Via Naked Capitalism comes this lovely Bloomberg piece:
Pay attention; this is good stuff.
Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.
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.
Moody’s Investors Service downgraded Bank of America’s long-term credit ratings Sept. 21, cutting both the holding company and the retail bank two notches apiece. The holding company fell to Baa1, the third-lowest investment-grade rank, from A2, while the retail bank declined to A2 from Aa3.
The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions.
Wait a minute. Why would the retail unit have a higher credit rating? Why would Merrill’s derivative counterparties want those contracts to be held by the retail unit? You know, the retail unit with $1 trillion of deposits, which are insured by the FDIC, which is backed by the U.S. Treasury?
If you happen to have an account with Bank of America, would you do me a personal favor and close it? And if you know anybody with an account, would you please ask them to close theirs, too?