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BAC Bank of America Corp
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BAC Bank of America Corp

  #51 (permalink)
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Private Banker View Post
Without getting extremely complicated, the bad bank could be funded/paid for from the original bank from an equity raise or debt sale with the equity in and supporting collateral being the good bank. The bad bank would then purchase the bad assets (for pennies on the dollar) from the good bank and look to unwind and/or sell them to the highest bidder. It's obviously a big process that would take place but that's the gist of it.

OK ... (thanks for playing) ... and why doesn't BAC do this on their own today? Why will it take the imminent collapse of a trillion dollar bank and the end of the world before change will occur?

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  #52 (permalink)
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OK ... (thanks for playing) ... and why doesn't BAC do this on their own today? Why will it take the imminent collapse of a trillion dollar bank and the end of the world before change will occur?

Mike

My thoughts exactly. This should be done immediately. I'm sure there's shareholder pressure or whatever but at some point pre-packaged BK is the only sensible (key word) way out of this mess.

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Private Banker View Post
Without getting extremely complicated, the bad bank could be funded/paid for from the original bank from an equity raise or debt sale with the equity in and supporting collateral being the good bank. The bad bank would then purchase the bad assets (for pennies on the dollar) from the good bank and look to unwind and/or sell them to the highest bidder. It's obviously a big process that would take place but that's the gist of it.

I read about his about 4 years ago and was led to believe the S. Korean's created this! haha...

Good bank, Bad bank concept. My understanding is that is what they have done with a few banks if I am not mistaken?

It will be interesting to see. I will keep my money at BofA for now as it doesn't exceed the 250K.

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I would imagine there are a few things that could be done but like Lornz mentioned, following some sort of Scandinavian style work out makes sense. Sweden broke down the large banks via pre-packaged BK and created good banks/bad banks. Taking all the good assets and placing them with the good banks and the bad with the bad. The bad banks assets were auctioned off or just sat there while the good banks were able to recover and create a healthy base again. I believe Norway nationalized their banks while Sweden just sort of mandated what the banks were to do. Maybe Lornz can confirm that.

The thing is BAC will probably not have the option of saying yes or no. I would think they get to the point where they are on the verge of failure and that's when they should be broken up ASAP if not sooner. The issue is what are their underlying assets? There's been a huge uproar about the amount of derivatives they have. But I'm almost certain not all of the derivatives are just the CDO/CLN/CDS type. Don't get me wrong, I'm sure they have way more of that than they should have which will be their demise but a lot of bank's derivatives are also in FX Swaps which aren't the toxic type we're concerned with. Unfortunately, BAC has hid all of this from us so it's hard to decipher. But my point is, there should be a bad bank set up that can "swallow" the bad assets and attempt to unwind whatever they can and auction off whatever will get a bid which will be pennies on the dollar of course. The bad bank would be more or less a private fund vs a traditional bank. Then the good assets could be used to create a new bank that is far smaller and less complex as far as underlying assets and liabilities. Just a thought of course and Bernanke will inherently do the wrong thing but you'd think the guy learned by now.

Good post, I agree with that.

As far as I know, the Swedes only took over Nordbanken (now Nordea). They created Securum to transfer its bad assets to. In Norway, after private attempts of rescue had failed, we created bank funds and wiped out stockholders.

What I don't get is why government should subsidize private enterprise. If the government has to (temporarily) be involved, I would prefer it to act as a "ruthless" PE fund. Why shouldn't the government act as capitalistic as private corporations? That makes more sense to me. Thomas Jefferson wrote about "The Natural Aristocracy", and that would probably be the optimal way of governing. I don't see it happening, though.

The way the last crisis transpired, makes it the greatest robbery in (modern) history. It seems the worst is still to come...

I remember David Roche was pretty outspoken on CNBC a few years back, and I think this article sums it up nicely.
A 'Bad' Bank Can Solve Our Problems - WSJ.com

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I was able to locate BofA's 3rd quarter 10Q filing and as I mentioned earlier, a majority of the derivatives it holds are comprised of the lower levered FX and Interest Rate Swaps. But there is one big problem and that's the CDS holdings which accounts for $4,138,400,000,000 +/- a few bucks. That ought to be enough to take down the farm. Also, should there be a blow on the CDS side, look for the other derivatives to be in trouble as counter parties will want to collect or exit their positions with BofA or better put, one big margin call.

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  #56 (permalink)
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Private Banker View Post
I was able to locate BofA's 3rd quarter 10Q filing and as I mentioned earlier, a majority of the derivatives it holds are comprised of the lower levered FX and Interest Rate Swaps. But there is one big problem and that's the CDS holdings which accounts for $4,138,400,000,000 +/- a few bucks. That ought to be enough to take down the farm. Also, should there be a blow on the CDS side, look for the other derivatives to be in trouble as counter parties will want to collect or exit their positions with BofA or better put, one big margin call.


