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A plan by beleaguered Bank of America to foist trillions of dollars of funky Merrill Lynch derivatives onto its depositors is raising eyebrows on Wall Street.
The rarely used move will likely save the bank millions of dollars in collateral but could put depositors’ cash behind the eight ball.
The move also brought to light fissures between the nation’s top banking regulators, the Federal Deposit Insurance Corp. and the Federal Reserve, in the wake of new regulations meant to curb the free-wheeling habits that fostered the worst crisis in a generation back in 2008.
At issue is BofA’s decision to shift what sources say is some $55 trillion in derivatives at Merrill Lynch to the retail bank unit, which houses trillions in deposits insured by the FDIC.
Critics say the move potentially imperils everyday depositors by placing their money and savings at risk should BofA run into trouble.
Sources say that the derivative transfers from Merrill to BofA’s bank subsidiary were sparked by credit-rating downgrades to the bank holding company and are meant to help BofA avoid having to fork over more money to post as collateral to its derivative counterparties.
BofA officials who have talked privately say the move was requested by its counterparties and shouldn’t be perceived as problematic for the bank giant, sources said.
A BofA spokesman declined to comment.
For weeks, BofA CEO Brian Moynihan has been dogged about the health of one of the nation’s largest banking franchises and its massive exposures to toxic debt after its shotgun mergers with Merrill and Countrywide Financial during the credit crisis three years ago.
Under Moynihan, BofA has been attempting to right the bank’s ship and convince shareholders that the firm is healthy and doesn’t need to raise fresh capital to backstop against potential losses from faulty foreclosures and other mortgage-related lawsuits.
In the third quarter, BofA posted profit of $6.23 billion, or 56 cents a share, down 15 percent from the same period a year ago.
The bank’s shares gained 1 percent yesterday, to $6.47. They are off 51 percent this year.
BofA’s third-quarter performance comes as fears persist about the big bank’s ability to make money amid stiff economic headwinds and a host of potential land mines that could see it shelling out billions.
The derivatives transfer has irked officials at the FDIC which, sources said, was informed of BofA’s plan to shift the contracts to a retail deposit-taking entity just last week.
One source says that the FDIC is in the process of reviewing the transfer and will relay its opinion to the Federal Reserve.
But ultimately it’s the Fed that has the final say on authorizing any transfers.
Neither the Fed nor the FDIC would comment on BofA’s plans, which were first reported by Bloomberg.
The discussions about BofA’s move have created some tension between the FDIC and the Fed, with the Fed at one point accusing the deposit insurer of leaking BofA’s moves to the media.
For the FDIC, weighing in on BofA’s sleight of hand comes at a delicate time for Martin Gruenberg, who is awaiting Senate confirmation to officially be named FDIC chair, replacing the hard-charging Sheila Bair.