So the markets are getting skittish and the media is obsessing about the many things that could go wrong out there. It’s like 2007 all over again, but with one big difference: Back then the mega-banks were reasonably sure the government would, if necessary, bail them out of their hundreds of trillions of dollars of derivatives liabilities. Otherwise, as they actually did tell a befuddled George W. Bush in 2008, the next day would see martial law declared.
Then, in the wake of the near-evaporation of the global financial system caused by the aforementioned derivatives, Congress passed a law, Dodd-Frank, that required banks to move their derivatives trading to divisions that aren’t protected by the Federal Deposit Insurance Corporation (FDIC). In other words, no bailouts next time around.
But having to cover their own derivatives losses presents an unfair and unacceptable risk for the banks, so after helping finance the successful campaigns of a slew of new congress-folk in November, Wall Street immediately cashed in its chits, getting that provision of Dodd-Frank stripped out. From Bloomberg:
