Glass-Steagall

BREAK ‘EM UP Reason #6: Derivatives Trading Siphons Capital Out of the Banking Sector

  Derivatives credit management practices siphon capital out of the commercial banking deposit system, capital that could otherwise be used to support lending. Small and medium-sized businesses face enough headwinds from globalization and technology. They don’t need this assault on their ability to borrow. Derivative contracts can serve a useful purpose. They just shouldn’t be…

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BREAK ‘EM UP Reason #5: TBTF Banks Are Tied Together Through Derivatives

  Derivatives tie the world’s largest banks together in ways they’ve never been connected before. Credit ratings play a role, affecting derivatives in two ways — one from downgrades (a change in credit profile), the other from where these contracts are booked. This post covers the impact of a financial institution’s downgrade.  The over-the-counter (OTC) derivatives…

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BREAK ‘EM UP Reason #4: TBTF Banks Use the FDIC to Cushion Against Losses

What a difference a credit rating notch can make. The biggest banks have used their FDIC-guaranteed, taxpayer-supported banking subsidiaries and the bank subsidiary’s credit rating advantage to reduce the capital behind their derivatives activities required by regulators to cushion against potential losses. This is another way that credit ratings influence derivatives through the taxpayer guarantee.…

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BREAK ‘EM UP Reason #3: The U.S. Bankruptcy Code Was Changed to Favor Derivatives Over Loans

A law passed during the height of the bubble in 2005 altered the treatment of derivatives in the U.S. Bankruptcy Code to greatly favor derivatives counterparties over other creditors. The law’s title was, ironically, “The Bankruptcy Abuse Prevention and Consumer Act of 2005”. Bankruptcy law had been designed to rehabilitate debtors while protecting creditors. The…

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