Magazine article American Banker

B of a's Bailout of Fund Raises No Red Flags at Fed

Magazine article American Banker

B of a's Bailout of Fund Raises No Red Flags at Fed

Article excerpt

WASHINGTON -- Bank-America Corp.'s recent bailout of a proprietary mutual fund managed by its lead bank set off no alarm bells at the Federal Reserve, according to Fed Governor John LaWare.

In an interview this week, Mr. LaWare characterized the bailout as an "unusual circumstance" that raises no concerns about the safety and soundness of the banking system.

"They had the integrity of the whole corporation to defend because a serious problem with an affiliate could affect the confidence of the bank, even though there were no bank funds involved," Mr. LaWare told the American Banker.

"But it doesn't concern me from the standpoint of the safety and soundness of the banking system," he said.

Some Lawyers Disagree

Industry lawyers, by contrast, say the incident reveals the real risk that banks face in this business, namely exposure to losses by proprietary funds, and argue that regulators should pay more attention to that area.

Mr. Laware said that although the amount of the bailout was "peanuts," the episode nonetheless has probably caused the bank to reevaluate the appropriateness of the instruments used and the fund's risk management system.

But at the Fed the incident has raised no questions about the use of derivatives by bank-managed mutual funds.

Repeating an argument he has made on the use of derivatives generally by banks, Mr. LaWare said the critical issue is not whether derivatives are used, but how their risk is managed.

Strong Response

Responding to a question about a recent meeting of the Fed's Consumer Advisory Council at which several members supported bank testing by federal regulators, Mr. …

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