Ryan Price's Soapbox

I don’t expect most people to really understand Wall Street, as a matter of fact even I don’t understand what they do most of the time but after I read something that I feel is relatively important – I feel the need to pass the knowledge around because being an informed citizen is the most important thing you can be as an American. Sitting around doing nothing will only prolong the status quo in Washington and in Wall Street. Yesterday, Bank of America began shifting derivatives in its Merrill investment banking unit to its depository arm, which has access to the Fed discount window and is protected by the FDIC. So what exactly does this mean to the average American?

This means that the investment bank’s European derivatives exposure is now backstopped by U.S. taxpayers.  Bank of America didn’t get regulatory approval to do this, they just did it at the request of frightened counterparties.  Now the Fed and the FDIC are fighting as to whether this was sound.  The Fed wants to "give relief" to the bank holding company, which is under heavy pressure.

This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input.  You will also read below that JP Morgan is apparently doing the same thing with $79 trillion of notional derivatives guaranteed by the FDIC and Federal Reserve. No I didn’t mistype that.. 79 trillion dollars of derivatives…that’s well over 5 times the GDP of our country.

What this means for you is that when Europe finally implodes and banks fail, U.S. taxpayers will hold the bag for trillions in CDS insurance contracts sold by Bank of America and JP Morgan.  Even worse, the total exposure is unknown because Wall Street successfully lobbied during Dodd-Frank passage so that no central exchange would exist keeping track of net derivative exposure.

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.

Most people should be very afraid of this. The banks are basically putting us on the hook again so they don’t have to be responsible for the huge amount of risk they are dealing with. When Greece, Italy, Portugal, Spain and Ireland default on their sovereign debts and the EU can’t bail them out anymore there will be a massive run on the banks and it will be 10 fold what 2008 was when everything collapsed. It sure would be nice to have the gold standard right about now…even at 1600 dollars an ounce and holding over 5700 tons of Gold the total wealth of our gold holdings could theoretically end out debt, and back all this risk with plenty left over…to the tune of 278 trillion dollars. Unfortunately I don’t see us going back to the gold standard anytime soon nor reenacting the Glass-Steagall Act which would get the banks out of investment banking. If anything – this is what Occupy Wall Street should definitely include for reasons to protest.