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April 30, 2010

First-Time Resolution on Derivatives Wins 39% of Shareowner Vote at Bank of America
    by Robert Kropp

Strong support for resolution follows a 30% vote in favor at Citigroup; votes at Goldman Sachs and JP Morgan Chase are next.

SocialFunds.com -- Stating that “For many years, the proponents have been concerned about the long-term consequences of irresponsible risk in investment products,” a shareowner resolution requesting that Bank of America report to shareowners on its policy regarding “the use of initial and variance margin (collateral) on all over the counter derivatives trades” won 39% of the vote at the company’s annual meeting yesterday.

The resolution, filed by members of the Interfaith Center on Corporate Responsibility (ICCR), also requested that Bank of America “ensure that the collateral is maintained in segregated accounts and is not rehypothecated.” Rehypothecation refers to the practice by financial institutions of taking in collateral as guarantees on derivatives trades, and then using it as collateral for their own transactions.

The resolution also points out that “assets of the largest financial institutions were leveraged at the rate of over 30 to 1” leading up to the financial crisis, contributing to its severity and resulting in a global recession.

The vote at Bank of America follows last week’s 30% vote in favor of the same resolution at Citigroup. The resolution is scheduled to be voted on by shareowners at the annual general meetings of Goldman Sachs on May 7, and JP Morgan Chase on May 18.

The four financial institutions targeted by the resolution are among the five companies that are reported to account for 96% of all derivatives trading in the US. According to an article in today’s
New York Times, the financial reform legislation currently being deliberated in the US Senate could cause the banks to lose up to 41% of their annual earnings.

Public outrage at the complicity of large financial institutions in the financial crisis has led to calls for strict measures to help prevent a reoccurrence. The four largest banks in the US—Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo—reportedly hold $7.4 trillion in assets, or more than half of the nation’s Gross Domestic Product (GDP). Three of the four banks are larger now that they were before the TARP bailout, and calls for the breakup of such large institutions are mounting.

Another measure that is gaining support is the return of the Glass-Steagall Act, enacted in 1933, which established the Federal Deposit Insurance Corporation (FDIC) and prohibited commercial banks from engaging in investment banking or insurance. The Glass-Steagall Act was dismantled by deregulation measures enacted by Congress in 1999.

In addition, the Volcker Rule, which would restrict banks from making investments that are not on behalf of their customers, has been publicly supported by the Obama administration.

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