Little surprise this week that the Federal Reserve and FDIC have assigned failing grades to Wall Street’s ‘too big to fail’ banks assigned to writing ‘living wills.’
As a frame of reference, these ‘living wills’ are required by the Dodd-Frank legislation intended to reform Wall Street and prevent the need for another government bailout of our ‘too big to fail’ banks.
Really? Well, in theory anyways.
Why is it that our ‘too big to fail’ banks cannot write ‘living wills’?
The answer is actually fairly simple and straightforward. How can individual banks provide answers and guidelines to a systemic issue, that being the risks within the quadrillion-sized (that’s a thousand trillion, folks!!) derivatives market? They can’t.
As the writer at the link above points out, the derivatives market dwarfs the size of our global economic GDP by an order of magnitude of 20 to 1. Industry insiders would likely pan that assessment and promote the concept that a lot of the risk is effectively netted out. What an absolute crock of bull$*&#!!
What good is a netting process when the storm washes over the entire house of cards? Great question. We learned in 2008 that when a large enough storm begins to wash over individual firms, the derivatives market does not mitigate the systemic risk but rather accelerates it.
How do the brain surgeons housed within financial regulatory offices propose to deal with this issue?
Watch your wallets, folks!!
We read this morning that in times of future crises regulators are proposing to temporarily suspend the insurance payments that would otherwise be required in the terms of derivatives contracts. What does that mean? Let me put it in layman’s terms. It means that the insurance policy you bought on your home would not necessarily payout for an extraordinary event. Really? Yep.
The WSJ provides a brief technical review of this reality in writing,
