AFR Letter: BofA/Merril Lynch Transfer Poses Risk to Taxpayers

Read our letter to Chairman Bernanke, Acting Chairman Gruenberg, and Acting Comptroller Walsh here.

November 4, 2011

The Honorable Ben S. Bernanke


Board of Governors of the Federal Reserve System

20th St. and Constitution Ave. N.W.

Washington, D.C. 20551


The Honorable Martin J. Gruenberg

Acting Chairman

Federal Deposit Insurance Corporation

550 17th Street, N.W.

Washington, D.C.  20429


Mr. John G. Walsh

Acting Comptroller of the Currency

Administrator of National Banks

Washington, D.C.  20219

Dear Chairman Bernanke, Acting Chairman Gruenberg, and Acting Comptroller Walsh:

On behalf of Americans for Financial Reform, we are writing to express our concern over reports that, with Merrill Lynch under pressure, the Federal Reserve Board has permitted Bank of America Corporation to move large amounts of derivatives to its insured depositary subsidiary.

Americans for Financial Reform is an unprecedented coalition of over 250 national, state and local groups who have come together to support reforms in the financial industry. Members of our coalition include consumer, civil rights, investor, retiree, community, labor, religious and business groups as well as respected experts.

We know that ten U.S. Senators, led by Senator Sherrod Brown of Ohio, as well as eight members of the House of Representatives led by Representative Brad Miller of North Carolina, have already written you laying out a set of important questions on this issue. We want to emphasize our view that these are fundamentally important matters and the public has the right to be informed about them. Allowing a very large Wall Street bank to move risky assets in a way that could affect public liability in the event of a resolution would be contrary to all of our efforts to end public subsidies to ‘ too big to fail’ banks.

As you know, Section 23A of the Federal Reserve Act is designed to prevent an insured depository institution’s affiliates from benefitting from its federal subsidy and to protect it and the insurance fund from excessive risk originating within a non-bank affiliate. The depository subsidiary should be shielded from the risks in the holding company and if possible the holding company should serve as a “source of strength” for the banks. In this case the situation appears to have been reversed with the publicly insured deposit subsidiary being used to support the bank holding company. Moving these risky derivatives out of the holding company affiliate and into the retail bank could create substantial additional risks for the FDIC’s Deposit Insurance Fund should the bank fail. The safe harbors available for derivatives in bankruptcy procedures would complicate a resolution as well.

An exemption for Bank of America would continue a disturbing trend in which major investment banks have been granted 23A exemptions in order to transfer large derivatives books to their insured subsidiaries. During the financial crisis both Goldman Sachs and Morgan Stanley were granted such exemptions, despite the fact that they had only recently become bank holding companies.

If an exemption for Bank of America would violate the spirit of Section 23A, it would perhaps do even more to violate the spirit of the recently passed Dodd-Frank Act (DFA). Multiple sections of the DFA – such as Section 619 and 716 — call for greater separation between core banking activities such as deposits and lending and risky investment bank activities. While certain types of less complex derivatives can be a part of core banking activities, the full derivatives book of a bank holding company is likely to contain large amounts of essentially speculative derivatives.  Depending on the size and counterparties of any derivatives transferred, this transfer could also result in concentrations of credit exposures to individual clients or financial institutions above 10 percent of the bank’s capital. If so, this would exacerbate systemic risk and violate the restrictions on bank interconnectedness and concentration of credit exposure in Section 610 of the DFA.  As part of informing the public about these important issues, we would ask you to address the following questions:

  1. Has the Federal Reserve in fact approved a transfer of derivatives from Bank of America’s Merrill Lynch subsidiary to the bank’s insured depository subsidiary? If so, how large is this transfer in notional value?
  2.  If such a transfer has been approved, what public policy purpose does it serve?


  1. What impact would such a transfer have on the ability to safely resolve Bank of America without exposing either taxpayers or the Deposit Insurance Fund to additional losses that would not have occurred without the transfer?


  1. What impact would such a transfer have on the concentration of credit exposures and systemic risk?


Finally, and perhaps most importantly, if this transaction has taken place, we are disturbed by the lack of transparency and public discussion concerning it. A major lesson of the financial crisis is that key choices about risks taken at our systemically critical financial institutions are and ought to be matters of public concern. We urge you to provide public responses to the questions posed by the letters from Congress that you have received, as well as the questions above.

We look forward to your response.


Americans for Financial Reform