There's a good discussion with William Black, "white-collar criminologist" and Associate professor of economics and law at the U of MO-KC, on Democracy Now! today, including this excerpt:

"...it just broke yesterday that affiliates of Bank of America—this is Merrill Lynch—with really bad derivatives, has been allowed by the Federal Reserve to transfer perhaps many billions, or perhaps even trillions—we don’t know—of these derivatives to Bank of America, which is where we come in as a federal guarantee, and it puts us on the hook as the government. This is obscene public policy, the kind that would have never been permitted in our era. And now, under a Democratic president that rails about excess influence and not putting the taxpayers at risk, that’s exactly what they’re doing.

So, the story on the regulatory side, we had the leading failed regulator in a Federal Reserve Bank, Geithner, and they promoted him to Treasury secretary. We had the leading failed regulator in America, Bernanke, and he was reappointed. So that—and most of the wrecking crew was left on as temporary folks, so most of the wrecking crew is still in place. We have almost no effective regulation, and it’s showing up. They hid the losses by changing the accounting rules through congressional extortion of the Financial Accounting Standards Board. And these problems don’t go away. They just fester, and they pop up three years later. And they’re going to keep popping up until we start telling the truth.
http://www.democracynow.org/2011/10/19/former_financial_regulator_william_black_occupy

There's a special place in hell waiting for these people.

Oh, Hank Paulson probably isn't smiling. Maybe later, though, after he's finished masturbating like a caged ape.

There are derivatives and then there are derivatives, like ETFs that many of us ordinary investors hold in brokerage accounts. What is being transferred could be as mundane and T-Bill or T-Bond Indexes, next month futures, the Dow 30 or the S&P 500. The linked article is remarkable in its lack of specificity and lucidity.

The derivatives that are being transferred are reportedly the worst of the worst. They are being unloaded on Bank of America. Merrill Lynch is trying to remain in business, knowing it would be politically difficult to get a bailout. This is a way to get a bailout without having to ask for one.

Now contrast this behavior with the spin that is taking shape:
The problem here is poor people who didn't work hard enough to become rich.
I heard a pundit on Fox Business News openly mocking Greece for not being able to get its act together, without so much as a mention that Greece only got into trouble by dealing with Goldman Sachs under the direction - at the time - of Henry Paulson.
The corporate media deliberately ignores or distorts what happened, and then the pundits say, "My, these protesters seem so uninformed."

This is obviously shady, but are these really insured "deposits?" Banks can hold assets other than deposits, and FDIC insurance--as far as I know--is still limited to $250k per account holder. Is this really more in the "too big to fail" ledger than the insurable deposit category? Anyone know for sure?

Speaking of the Bank of America (BAC) -- lender of choice for the City of Portland -- the O's Stuart Tomlinson has provided this account of how the virtually involuntary theft of the modest sum of $565 from a local BAC has resulted in a sentence in a federal court of two years, with one left to serve, for a 52-year-old Portland man:
http://www.oregonlive.com/portland/index.ssf/2011/10/convicted_bank_robbers_homeles.html

Mr Tomlinson has not calculated the cost of apprehending and prosecuting this straight-talking but desperate man.

Nor has Mr Tomlinson mentioned that no one at BAC has been apprehended, tried, or sentenced for willfully removing billions of dollars from the pockets of millions of people.

The judge in this case, Malcolm F. Marsh, has "split the difference" between prosecution and defense recommendations in awarding the defendant a year in federal prison. (Calculation of cost to the economy?) J. Marsh has opined that another year in jail should be enough for the confessed bank robber "to stabilize his life."

Neither J. Marsh nor Mr Tomlinson makes reference to the three years BAC has enjoyed to "stabilize" its life (for corporations are people, too) after an injection of $45 billion in TARP money. Nor have they publicly ruminated upon the possibility that life stabilization is not a straightforward process, as suggested by the latest news of BAC's ongoing difficulties.

J. Marsh has, however, proffered a kernel of tentative, unexamined wisdom:

“'This case shows how much we may not know about the plight of the homeless.'"