Thanks for your analysis Private Banker.

I just doubt this $4,138,400,000,000 exposure is a directional one: this should rather be the sum of various long and short positions that are aggregated. Very few people in a bank can take a directional bet, only prop desks can do that. 90% of an investment bank revenues are generated through fees and bid-ask spreads.

Futhermore if I had to short financials, I'd rather look to the good old europe that have tons of irresponsibly leveraged banks.

Have a look at this blog from a French economist, these are really interesting times !

Jean-Pierre CHEVALLIER Categorie : English

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TheTrend View Post
Thanks for your analysis Private Banker.

I just doubt this $4,138,400,000,000 exposure is a directional one: this should rather be the sum of various long and short positions that are aggregated. Very few people in a bank can take a directional bet, only prop desks can do that. 90% of an investment bank revenues are generated through fees and bid-ask spreads.

Futhermore if I had to short financials, I'd rather look to the good old europe that have tons of irresponsibly leveraged banks.

Have a look at this blog from a French economist, these are really interesting times !

Jean-Pierre CHEVALLIER Categorie : English

You're welcome. From what I understand a majority of these derivatives were from Merrill Lynch so, who knows what crazy trades they have on there. They were obviously bad enough to make BofA keep them in a separate entity since they acquired Merrill.

Yeah I bet there are some great short opportunities with the EU banks. I think most of the fun with shorting BofA has be taken care of but it could get interesting if they end of failing or go bankrupt. Merci beaucoup for the link, I'll check that out.

Cheers,
PB

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interesting thread.Ive been scaling out of the 401k for the last few weeks, and was hoping the dow could break above 12k, to take the last 25%, and put it on the sidelines.The announcement on wednesday, i fear, could generate a huge selloff.Tomorrow, i will call the wife at work, at state my case.I think its hilarious, that while the european nations are trying to figure out how to help Greece, the Greeks are rioting in the streets.Comical!There are some tough decisions for the greeks, no doubt, and i feel for them, but, thats just the wrong answer.When they go down, watch some others follow.Hey, look at what the usa did, when it came to the debt ceiling vote.Talk about a cluster f#$%!!.If the usa cant get it done, all on its own, then haow are 17 nations supposed to get it done??I live in NYC, but i read the news...we have big problems here...still.Just because we have some decent earnings, big deal.Half of the states cant even pay their overnight debt...the thing that amazes me, is that the dow would even consider to go up.I must say, i learned alot this year, and how the daily chart on the dow can just blow thru good signals.
On another matter, BAC.Are you fn kidding me??That stock came very close to the $5 mark, just recently.What happens if the european mess collapses, like it should?BAC , look out below....they could make a run on that bank, and MS is next!!We got serious issues, besides a 15 trillion dollar debt, and 10%unemployment!!With cnbc blairing all day, asking every bonehead out there if weve seen a bottom yet, its no wonder!!someone whispers default, and the dow drops 200 points.
So, i , for one, think this is just an empty rally.....but, i also wouldnt be surprised if we hit the highs of this summer.Does this make me sound confused?? youre damn right!!Thankfully, i daytrade, technically.One thing i do know, however, is if i can flatten the 401k, at above 12k, i dont care how high it goes!!Dont forget, the bottom was around 6700 for the dow, so, lets not be greedy now!!
Thanks for the rant, its been on my mind for a while...and by the way, if BAC gets to $2, i will be a buyer, because if Geithner and Bernanke let that one fail , the usa will really be in the can!!

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Big Mike View Post
So your solution is basically wait for the next bubble to collapse and they will fix themselves? I am not so confident, I think BAC failing will lead to many other failures. I can't see a solution that doesn't involve some sort of bail out, even though I strongly oppose a bail out.

Mike

thanks Mike!! BAC was real close to$5 this month, and if europe really unravels, BAC , imo, as well as MS, will be targeted.I , for one, dont think it too far fetched, for this to happen.The US is not in a great situation, either, far from it.I get a kick out of the cnbc people, telling europe to get this taken care, and blaming the dows woes on europe.Watch, when the crap hits the fan, they will have Cramer on the floor of the stock exchange, like hes gonna help!!

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Source: FDIC To Cover Losses On $75 Trillion Bank of America Derivative Bets | Problem Bank List


Quoting 
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.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

Moody’s Investors Service downgraded Bank of America’s long-term credit ratings Sept. 21, cutting both the holding company and the retail bank two notches apiece. The holding company fell to Baa1, the third-lowest investment-grade rank, from A2, while the retail bank declined to A2 from Aa3.

The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody’s decision, said a person familiar with the matter.

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.

Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.

Mike

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