Wednesday, May 07, 2014

Bank On It !!…..

Absolutely Shocking !!!

Headline - Extra! Extra!

"The Multi-Trillion Dollar Bank of America Has A Little $4 Billion Problem…"

"If you're a bank executive, it's never going to be easy to tell your shareholders: Oops, we made a $4 billion mistake!"
 - Gretchen Morgenson (NYT - 5/4/2014)

Well, that's exactly what Brian Moynihan, the CEO of BOA - the largest bank in the U.S. by many measures,  had to do last week. Got any idea where and how the little $4 billion oversight occurred? Let's take a look:

"The issue concerned so-called structured notes.  If you don't know anything about these, you're in good company.  In short, these are hybrid securities that include different types of financial products - say, a stock or bond plus a derivative.  In the present case, according to the WSJ, the notes were bonds with set maturity dates paired with related derivatives."

Located across the street
from NCUA !
Alexandria, Va
"The purpose of commingling products [with derivatives] like this is to change the risk profile - that is, to make the underlying securities less risky and thereby increasing or decreasing potential returns." - The Motley Fool (4/30/2014)

As I recall, one federal regulatory agency has
Located across the street
from The Motley Fool !
Alexandria, Va
recently adopted a derivatives rule while frankly admitting that the agency didn't have the staff expertise to monitor and provide oversight of derivatives…

Corner of Duke and Diagonal !
Alexandria, Va
Hate to keep repeating the message, but this is like watching an on-rushing train wreck in  slow motion…. 

Derivatives do not eliminate risk, they simply attempt to try and "transfer" risk to a more sophisticated financial counterparty - the "counterparty" is the credit union's partner in the derivative transaction.   

BOA is one of the top bank derivatives counterparties [partnering with credit unions] in the U.S. !

(On second thought, maybe writing off your NCUA deposit under the RBC rule does make a lot of sense. As the #1 credit union counterparty, NCUA looks increasingly risky…)

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