Tag: Merrill Lynch

Bank of America’s Shifts Derivatives Risk to Taxpayers | The Charlotte Observer Newspaper

On By southwerkIn Business Ethics

Bank of America’s Shifts Derivatives Risk to Taxpayers

Let’s make this simple. Derivatives are speculative instruments used to gamble on the success or failure of some monetary enterprise. Bank of America took these derivatives from one division (uninsured) to another (federally insured). They took a essentially a speculative gamble and moved it into a federally insured institution so that any losses will be born by the federal government.

Isn’t that just sweet?

– Well, it is if you are Bank of America

James Pilant

Lawmakers are criticizing Bank of America Corp. again, this time over the reported transfer of financial instruments from Merrill Lynch into the bank’s deposit-taking arm.

It’s a move the lawmakers say could put taxpayers on the hook for big losses – three years after the bank received billions in bailouts from the federal government.

Lawmakers criticize Bank of America’s transfers | CharlotteObserver.com & The Charlotte Observer Newspaper

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Banks Created Fake Demand To Keep Home Sales Going

On By southwerkIn business ethics, Capitalism, Economic measurement, ethics, Government Failure

Back in 2006, when the housing market began to slow banks began to have difficulty moving their CDO’s (collateralized Debt Obligations). So, they created an artificial demand by selling them to each other.

Tens of billions of dollars in deals were exchanged between the banks. The CDO’s were becoming increasingly risky as solid mortgage investments disappeared. But the banks had strong influence over the managers who created the CDO’s and how couldn’t they? A billion dollar CDO made the manager a millionaire off that once transaction.

Without these deals keeping demand high and luring new investors into the game, the housing market would have slowed much earlier with much less damage.

Investment firms like Merrill Lynch cultivated the CDO managers –

As the head of Merrill’s CDO business, Ricciardi also wooed managers with golf outings and dinners. One Merrill executive summed up the overall arrangement: “I’m going to make you rich. You just have to be my bitch.”

The mortgage debts varied in risk, so the banks kept the top 80% and marketed the high risk bottom 20%. But bizarrely, the banks bought each others CDO’s. That’s right, the bottom 20%. But remember, a one billion dollar deal results in five to ten million in fees. That’s a lot of incentive to make bad deals. Bad for your bank but very, very good for you.

The banks were so successful in creating this artificial demand that in 2006, the amount being traded doubled in spite of the cooling real estate market reaching a value of 226 billion dollars.

These were the kind of toxic assets the banks were holding. The banking industry would have you believe that home buyers got in over their heads looking for easy loans. How does that figure when the banks are buying each others’ mortgage investments? How does that work when the banks are creating artificial demand?

And you know the end of the story, how the federal government used tax money to buy those toxic investments which the banks bought from each other knowing they were toxic investment. Do you feel good?

This is isn’t about overenthusiastic home buyers, this New Depression is the result of financial mismanagement and naked greed.

James Pilant