Daily Archives: February 11, 2015

Bank Of America Used Government-Backed Funds For “Reckless, Extremely Levered” Tax Avoiding Trades


Today we find why yet another bank, Bank of America, has been extremely incentivized to preserve the post Glass-Steagall world in which cash depositing taxpayers are on the hook for a bank’s stupidity, and more impotantly, to make the uber-wealthy even uber-wealthier.

Recall that back in 2013, it was JPMorgan’s CIO Office, aka the London Whale, which, taking advantage of fungible, taxpayer-insured funding in the form of excess US deposits over loans, proceeded to attempt and corner the IG9 market in what was clearly a directional prop trade and which launched what is now a quarterly tradition of billions of non one-time, recurring legal charges for Jamie Dimon. As everyone knows by now, the London Whale trade (and its employees) blew up spectactularly and it was only a forced intervention by management which prevented impairment to the company’s depositors.

Now it is Bank of America’s turn to disclose that it, too, was being ridiculously cavalier with taxpayer-insured deposits. Only instead of traying to make money directly by letting its prop traders trade with deposit proceeds (actually, it did that too) BofA decided it would be more lucrative to use its government-backed subsidiary to “finance billions of dollars in controversial trades that helped hedge funds and other clients avoid taxes, according to internal documents and people familiar with the matter.

According to the WSJ which broke the story, BofA had been engaging in a “practice of using funds from its U.S. banking unit to finance transactions by its European investment-banking arm that, among other things” which helped hedge funds avoid taxes on stock dividends, according to the documents and people.

The practice dates back to at least 2011, when senior Bank of America investment-bank officials in London started pushing subordinates to adopt the policy in order to take advantage of the lower funding costs enjoyed by the U.S. unit called Bank of America National Association, according to internal emails and the people familiar with the matter. The goal was to attract more hedge-fund clients to Bank of America’s European investment-banking unit, including clients that were engaged in the so-called dividend-arbitrage tax trades.

Bank of America National Association, or BANA, is home to the company’s vast U.S. retail-banking network, including the majority of its federally insured deposits. BANA pays less to borrow money than business units that engage in riskier investment-banking activities.