Bank of America Bosses Find Friend in the Fed: Jonathan Weil

Oct. 20 (Bloomberg) -- One of the reasons so many Americans are ticked off at the Federal Reserve is a lingering sense that it puts big banks’ interests above those of ordinary taxpayers. The news that the Fed is taking Bank of America Corp.’s side in a dispute over where to park some of the company’s holdings only reinforces that impression.

Here’s the gist of the story, broken two days ago by Bloomberg News. Bank of America, which got hit with a credit-rating downgrade last month by Moody’s Investors Service, has moved an undisclosed amount of derivative financial instruments from its Merrill Lynch unit to its biggest commercial-banking subsidiary. The latter is loaded with insured deposits and has a higher credit rating than Merrill or the parent company.

The Federal Deposit Insurance Corp. is objecting to the transfers. That part is easy to understand: More risk for the retail lender means more risk for FDIC-insured deposits, which ultimately are backstopped by the U.S. government.

The Fed, however, has signaled to the FDIC that it favors the transfers. Shifting the derivatives to the commercial lender may let Bank of America avoid collateral calls and termination fees stemming from the rating downgrade. Some Merrill clients may prefer having their contracts with the higher-rated unit. In short, the Fed’s priorities seem to lie with protecting the bank-holding company from losses at Merrill, even if that means greater risks for the FDIC’s insurance fund.

Pushing an Agenda

Among the big questions we’re left with: Why is the Fed going to bat for Bank of America in the first place? If the FDIC doesn’t want its insurance fund exposed to potential losses from these investment-banking trades, why expose it? And how many other banks have managed to get the Fed to push their agenda in the same sort of way?

Unfortunately, none of the actors here went on the record to explain what’s going on. We don’t know what kinds of derivatives these are, or even the dollars at stake, only that they are big enough to make the FDIC upset. The entire story would be playing out in secret were it not for some unidentified whistleblowers who seem to have this crazy idea that the public should be informed about what the regulators and Bank of America are up to.

It’s not as if the FDIC’s deposit-insurance fund is flush with cash. It finally turned positive last June, when it finished with $3.9 billion of net assets, after seven consecutive quarters of negative balances. A surprise failure by even one community bank could easily wipe out that tiny surplus.

Capital Doubts

It’s also clear that the market harbors serious doubts about whether Bank of America has enough capital. Its shares trade for less than a third of the company’s common shareholder equity. Transferring the derivatives to the commercial-lending unit, where most of Bank of America’s derivatives are kept already, would let the holding company avoid a capital hit. For all we know, though, the derivative contracts Merrill wrote are far more exotic.

Keep in mind: Merrill and Bank of America each needed two rounds of federal bailout money, back in 2008 and 2009. As for whether taxpayers are still on the hook now, sure, we’ve been told the Dodd-Frank Act passed by Congress last year would end federal bailouts of large banks. It doesn’t exactly do that, though. Taxpayer money still would be at risk in the event that the FDIC has to exercise its new resolution powers.

Dodd-Frank lets the FDIC borrow money from the Treasury to finance a seized company’s operations for as long as five years. While the law says the FDIC is supposed to tap the banking industry to pay for any eventual losses, it’s hard to imagine the agency could ever charge enough to cover the costs from a failure at a company with $2.2 trillion of assets, or any other giant financial institution, for that matter. Plus, there’s always the chance Congress will change the law again.

If neither the regulators nor Bank of America will explain what’s going on here, the only hope may be for Congress to start asking its own questions. Perhaps then we might find out why the Fed seems to believe it’s a good idea to let a huge bank-holding company avoid a blow to its capital by shifting more of its trading risks onto the retail crowd. Taxpayers deserve to know.

(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in New York at

To contact the editor responsible for this column: James Greiff at