One Republican, One Democrat Take On TBTF Banks

[g5000]

Senators Sherrod Brown (D) and David "Pampers" Vitter (R) have sponsored a bill to take away the legislative advantages provided to our nation's largest banks. Read the bill for yourself before someone lies to you about what it contains: Text of S. 798: TBTF Act (Introduced version) - GovTrack.us


Here is my take on it, and you can read it for yourself to see if I am full of shit. Fair enough?

Basically, if a ginormous bank is backed by the full faith and credit of the Federal Reserve System and the United States government from every being allowed to fail, that is a kind of subsidy. The bank will receive a discount on any credit it receives because the risk the lenders perceive will be reduced by that "too big to fail" guarantee behind the bank. Don't worry, boys, whatever money you lend us, no matter how high we leverage, is backed by the American taxpayer.


This provides the TBTF banks an unfair advantage over smaller competitors in the marketplace. When you look at the economies of scale, that becomes a HUGE advantage. This is what I have referred to in the past as an unnatural concentration of wealth created legislatively that will not be solved by raising taxes on the guy in your town who lives in a bigger house than you.


Big banks these days are also allowed to gamble. Flat out gamble. They are actually exempted from state laws regulating gambling. This permits them to do what you and I cannot do. You and I cannot take out life insurance policies on our neighbors. And there's a good reason for that. The murder rate would skyrocket.

For the same reason, you cannot buy fire insurance against your neighbors' houses. Arson would skyrocket.

You have to have what is called an "insurable interest" before you can buy insurance. You have to demonstrate you face a real fiduciary loss if the object or person you are insuring is destroyed or dies.

Not so for Wall Street. A banker at Goldman Sachs can place a bet you won't pay your mortgage, even though that banker did not lend you the money for your house.


Anyway, Wall Street is leveraged out the wazoo with a whole universe of derivatives. And if their models got it all wrong, the financial world ends, as it did in 2008.

Just as an example, AIG was taking all kinds of bets on millions of mortgages burning down. Their models told them that Jesus Christ himself would arrive back on Earth before all those mortgages burned down. So they took those bets, believing it was free money.

Because they believed this, AIG did not set any money aside to cover those bets.

None. Zip. Zilch.

And so when those mortgages DID melt down, they had no cash to pay off the bettors. And gee, who were the bettors? The very people who built those mortgages. Hmmmm...

Arson.


So anyway, this TBTF Act will force banks that have assets valued at over half a trillion dollars ($500,000,000,000) to set aside 15 percent of their assets in reserve. And the reserve must be liquid assets.


But first, this Act directs the FDIC (the "Corporation") to conduct a study which is going to give every Libertarian a bad case of priapism.

The Corporation is to go back before there was an FDIC, before there was a federal income tax, and back before there was a Federal Reserve system. And find out what banks used to hold in capital reserve before there were any government safety nets.



Yeah. Are you feeling...engorged at this incredible prospect?


Not only that, the banks must also count all their off-balance sheet assets as part of their total assets which must be covered by 15 percent capital reserves.

Holy shit, it's the mother lode!



Read the bill. It's awesome.



The big banks are putting fresh batteries in their Great Whining Machines. The grinding and gnashing of teeth has begun.


Their smaller competitors are gobsmacked with Hope.


You see, every dollar a big bank has to hold back to cover their bets is a dollar they can't bet on your house burning down or that Greece will go up in flames, and that really, really, really, really pisses them off.


Read the bill. See for yourself. Do NOT take my word for it. Or anyone else's. Make your own judgments.

 

[Oddball]

The TBTF mega-bank that should be broken up and have all its special privileges removed is the Fed itself.

 

[g5000]

The TBTF mega-bank that should be broken up and have all its special privileges removed is the Fed itself.

It is federal law that no bank can have more than 10 percent of all US deposits.

In 2008, Congress waived that law for Bank of America so they could "rescue" Merrill Lynch.

The banks are bigger than ever. Bigger than before the crash.

"Too big to fail" is history. We are now living in a time of "too big to save". No one will be able to save them or us when the next crash comes.

 

[Oddball]

It is federal law that no bank can have more than 10 percent of all US deposits.

A law that the Fed is in clear violation of, if they're big enough to bail out anyone and everyone.

Any TBTF legislation should begin there.

 

[g5000]

It is federal law that no bank can have more than 10 percent of all US deposits.

A law that the Fed is in clear violation of, if they're big enough to bail out anyone and everyone.

Any TBTF legislation should begin there.

The bailout money came from Congress. Fed or no Fed, that money would have been printed, and Wall Street would have been bailed out.

So it is Congress which must be restrained. This bill will do that.

The Fed's real culpability lies in ZIRP. This is another gift to large banks as it requires massive economies of scale to earn any kind of real return on investments.

You and I are being robbed because we are earning virtually no money on our savings in order to keep the big banks propped up while they recoup their losses through carry trades facilitated by the Fed.

Consider this: If you invested $10 million in 2 year Treasuries in 2008, you would earn a comfortable $250,000 a year in interest.

Today, investing that same $10 million in 2 year Treasuries will net you a mere $24,000.

This is another example of what I am talking about when I tell Wall Street apologists they are defending the people who are stealing from them.

And these low returns are impelling investors to take gigantic risks in pursuit of a return.

"Never have investors reached so high in price for so low a return. Never have investors stooped so low for so much risk." - Bill Gross

 

[Oddball]

Where are they getting the money to pump up the stock market right now?

The have a big checkbook and no "reserves"....They are the root of the problem.

 

[BillyV]

Of course, to the extent these big banks are required to hold 15% in reserves vs. the 3-4% required by the FDIC, there will be a lot of creditworthy borrowers who will not find available funds, will not expand their operations or hire new workers. I also believe that the "too big to fail" banking problem needs to be addressed, but I think I would be more in favor of a break up than freezing that much capital on the banks' balance sheets; it seems to me you may have economic consequences.
On the other hand, the Bank of England seems to be in favor of the new legislation - of course, English banks are in competition with the US banks and will only be required to hold 7% (by 2015). Hmmmmm.....

 

[Oddball]

What's the reserve requirement for the Fed?

Who oversees them to ascertain that they're meeting that reserve requirement?