Search This Blog

Monday, April 13, 2015

Get Ready For GFC II

The global financial crisis of 2008 (GFC) is gearing up for another appearance. Get ready to hand the Too Big To Fail banks more of your hard-earned cash to compensate them for failure.

According to the Federal Reserve Bank, whose role as Big Daddy Warbucks protects the Little Orphan Annie banks from failure, the banks passed their latest stress test with flying colors. But, the Fed is making the same mistake it did last time and that's overcounting the value of derivatives. According to Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corporation, and former Fed governor, capital at the TBTF banks averaged only 4.97% at the end of 2014. The Fed itself, however, calculates that capital level at 12.9%.

The difference is substantial. In fact, a similar discrepancy occured just before the GFC. The late Fed governor Edward Gramlich warned of a similar discrepancy of capital—and was ignored. Will history repeat itself? Maybe not. But it could certainly rhyme. Will the Congress bow down to the TBTF banks again? We suspect that the fury of the taxpayer will eliminate another bailout.

But, if the banks truly own the government, we should expect the same result, unfortunately.