Invest in Gold - and the Chinese Renminbi

Bank of America transferring $75 trillion (nominal value) in derivatives from the Merrill Lynch unit to the commercial banking unit.

This could be just a clever accounting scheme to save Bank of America some money. BofA has estimated that a two-credit rating downgrade - which has already happened - would mean paying an additional $3.3 billion in collateral or termination fees. Or, this could be in preparation for a possible future bailout.

Regardless of the reason for the move, someone at risk management messed up. They clearly performed a stress test of a two-rating credit downgrade. I really wonder about the internal conversation after the stress test. Did it go something like this?: "Well, the stress test doesn't look good. If a two-step downgrade happens, we'll have to switch all the derivatives to the commercial banking unit. We're not sure if that's allowed, but we'll find out when we get there." That doesn't exactly sound like a great contingency plan. Even if this isn't related to a possible bailout, I'm concerned by the unconventional risk strategy here.

However, our readers are more concerned with the possibility of the federal government bailing out BofA should these derivatives go badly. Of course that's a real concern; but why is there sudden anxiety over this possibility? Folks, this is 2011, not 2007 - did anyone not expect Bank of America to receive a bailout in the event of another crash? It's the second-largest bank in the US, only recently dethroned by JP Morgan Chase. The Fed and Treasury won't let BofA go the way of Lehman Brothers.

The Fed has bailed out numerous banks, maintained near-zero interest rates for three years, promised two more years of low rates, enacted QE2, and most recently started to twist Treasuries. Perhaps if BofA fails, these guys would show some restraint? Let's not be naïve here. It doesn't matter where those derivatives are - the commercial unit, the Merrill Lynch unit, or the Planet Mars Bank of America branch expansion unit. As long as Bernanke and the boys are in power, those derivatives are insured by the American taxpayer.

During 2008, bailout opponents warned the supporters of creating a moral hazard with their actions. The proponents argued that this was a one-time event. Even some supposed free-market types supported the bailouts. And where are we now? Just look at Europe's situation with Portugal, Ireland, and Greece - and most recently Dexia Bank. Bailouts were not a one-time event - they have become the policy norm for central banks and governments around the world. Unfortunately, the possibility of a BofA bailout isn't news to me. This guarantee has been baked in the cake since 2008.