Desperate Bank of America Holds Taxpayers Hostage

The zombie apocalypse is nigh! A near-dead Bank of America lumbers into Washington, infecting the Federal Reserve and lashing out at consumers with a $5 fee in an effort to avoid death in the form of total insolvency. The masses flee. It’d be a bank run if not for bitten branch employees refusing to serve their customers.

The Bank of America zombies currently have the FDIC held hostage for nearly $75 trillion, with the approval Ben Bernanke’s Federal Reserve. The supposed assets were moved from Bank of America’s investment holding company, Merrill Lynch, into the consumer lending side of the business. This distinction is important, because the investment bank’s assets are not guaranteed by the FDIC, while your own deposits in their other division are. Of course, for the Federal Reserve to allow Bank of America to classify risky derivatives as FDIC-insured deposits is almost certainly illegal.

As far back as July 8, I argued that the FDIC could be used to provide the major financial institutions with direct access to the U.S. Treasury and credit line for future bailouts:

It is because of interventions like the FDIC that the federal government is rapidly becoming overleveraged. The oft-repeated description of state-run enterprise as a system that “privatizes the profits and socializes the losses” fully applies here, as the FDIC exposes taxpayers to all risk experienced by the financial system, without giving taxpayers a share of the Goldman Sachs holiday bonus. Had the fire of the 2008 financial crisis been allowed to reduce institutions that misallocated resources to dust and ashes on the forest floor, it seems unlikely that this relationship would have remained intact. Instead, then, as now, taxpayers and the U.S. Treasury remain on the hook for every mistake made by the banking industry.

… Congress should not shy away from asking the difficult questions about how much risk taxpayers are being exposed to through the FDIC’s theoretically infinite power to bail out or take over failed banks. Long-term policy changes should also be explored, such as closing the FDIC entirely to force banks to clean up their lending portfolios. Overall the federal government must seek to extricate itself from its tightly-entwined relationship with the world of finance to end the need for costly bailouts.

What Bank of America is doing here is clearly an abuse of the original purpose of government-subsidized FDIC insurance, but that’s my point! This situation is absolutely not something that should be surprising to the regulators sitting behind the desks at the FDIC headquarters. Any government intervention into the marketplace can and will be abused. It is like the executives of Bank of America read my column for instructions on how to, well, “privatize the profits and socialize the losses”. Regardless of what those Occupying Wall Street have to say about it, you can be a capitalist and believe that what is happening here is wrong. A private corporation should not be able to plunder the U.S. Treasury to cover its losses via the FDIC.

There appears to be very little information publicly available as to what could possibly even be worth 75 trillion dollars, but it’s most definitely not cash or paychecks from the individual depositors the FDIC was designed to protect. In fact, it appears to be 75 trillion dollars of risky debt packaged as derivatives. To put that in perspective, the annual GDP of all of planet Earth is only 58 trillion dollars! Unclear is whether or not any of those derivatives are tied to the impending government default in Greece; the virus may have spread from Europe to Wall Street. If the company stood to make a profit on the investments, they would probably not turn them over to the government at a moment when they are fearing bankruptcy. The “assets” are likely actually toxic liabilities: bonds and government debt tied to states on the brink of default, and bets on whether or not the debt itself will go bust heaped high on top of the debt, possibly all purchased with more debt! This general condition is, as they say, necessary but not sufficient to conclude that the Eurozone welfare state debt dominoes have begun to fall.

The Obama Department of Justice has proven itself horribly incompetent, or I would recommend that they prosecute Bank of America for insurance fraud. What the FDIC was set up to do is provide insurance on deposits. Debt in the form of derivatives cannot be a deposit; the two concepts are fundamentally incompatible. And of course, you can’t take out life insurance on a zombie. Bank of America’s woes were a pre-existing condition when they stumbled into the Federal Depositors’ Insurance Corporation office and threatened to maul a customer service representative with a chair in order to get coverage. That leaves one realistic and useful option: the vampires in Congress must investigate why the zombie apocalypse is imminent in the financial world.

Happy Halloween!