Add'l details here:

http://www.nakedcapitalism.com/2011/10/bank-of-america-deathwatch-moves-risky-derivatives-from-holding-company-to-taxpayer-backstopped-depositors.html

"Hank Paulson probably isn't smiling."

Puh-leeze, in one week he put his competitor (Lehman) out of business, kept his stock (and all his fortune) in Goldman-Sachs alive and even better gave AIG $70B to pay G-S with.

Then again with Paulsen and his auto-erotic activities - Self-love is the truest love.

Whatever happened to putting an end to "too big to fail"?

observer,
I make no claims of understanding all this completely, and that includes your question, but here goes:

The "too big to fail" component is in play because the Fed, etc..will do anything to keep Merrill Lynch going. So "too big to fail" is driving this. When derivatives go bad at Merrill Lynch, it would require another huge transfusion of cash to keep it running.
The Fed has already been secretly pulling trillions out of the air to keep the banks alive and by extension to keep the stock market from crashing. It would be tough to try and sell another bailout that we know about publicly.

However, a bailout to fund the FDIC after it's swamped by these derivatives and burns through its funds from member bank fees, would be an easier sell, the way it is easy to decide to give a mugger your wallet, if they are pointing a gun at you.

If the bank accounts of individuals disappear and they are not paid back from FDIC, the temple really does come down. Suddenly, there would be zero confidence in putting your money in the bank. I think we all saw that movie. The difference is Jimmie Stewart was not exposed to 75 trillion in derivatives in "It's a Wonderful Life."

So with that dire threat aimed at the system, a bailout for the FDIC - as it is continuously drained by paying off the newly transferred derivatives - would be a must do.

The conclusion nobody wants to reach is that we're looking at a new level of desperation here. It all comes back to these shocking derivative numbers. How is Bank of America Corp able to create 75 trillion dollars of financial risk on its own? That's always been the problem. Not greed. Not capitalism. Derivatives. That is what's killing us.

One little extra tidbit I recently learned: The motivation for the Triple A rating on these junk security swaps was in part because pension funds had to have that to buy into this instrument. So the Triple A thing was a deliberate fraudulent con specifically designed to widen the pool of victims to include teachers, and firemen, etc..whose funds couldn't invest unless the triple A rating was there. Makes you feel warm all over, doesn't it?

There's an entire second tier of criminal behavior here that I don't even get into. All the shenanigans to front load the mortgage system to give Wall Street some more products to convert to derivatives. Why even bother dwelling on that now? Mortgages were the raw materials. It's all about derivatives.

So secondary stuff like selling the mortgages in more than one security swap, or including them even though they had already been foreclosed on? These outrageous crimes are misdemeanors in the big picture. Just follow the derivatives as we try and keep the temple up. They are weapons of mass financial destruction as Buffett said, with one exception. These have to go off sometime - the bombs don't.

At this point we are rushing from one support column to the other in the temple hopelessly trying to prop them up, by any means, criminal or otherwise. This latest move is an example of big chunks of the ceiling starting to crash to the floor. It seems more and more likely that the whole temple's going to come down.

observer - Changes to the bankruptcy laws in 2005 mean that derivatives counterparties are first in line in the event of a bankruptcy. It looks like Europe's banks will probably have a crisis within the next month or so, in which case a lot of these derivatives are going to require more collateral to be posted. This is basically the same thing that caused Lehman Brothers to fail in one weekend back in '08. So if BAC becomes insolvent, then the derivatives counterparties are paid first from the bank's deposits, and then the FDIC has to pay the account holders. Of course the FDIC doesn't have that kind of money, so they'd have to go to Congress to get additional funding. BAC knows Congress wouldn't approve another AIG-like bailout, but they won't hang account holders out to dry. Very sneaky.

The Naked Capitalism article that CM linked to has more detail, but is more technical.

Here's a little edited snippet from Bloomberg:

Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina.

In 2009, the Fed granted Section 23A exemptions to the banking arms of Ally Financial Inc., HSBC Holdings Plc, Fifth Third Bancorp, ING Groep NV, General Electric Co., Northern Trust Corp., CIT Group Inc., Morgan Stanley and Goldman Sachs Group Inc., among others, according to letters posted on the Fed’s website.

