Dems demand answers on Bank of America’s derivatives deal

{mosads}At issue for the lawmakers is the news that Bank of America transferred an undisclosed amount of derivatives from Merrill Lynch, an investment subsidiary of the bank, to Bank of America NA, which is its retail banking arm.

First reported by Bloomberg, the lawmakers are concerned the deal results in the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits, “effectively subsidizing” high-risk deals, at the cost of the American taxpayer.

“It appears highly likely that losses on derivatives would result in looses to insured deposits ultimately borne by taxpayers,” they wrote.

The transfer reportedly came about after concerns that Merrill would have to post another $3.3 billion in collateral to back the deals following a credit downgrade. The retail banking arm has a higher credit rating and therefore would be required to post less collateral.

The lawmakers want regulators to determine if the derivatives were moved to avoid the additional collateral obligation. In addition, if the derivatives prove risky, they want to know if placing them under the umbrella of a federally insured bank poses a threat to the financial system.