Courtesy of Pam Martens
Turns out the federal government’s plan for dealing with a mega bank failure on Wall Street is no better conceived than the federal government’s plan for dealing with the worst pandemic since 1918.
The Federal Reserve issued two press releases yesterday about “large banks.” One read: “Agencies finalize rule to reduce the impact of large bank failures.” The other read: “Agencies issue final rule to strengthen resilience of large banks.”
Wait. What? Fed Chairman Jerome Powell has been telling anyone who would listen this year – from Congress to viewers of the Today show – that the large banks have been a “source of strength” during the worst economic downturn since the Great Depression. If that were true (which we’ve questioned from the first time Powell said it) why is the Fed now worrying about a “large bank failure” and the need to “strengthen” large banks?
The first press release from the Fed yesterday deals with the fact that the biggest banks on Wall Street remain interconnected to one another. If you recall, in 2008 the interconnections of Lehman Brothers, Citigroup and AIG to the biggest banks on Wall Street created a daisy chain of rapid meltdowns across Wall Street.
So federal regulators had this plan: They would make the largest banks issue TLAC debt – “Total Loss Absorbing Capacity” debt. The idea, according to the regulators, was that this “debt could be used to recapitalize the holding company during bankruptcy or resolution if it were to fail,” rather than putting the taxpayer on the hook for another massive bailout like 2008.
Now, if you read between the lines of the finalized rule, it would appear that the banks have attempted to game this plan by buying up their own and/or each other’s TLAC debt, thus increasing the very interconnectedness and systemic risk that the federal regulators were trying to avoid. So the federal regulators, including the Fed, are going to spank the large banks by penalizing them on what they will count toward their regulatory capital if they hold their own or other bank’s TLAC debt.
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