Time to bring back Glass-Steagall.

The first television commercial for Occupy Wall Street will be hitting the airwaves soon --
http://www.dailykos.com/story/2011/10/19/1028063/-Occupy-Wall-Street-TV-commercial-set-to-hit-the-airwaves

Also courtesy of DailyKos: Adbusters, which initiated the original call to Occupy Street, is now calling for global marches on October 29 in favor of a 1 percent 'Robin Hood tax' on all financial transactions and currency trades. If you are unfamiliar with the Robin Hood tax, this film with Bill Nighy from RobinHoodTax.org explains --
http://www.youtube.com/watch?v=qYtNwmXKIvM

Meanwhile, back in the boardroom....

Romney's Housing Plan: 'Allow Investors to Buy up Homes' by Accelerating Foreclosure Process

Ahead of tonight's GOP debate in Las Vegas, Mitt Romney tells the Las Vegas Review-Journal that the problem in housing is that banks haven't been allowed to foreclose on enough people, making it more difficult for investors to buy underpriced properties to rent to former homeowners ( Oct 18, 2011) --
http://www.dailykos.com/tv/w/002901/

Great discussion! Thanks Bill and others for your perspectives.

I think JD in the NE could have added a crucial clue here about the changes to derivatives in the Bankruptcy Act of 2005.

Wall Street types like Henry Paulson love to play ignorant about their knowledge of the scope of the derivatives problem as it unfolded.

I always thought that was B.S. Somebody in 2005 had that stuck in the new act because the Street knew damn well what was coming. I always suspected Henry Paulson went to Washington - not so much to help America - but to manage the crisis in a way that would protect the bankers.

I don't buy the "aww, shucks, I was caught off guard" routine. Henry Paulson went to Washington to use the Federal Government - not to help it.

Gardiner Menifree:

Do you really believe that sentences for bank robbery should be dependent on how much money they stole?

I know several bank tellers who would disagree.

Maybe assault perps should only be punished if the victims' injuries are long lasting?

Maybe DUII shouldn't be prosecuted unless they hit something?

A slippery slope indeed.

A friend put it succinctly:

It's just a new casino that has opened. You have to be a club member. You can bet as much money as you want. Never your own money, you get to keep most of the winnings, and you aren't responsible for losing. Anything else said is just a smokescreen.

Do you really believe that sentences for bank robbery should be dependent on how much money they stole?

Not trying to speak for anyone here but I really don't see where Gardiner Menifree has said anything of the sort. I just read an excellent piece (an excerpt from a book by Glenn Greenwald) that gets to the heart of the matter: the unequal application of the rule of law.

http://www.truth-out.org/liberty-and-justice-some-how-law-used-destroy-equality-and-protect-powerful/1319036965

For all the homage we pay to equality under law, we have virtually abolished it in practice. Indeed, beyond isolated, politically motivated rhetoric, we hardly even pretend to believe in its validity any longer. Instead, the United States now has the exact opposite of a single set of laws before which everyone is equal. It has an entrenched two-tiered system of justice: the country’s most powerful political and financial elites are virtually immunized from the rule of law, empowered to commit felonies with full- scale impunity and to act without any constraints, while the politically powerless are imprisoned with greater ease and in far greater numbers than in any other country on the planet.

Transforming aid for the poor into precisely the opposite.

Create a program to exclude individuals from buying a large pool of available homes. Then demand financial aid for institutional and governmental bulk buyers, at discounted prices to rent them out:

"Investor financing would serve to stimulate investor demand and further cushion home price declines." (Amherst)

Source: REO Clearance Hinges On Investor

I say let home prices fall to their natural equilibrium with income.

Repeal all the bailouts.

The bankrupt BoA would whine that their unearned gifts cannot be taken back, under Winstar, to which I would insist that the BoA was not granted immunity from 18 USC 1014 and comes to court with unclean hands as to criminally overvalued collateral.