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All U.S. Regulators Admit: Banks Are Too Complex To Fail, May Have To Be Broken Up
6 August 2014
Aug. 6, 2014 (LPAC) — "Bailout Barney" Frank repudiated: On Aug. 5 the Financial Stability Oversight Board (FSOB), consisting of the major U.S. bank regulator agencies, said U.S. megabanks are too big and complex to allow to fail, and their "living wills" mandated under the Dodd-Frank Act of 2010 are a useless sham. Moreover, the regulators left open the possibility that they may have to move in mid-2015 to break up the "top eleven." So much for Barney Frank’s July 22 testimony at the House Financial Services Committee, where he claimed to Rep. Lacy Clay’s (D-MO) question that restoring Glass-Steagall was not necessary or useful, because the Dodd-Frank Act had taken care of all the major problems in the banking system. Congress should not wait for mid-2015, but restore Glass-Steagall and start the Wall Street break-up now. Since big bank failures have already returned to Europe (Banco Espirito Santo, Portugal; Hypo Alte Aldria Bank, Austria) and are now spreading, it is ominous that the U.S. regulators’ statement says that the banks’ so-called living wills "fail to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for an orderly failure." By "orderly failure" they mean a big bank failure which doesn’t trigger a general bank panic and collapse, and doesn’t bring on bailouts in the hundreds of billions. When did such "orderly failures" last occur? When Glass-Steagall was still in effect and being enforced (failure of Drexel, Burnham, Lambert in 1990, failure of Solomon Brothers in 1991). Since the regulators, like Supreme Court justices, were contributing separate versions of the opinion, FDIC vice-chairman Thomas Hoenig added: "In my view each plan being discussed today is deficient and fails to convincingly demonstrate how, in failure, any one of these firms could overcome obstacles to entering bankruptcy without precipitating a financial crisis. Despite the thousands of pages of material these firms submitted, the plans provide no credible or clear path through bankruptcy that doesn’t require unrealistic assumptions, and direct or indirect public support." [Emphasis added] This is crushing, because only in June Hoenig had told the Economics Club of Washington that the bank "living wills" were the "best hope" for liquidating a big bank that is failing, through a bankruptcy (Title I) procedure — in contrast to Dodd-Frank Title II "bail-in", which Hoenig said did not offer such hope. The Wall Street Journal called the regulators’ report "a sweeping rebuke to Wall Street." The "Heard on the Street" column by David Reilly said "this is the nuclear option." Janet Yellen’s Federal Reserve, trying to soften the blow, gave the banks 11 months to produce something credible, or else be told to "make divestitures" (sell off some units). Each major bank now has a mind-boggling 2,000-3,500 subsidiaries, making this Fed threat wholly inadequate. The FDIC was tougher, voting unanimously that the 11 banks’ plans were "not credible." This triggers the requirement for immediate new plans, or moves toward breaking up the banks. The Journal said the report "will likely feed the appetite of some lawmakers to push for more aggressive action to force structural changes at the biggest banks." Will it? Or are those lawmakers too gutless and/or addicted to Wall Street cash? [Paul Gallagher] |