Remember that Bank of America bought Merrill Lynch? Merrill had a problem. It didn't have the ability to post enough collateral to cover its $54 TRILLION of derivative positions and was going to be forced into a Lehman bankrupcy. The Bank of America took them over and put that $54 Trillion obligation into a holding company.
On October 18th, Bloomberg news ran an article exposing the fact that Bank of America shifted the obligation from the holding company to its retail banking unit, Bank of America, NA. That $54 Trillion is now collateralized with your checking account.
Here's why they did it: They got pressured from the 'Too big to fail' banks and hedge funds who are counterparties to those derivative contracts and who will not get paid if the Holding Company didn't have the resources. B of A was going to have to put up an additional $3.3 Billion to keep them happy. Instead, B of A got clever and asked the Federal Reserve for an exemption to Section 23A, the section that applies to FDIC protected deposits in banks. With an exemption to 23A, B of A can (and did) literally collateralize these obligations with your money.
The concept is simple enough: Your money is guaranteed by the FDIC so if B of A can't pay the derivative obligations it can use your money to pay them off and you get repaid by the FDIC. And the tax payer is on the hook for the FDIC.
Naturally, the vastly underfunded FDIC objected to the deal and were overruled by Bernanke and crew. The were simply following precedent. Other financial institutions have similarly been allowed to pledge checking and savings accounts to cover their gambling risks. These banks include HSBC, Fifth Third, Bankcorp, ING, GE, Northen Trust, Citi, Morgan Stanley and Goldman Sachs. For example, JPMorgan Chase Bank uses its checking and savings deposits to secure 99% of the NY firm's $79 trillion of notional derivatives.
What the hell? Its one thing to set up the FDIC to cover us if a bank run starts but its another thing entirely to let banks take derivative risks and secure those risks with our money. Essentially, wall street gamblers are uploading all the counterparty risk to the Federal government - which ultimately means you and me.
Maybe Occupy Wall Street hasn't caught on to the real shenanigans going on out there but when more serious people figure this out, we're going to see some fireworks. The question isn't going to be whether the Wall Street Big Guys and the Washington Big Guys have been messing with us. There is no question. The question is going to be whether in our attempt to get control of the Wall Street Big Guys we inadvertantly or explicitly make the Washington Big Guys bigger.
How about we make them all smaller? How about we take away Washington's funding by instituting a mandatory balanced budget amendment, repeal the 16th amendment, replace it with FairTax and get rid of about 10 Federal agencies?
Now go play.