Bank of America dumps $75 Trillion in derivatives

According to Bloomberg reports, the Bank of America has transferred about $22 trillion worth of derivative obligations to the FDIC insured deposit division. Besides, the FDIC insured unit was already filled with $53 trillion of obligations, making a total derivative worth of $75trillion.

Derivatives are used to hedge financial risk from time to time, but mostly for speculation. The speculation is betting on stocks, bonds, mortgages, commodities and financial indices. Banks like Bank of America issue derivatives which are highly profitable to issuers and generate big bonus to executives who manage them when the derivatives are not triggered. And when the derivatives are trigged the obligation falls upon the issuer entity rather than executives. As for Bank of America, by putting the derivatives in insured retail banks and the insured retail division, the obligations falls upon taxpayers and savers. The value of derivatives is so large that the United States has to pay off the obligation by dollar depreciation if the derivatives are triggered.

The derivatives betting on the default of mortgages are the catalyst in the global financial crisis in 2008, rather than the subprime mortgages. It is the derivative obligations of AIG that implode the insurer. With the fear of contagion, US government issued billions of dollars to bailout AIG counterparties---the biggest banks of Europe and America. Without the bailout, banks on Wallstreet have gone to bankruptcy, followed with bunch of European and Asian banks.

Not like AIG and other banks on Wallstreet which could have been allowed bankruptcy, the derivatives closely tied with FDIC insured division make the obligations have to be paid by US government. There is no choice for except the default. Bank of America is insured by FDIC, with the protection of the Federal Reserve. When obligations are triggered, FDIC and counterparties of Bank of America will be bailed out as guaranteed by the US government credit. Therefore, the risks are directly transferred to taxpayers and dollar savers.

It is a good case in point that the bank-controlled entity poses power over nation’s credit system. After financial crisis in 2008 such power has become more rather than less and the instability problem still exists. Another example is JP Morgan is allowed to issue derivatives insured by FDIC retail banking Unit. With such power over the national monetary the taxpayers and savers will never be protected.