Privatized Profits, Socialized Risk

No matter how outraged you are, it’s impossible to keep up (h/t Lily Tomlin). In last week’s installment of “Let’s Hope No One’s Paying Attention,” the Bank of America moved uninsured Merrill derivatives to its commercial bank’s federally insured ledgers. In other words, if Bank of America fails, the FDIC must clean up its mess. And apparently the FDIC isn’t any too happy about it. But the Fed is reportedly all in favor of the move. Matt Taibbi explains: “Essentially, an irresponsible debtor, B of A, is keeping a loan shark from breaking his legs by getting his rich parents to co-sign his loan. The parents in this metaphor would be the FDIC.” Actually, the “parents” would be both the FDIC (Mom) and the Federal Reserve (Dad). But Dad is egging the miscreant on instead of calling him to account.

The Federal Deposits Insurance Corporation was created by the Glass-Steagall Act of 1933, when Depression with a capital D had brought the country to its knees, leading to the bank panic of 1933. The Glass-Steagall Act separated investment banking from commercial banking in order to protect depositors (like you and me) from the risk inherent in investment banking. In effect, it prevented Wall Street from gambling with money deposited in commercial banks. And it created the FDIC to protect commercial banks’ deposits.

In 1999, Republicans, enjoying a majority in both chambers of Congress and counting on nobody paying attention (all too often a safe bet), passed the Gramm-Leach-Bliley Act, which repealed the part of Glass-Steagall that prohibited a single institution from acting as any combination of an investment bank, a commercial bank, and an insurance company. During the debate over the Gramm-Leach-Bliley Act, Rep. John Dingall (D-Michigan), eloquently warned of the consequences: “Under of this legislation … liability in one area is going to fall over in the liability of the next. Taxpayers are going to be called upon to cure the failures that we’re creating tonight. And it’s going to cost a lot of money.”

So the riskier Merrill Lynch liability is now spilling over into the federally insured liability of Bank of America’s commercial operation. And, as predicted, taxpayers are being called upon to cure the failures created by Congress in 1999. Jonathan Weil reports:

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.

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. … 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.

So in spite of the outcry of Occupy Wall Street, the behemoth Bank of America, in all of its too-big-to-fail glory, is still acting as though no one is paying any attention. Hiding behind the voluminous skirts of the FDIC, whose deposit insurance “is backed by the full faith and credit of the United States government,” B of A continues its dance of privatized profits backed by socialized risk. Where are the decriers of socialism when you need them?


4 thoughts on “Privatized Profits, Socialized Risk

  1. Over the course of the 70s and 80s, commercial banks were losing profitable lines of business to non-bank competitors who didn’t bear the costs of safety and soundness regulations.

    Going into the 90s, there were serious concerns about the viability of commercial banking.

    Given the politics of the day, there was no way regulations could be imposed on the competitors, however.

    Commercial banks provided service essential to everyday commerce: credit systems and payment systems and those services, together with the conservative financial restrictions on commercial banks were the assumptions of the concept of the Fed as lender of last resort, which itself reduced inter-bank credit risks and thus kept transactional costs low.

    Sadly, allowing commercial banks to be rescued through mergers with investment banks brought the high risk business of investment banks under the Fed’s protective umbrella.

    With the result that TARP was essential to keep our credit and payment systems, and thus our daily commerce, in operation in 2008.

    We “saved”

    The repeal of Glass steagall

  2. According to Avery Goodman on Seeking Alpha (, “Bank of America (BAC) has shifted about $22 trillion worth of derivative obligations from Merrill Lynch and the BAC holding company to the FDIC insured retail deposit division. Along with this information came the revelation that the FDIC insured unit was already stuffed with $53 trillion worth of these potentially toxic obligations, making a total of $75 trillion.”

  3. Paul Volcker: “I well recall a conversation with Bill Taylor [then President of the FDIC] near the end of my Federal Reserve time [circa 1987]. In stark terms he set out his concerns. As I recall the words, he put the point forcibly: “If you permit banks to securitize and sell their loans, they will lose interest in maintaining a strong credit culture and controls. And you are going to end up with even bigger crises.”

    • Perfectly apt, Phil. Thank you! Your blog post is spot on. And thanks also for the link to the article in Izvestia.

      “He also spoke of the perils of institutions that are too large or interconnected to be allowed to fail. Calling this the greatest structural challenge facing the financial system, he said we must shrink the risks these companies pose, ‘whether by reducing their size, curtailing their interconnections or limiting their activities.’”

      Does that mean we can shrink them down until they’re small enough to drown them in a bathtub?

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