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Bill Black: BAC, has directed troubled financial derivatives from its Merrill Lynch subsidiary to federally
insured bank Bank of America making private risk public

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. Bill Black, the former financial regulator and author of the book The Best Way to Rob a Bank Is to Own One, has recently written an article titled “Not With A Bang, But A Whimper: Bank Of America’s Death Rattle”. He now joins us from Kansas City to talk about this Bank of America and Merrill Lynch shenanigan. Thanks for joining us, Bill.


JAY: So just tell us the basic facts here and why it matters.

BLACK: Bank of America has a holding company called BAC. The game always is to take bad assets out of the holding company and its subsidiaries and move them to the insured institution, the bank that’s insured by you and by me, the FDIC, backed up by Treasury, because that’s where they’d rather have the losses, for obvious reasons: that’s where they can get a bailout. So here’s the deal. Bank of America Corporation’s credit ratings have been chopped recently because it has really bad financial derivatives. So Bank of America Corporation said, these bad derivatives are mostly at Merrill Lynch; why don’t we transfer them to Bank of America, the insured depository institution, which will expose them to the losses instead of us to losses? Right?

JAY: Yeah.

BLACK: Now, that’s insane that–the rules are designed to stop precisely that, and any normal regulator would say, no, hell no–except, of course, that’s what the FDIC tried to say. And so, according to press reports, the holding company and Merrill Lynch just [went] to the friendly Fed, and the Federal Reserve, which represents the 1 percent, not the 99 percent, said, sounds like a great idea to us; that’ll help the bank holding company, which is what we regulate, and we don’t much care what it’ll do to the insured institution and Treasury. And so they not only said this deal was okay; they apparently worked together with Bank of America to say, don’t even bother to file an application that the FDIC should say no to; just transfer this. And this is the good news. The bad news is–that has become public as part of this–that Merrill Lynch has an estimated $75 trillion–.

JAY: Okay, say that number again, $75 trillion.

BLACK: Seventy-five trillion dollars, which is bigger than the world’s economy, basically.

JAY: Seventy-five trillion dollars of rotten, toxic derivatives.

BLACK: Maybe not all of them rotten–indeed, I’m sure not all of them are rotten. But there is an incentive to take the rottenmost ones and transfer them to the insured institution, and that way the credit rating of what remains will be better. So this has really perverse incentives. And, of course, if they send any–even the tiniest portion of $75 trillion to Bank of America, they assure that Bank of America will fail. In fact, of course, this very conduct tells us that they’re afraid that failure is imminent. So this is completely outrageous behavior.

JAY: Yeah, because the point here would be, if you think Bank of America’s going to fail, then dump as much crap into it as you can and get rid of it in the failure.

BLACK: That’s–and that’s always the game, and that’s why the rules have always been designed to protect against exactly this.

JAY: And so, just for people that sort of connect the dot here, because Bank of America is insured, then people, when it goes down, all these depositors are going to get repaid through the insurance plan, and Merrill Lynch gets to get rid of all the toxic stuff.

BLACK: Yeah, and that means that there’s far fewer dollars left to pay the liabilities that will come with these derivatives. And as a result, the hit to the Treasury will be much bigger. And the final kicker is this: none of this would have been legal but for the repeal of Glass-Steagall. And so this is yet another of those gifts that keep on giving, the deregulation (in this case on a bipartisan basis in the Clinton administration) that produces the potential for catastrophic losses to the taxpayers.

JAY: So now this has gone public. Is it happening?

BLACK: It already happened is what we hear. Now, that needs to be reversed and we need to block further transfers. The odds are that the story came out because someone at the FDIC leaked it because they despaired, you know, with the Fed pushing the deal, that they’d ever be able to protect the taxpayers. The Senate, of course, can hold hearings; the Democrats still control the Senate, and they could have hearings. And you would hope and pray that the Republicans would find this appalling as well and would hold prompt hearings. But it is a real-world test of two hypotheticals.

JAY: Well, maybe you get another Kucinich-Paul thing happening in the House and they could do something. They did push for some accountability of the Fed.

BLACK: That is correct. And here we had a real-world test: does the Fed represent the interest of the American people, the 99, or does it represent the interests of the 1 percent? Well, actually, it’s the 0.001 percent. And, unfortunately, I don’t think many people are going to be surprised in America that they went with the 0.001 percent of the wealthiest.

JAY: Thanks for joining us, Bill.

BLACK: Thank you.

JAY: Thank you for joining us on The Real News Network.

End of Transcript

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William K. Black, author of The Best Way to Rob a Bank is to Own One, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics.

Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.

Black developed the concept of "control fraud" frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.