Bank of America

Underneath all the recent outrage of Bank of America's (BoA) newest debit card fees an even more serious problem has been brewing. Unbeknownst to the American public, Bank of America has been moving its riskiest assest from its recent Merrill Lynch acquisition to subsidiary consumer banks. By moving their toxic assets into consumer banks BoA is putting the Federal Deposit Insurance Company (FDIC) on the hook for when they all go bad. If the derivatives start to go bad, the banks will have to use their consumer deposits, the money you and I put in the bank, as collateral for the 70+ billion dollars worth of damages. Since the FDIC insures all deposits 500,000 dollars and under, they could potentially have to give BoA's subsidiary banks billions of dollars, bankrupting the FDIC. However, if this weren't bad enough because the FDIC cannot go bankrupt, it is backed by the full faith and credit of the US government, taxpayers will wind up paying yet another bailout.

Now this isn't necessarily going to happen, this is just the worst case scenario. BoA is doing this as a hedge against the European debt crises imploding. We also have no idea how exposed BoA is to direct or indirect catastrophic failure of the European banking system due to the opaque and unregulated nature of the derivatives market. However, because BoA is doing something so damn drastic and politically risky, it leading me to think that their exposure is bad.

This is exactly the kind of stuff the Glass-Steagall Act was created to prevent. This only reinforces my opinion that the repeal of the Glass-Steagall Act is the worst decision congress has made in the past 15 years. To matters even worse though, the Federal Reserve has recently come out in favor of the derivatives transfers, leaving the FDIC the only sane looking one in the room. In a world governed by more competent people, BoA would never be able to even think of doing this and then when their bets were called they would go into receivership and have their assets wound down by the FDIC. Thankfully, the FDIC has some power to stop this, and if they do they can take control and BoA and resolve the bank. BoA has been on a nasty downward spiral for a long time now, lets just hope we let it die without it taking us all with it.