it.

This effectively makes the depositor the “guarantor” of the swap ex-post-facto.

That the regulators are allowing this is an outrage.

If you’re a Bank of America customer and continue to be one you deserve whatever you get down the line, whether it comes in the form of higher fees and costs assessed upon you or something worse.

Stand Up to the Coup

Bank of America has repeatedly become insolvent due to fraud and risky bets, and repeatedly been bailed out by the government and American people. The government and banks are engineering an age of permanent bailouts for this insolvent, criminal bank (and the other too big to fails).  Remember, this is the same bank that is refusing to let people close their accounts.

This is yet another joint effort by Washington and Wall Street to screw the American people, and totrample on the rule of law.

The American people will be stuck in nightmare of a never-ending depression (yes, we are currently in a depression) and fascism (or socialism, if you prefer that term) unless we stand up to the overly-powerful Fed and the too big to fail banks.

Posted in Politics / World News | 13 Comments

From Counterpunch.org

The Derivatives Flap

Is Bank of America Headed for the Glue Factory?

by MIKE WHITNEY 10-21-23-11

Why is Bank of America moving derivatives from Merrill Lynch to an insured subsidiary? Is it because the derivatives could blow up at any time leaving Merrill with gigantic, unsustainable losses? If that’s the case, then it would make perfect sense to shift them into a depository institution that’s covered by the FDIC. That way, the taxpayers would wind up paying for the damage and no one would be the wiser. It’s like a stealth bailout, right? The only problem is that Bloomberg let the cat out of the bag, so now everyone knows what’s going on. And that’s going to be a very big problem for B Of A.  Here’s a clip from the Bloomberg article:

“Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

“The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

“Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC-insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.” (“BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit”, Bloomberg)

There are two things worth noting in this article. First, according to Bloomberg, “the transfers (of derivatives) are being requested by counterparties.” Well, how do you like that? In other words, the investors on the other side of these contracts want Merrill to put them under an insurance umbrella provided by the FDIC.

Now, why would that be? The only reason I can come up with, is that they know that a lot of these complex instruments are undercapitalized and ready to implode, so they want to make sure they get their money back any way possible. That means they need to latch on to Uncle Sam without anyone knowing about it. But, like we said, the cat is out of the bag.

The other thing worth noting is that the Fed and the FDIC are at loggerheads over the matter. (“The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting.”) Now, that’s not good at all, in fact, it’s a big red flag that suggests the Fed trying to pull a fast one on the American people. One does not have to look too far for other examples of Fed misbehavior; the endless bailouts (TARP, QE1 and 2, Operation Twist, ZIRP, etc) In fact, the Fed’s history is a tedious chronicle of one shifty deal after another. This is just more of the same; another gift to big finance at the public’s expense.

It’s ironic that the B Of A flap is taking place at the same time the non-partisan Government Accountability Office (GAO)  just released its report on conflicts of interest in the Fed. It helps to put the Fed’s dubious behavior into context. This is a summary of the report from Washington’s Blog:

“The GAO detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves….

“The corporate affiliations of Fed directors from such banking and industry giants as General Electric, JP Morgan Chase, and Lehman Brothers pose ‘reputational risks’ to the Federal Reserve System, the report said. Giving the banking industry the power to both elect and serve as Fed directors creates ‘an appearance of a conflict of interest,’ the report added….

Joseph Stiglitz – former head economist at the World Bank and a Nobel-prize winner – said yesterday that the very structure of the Federal Reserve system is so fraught with conflicts that it is ‘corrupt’ and undermines democracy.

Stiglitz said,  ‘If we [i.e. the World Bank] had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure.’” (“Non-Partisan Government Report: Federal Reserve Is Riddled with Corruption and Conflicts of Interest,” Washington’s Blog)

So, no one should be surprised that the Fed is involved in another sketchy deal. Even so, this particular maneuver really seems to have hit a nerve with some prominent and usually even-tempered, financial bloggers, like Yves Smith over at Naked Capitalism. Here’s Smith’s take on the Fed’s subterfuge:

“This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositories pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario…..This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.” (Naked Capitalism)

“Just plain evil.” Maybe that should be the Fed’s byline?

Anyway, Smith is not alone in her contempt for the Fed, but there are those who feel she may be off-base in her assessment of what is going on vis a vis the derivatives dump. Bank analyst Christopher Whalen at Reuters thinks that the transfer could be a sign that B of A is getting ready to throw in the towel. Here’s an excerpt from the article:

  “…. the move to put the derivatives exposures of Merrill Lynch under the lead bank could be preparatory to a Chapter 11 filing by the parent company. The move by Fannie Mae to take a large junk of loans out of BAC, the efforts to integrate parts of Merrill Lynch into the bank units earlier this year, and now the wholesale shift of derivatives exposure all suggest a larger agenda.

“I don’t have any access to inside skinny, but what I see suggests to this investment banker that a restructuring may impend at Bank of America.” (“Is Bank of America planning for a Chapter 11″, Reuters)

“Restructuring”? So is B of A headed for the glue factory?

No one knows for sure, but the banking behemoth has been laying off workers by the thousands, slashing expenses, and raising fees while its stock has dropped 49 per cent in a year. These are hardly signs of a thriving business.

So, consider this: If you were in Fed chairman Ben Bernanke’s shoes, what would you do?

Let’s say the second biggest bank in the country is starting to teeter because it’s loaded with all manner of dodgy (toxic?) derivatives that could blow up at any minute and take down the entire global financial system. Would you (a) Wait until the bombshell exploded knowing that the only choice you would then have would be to further expand the Fed’s balance sheet by another couple trillion dollars or (b) Try to sleaze the whole thing off on Uncle Sam and let the taxpayers pick up the tab?

I’m not sure, but I think Bernanke may have chosen (b).

Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com