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Too Bigger To Fail

By Da King Published: April 16, 2012

When President Obama and the Democrats were pushing the Dodd-Frank legislation in 2010, Obama pledged the legislation would insure that "never again will the American taxpayer be held hostage by a bank that is 'Too Big To Fail'".

And if you believe that, I have a bridge to sell you.

Too Big To Fail has become Too Bigger To Fail:

 

Two years after President Barack Obama vowed to eliminate the danger of financial institutions becoming “too big to fail,” the nation’s largest banks are bigger than they were before the nation’s credit markets seized up and required unprecedented bailouts by the government.

Five banks -- JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. -- held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the U.S. economy, according to central bankers at the Federal Reserve.

Five years earlier, before the financial crisis, the largest banks’ assets amounted to 43 percent of U.S. output. The Big Five today are about twice as large as they were a decade ago relative to the economy
, sparking concern that trouble at a major bank would rock the financial system and force the government to step in as it did in 2007 with the Fed-assisted rescue of Bear Stearns Cos. by JPMorgan and in 2008 with Citigroup and Bank of America after the Lehman Brothers bankruptcy, the largest in U.S. history.

“Market participants believe that nothing has changed, that too-big-to-fail is fully intact,” said Gary Stern, former president of the Federal Reserve Bank of Minneapolis.

If that isn't bad enough, there's even worse news. The derivatives market (aka, currency and credit default swaps), which was one of the main culprits in the financial crisis, has grown from $600 trillion to $800 trillion over the last couple years, according to the U.S. debt clock, which derives it's information from the Bank For International Settlements. That's how great of a job Dodd-Frank has done in bringing "accountability" to the derivatives market. The Dodd-Frank "regulators" have stood by and watched the derivatives market grow even more out of control than it was before. In my opinion, there should be no such thing as a derivatives market. Derivatives represent a systemic threat to our entire financial system, and should be illegal. Where's that legislation to protect us ? Hello, Republicans ? Hello, Democrats ? Who are you working for ?

But I haven't even gotten to the worst news of all yet. Last year, the Federal Reserve dumped $75 trillion in derivatives onto the Federal Deposit Insurance Corporation (FDIC). That means the government is directly backing these derivatives, which means the American taxpayers are directly backing these derivatives. Here's that sorry tale:

 

Potential losses on Bank of America’s massive $75 trillion book of risky derivative contracts has just been dumped onto the FDIC by the Federal Reserve.

Derivatives, once described by Warren Buffet as “financial weapons of mass destruction” are complex contracts entered into for speculation or to hedge risks linked to a wide variety of other (derivative) financial instruments such as currencies, commodities, interest rates, bonds, etc. In testimony to the Financial Crisis Inquiry Commission in March 2011, Buffett warned that the trillions in derivatives held by major banking institutions could be “disruptive to the whole financial system” and that the risks were “virtually unmanageable.”

Regulators have fought to rein in risky trading in derivatives by banks under the Volcker Rule, but the banks have fiercely resisted and, so far, have been winning the battle. Derivatives contributed to the financial meltdown in 2008 when the government was forced to bail out giant insurance company AIG whose huge derivative bets exploded, putting the entire financial system at risk. Part of the problem is that due to the immense complexity of derivatives, regulators are unable to formulate rules that would effectively regulate them or reduce risks.

Instead of curtailing derivative trading, the major banks have expanded their risky trading. Bank of America, with a massive position of $75 trillion in gross derivatives, suddenly has a crisis on its hands. Nervous counter parties are demanding more cash collateral after downgrades of Bank of America’s credit rating. It’s 2008 all over again, nothing has changed and the risk of losses are once again being transferred to taxpayers...

This is how your government works for you !!!...By putting you on the hook for risky and complicated financial instruments that can swamp our entire economy, financial instruments that are larger than our entire economy five times over !!! Thanks, Big Government !!! You guys are the best !!!...Bank Of America gives you a big thumbs up, and so do the other too big to fail boys !!!

And people wonder why protest movements are springing up. Given the way our government is screwing us, it would be a big problem if they didn't. Onward, Tea Party !!! Onward, Occupier...well, you guys, not so much.

Too big to fail never left, and despite the thousands of pages of new rules in Dodd-Frank, things are worse than ever.

I'll leave you with the immortal words of Rep. Barney Frank (D-VT) from 2005 as comfort:

 


" I think we have an excessive degree of concern right now about home ownership and its role in the economy. Obviously, speculation is never a good thing. But those who argue that housing prices are now at the point of a bubble seem to me to missing a very important point. Unlike previous examples we have had, where substantial excessive inflation of prices later caused some problems, we are talking here about an entity — home ownership, homes — where there is not the degree of leverage we have seen elsewhere. This is not the dot-com situation; we have problems with people having invested in business plans for which there was no reality. People building fiber-optic cable for which there was no need. Homes that are occupied may see an ebb and flow in the price at a certain percentage level, but you’re not going to see the collapse that you see when people talk about a bubble. And so, those of us on our committee in particular, will continue to push for home ownership."

Thanks, Barney. Perhaps you can tell us again how there's nothing to worry about now that you have written your new legislation. I know that will sure make me feel better. I love a good fairy tale.

 

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