Prank Of America Continues With Derivatives Bailout

Prank Of America Continues With Derivatives Bailout

To readers of WTF Finance it should come as no surprise that Bank of America is in dire straits. We already reported in our articles “Bankrupt Property Management Company Ran An Accounting Scheme” and “Inside The Bubble Economy” that BAC is running an accounting scam to keep it’s mismanaged company afloat.

The fact is that Bank Of America has written down a significant amount of so called “A” paper debt. Contrary to popular belief, “A paper” is not significantly better in quality than subprime, given that A paper clients over the past decades relied on deficit spending and credit availability as much if not more so than the subprime demographic. A paper clients just like their subprime client counterparts rely on maintaining their debt payments with the acquisition of more debt. The only difference is that A paper clients often had Real Estate debt that was linked to more expensive housing. Why would that make a difference? Since banks such as Bank Of America were greatly mismanaged and heavily leveraged, they could not afford to foreclose on the expensive properties since the A paper loans were greater in value and not covered under the Insurance of the Federal Housing Administration. WTF Finance reported in the past how this is exactly the reason why upper income housing has not deflated in value as much as it should have – the Jumbo loan RE market was heavily manipulated as financial institutions such as Bank of America opted not to foreclose and instead legally cooked their books with the help of changes in accounting regulations.

Without the changes from mark to market accounting regulation to mark to whatever bubble value you want to mark it to, Bank of America would have been exposed as the insolvent company it truly is – it would have been “Bear Stearned”. Those changes in accounting regulation in late February of 2009 allowed Bank of America and other financial institutions to report phantom profits due to their creative Enron-like accounting gimmicks that were made possible with the implementation of anti-free market accounting regulations by the U.S. Government. While the naïve and clueless believed that the financial conditions of US companies improved, readers of WTF Finance were educated that the stock market rally of 2009 was merely an illusion of a fundamental recovery, only made possible and ignited by those accounting changes.
Finally last month, Bank Of America was downgraded by S&P and also by Fitch. Needless to say, both downgrades aren’t realistic enough as both credit rating agencies still give too positive of a rating for Bank of America and other financial institutions. Bloomberg reports:

“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.
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.”

Bank of America sure has friends in high places as the quasi-private Federal Reserve would like to relieve Bank of America of its bad business decisions and contracts, namely the trillions of bad paper that Bank of America has written down and still holds in the form of toxic derivatives.
If it weren’t for the anti-free market policies Bank of America and other financial companies could not engage in nonsensical business practices without having to face serious consequences for the irresponsible business decisions that they made. Only in a manipulated environment can a financial institution write bad business, reward its executives and employees with unmerited bonuses while passing the losses onto others.

Without the changes in accounting regulation to the “Enron Accounting Standard” in March 2009, Bank of America would have been exposed as the insolvent institution it is. The record profits that Bank of America reported starting with the 1Q 2009 were solely made possible with accounting gimmicks. These phantom profits allowed Bank of America to issue more shares as the financial and economic clueless wrongfully believed that the finances of Bank of America et al. improved fundamentally. With the next round of financial bailouts in the form of derivative purchases by the Federal Reserve, the story of Prank of America will continue…

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This post was written by:

Jesse Livermore - who has written 99 posts on WTF Finance.

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