Bank of America Just Hit You Up, Hard

It's a bit complex, but here's the deal:

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… --Naked Capitalism quoting Bloomberg

IOW, BofA moved its high-risk assets from Merrill Lynch into the bank's portfolio--meaning that if BofA goes *poof* the FDIC (that's you, sucka!!) will take the hit on the CDS.

How did that happen?  Under the old scenario, where Merrill Lynch held the CDS,:

The operating units, most importantly, the banks, would not be affected and could be spun out to a new entity or sold. Shareholders would be wiped out and holding company creditors (most important, bondholders) would take a hit by having their debt haircut and partly converted to equity. This changes the picture completely. This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs.

The Fed (Bernanke & Co.) like this.  FDIC is apoplectic.

And you can bet that some Clark Clifford Pubbies (see below) are just fine with this, too.