Fact and Fiction Behind Too Big to Fail

BREAK ‘EM UP Reason #8: Credit Default Swaps Are Insurance Masquerading as Derivatives

No product that was financially-engineered during the growth of the Great Bubble is as destructive as credit default swaps (CDSs). They are more insurance than derivatives. Only the largest banks trade them. Only a rather small percentage are cleared on central counterparty clearing platforms, despite Dodd-Frank. The International Monetary Fund (IMF) and many in the…

BREAK ‘EM UP Reason #7: Regulators Cannot “Ring-Fence” Risk Out of TBTF Banks

Ring-fencing of risks may be a useful tool for financial sector regulators, but it isn’t a solution to systemic risk. In a systemic event, one cannot fence in trust and fence out fear.

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…

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…

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….

Fairy Tale Capitalism: Fact and Fiction Behind Too Big to Fail

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Was the mortgage debacle the sole cause of the financial bubble's collapse? Do you believe those who say the elimination of Glass-Steagall barriers didn't contribute to its building? Fairy Tale Capitalism: Fact and Fiction Behind Too Big To Fail places the mortgage mess into a broader perspective. It explains how the Federal deposit guarantee was married to investment banking's trading intensity, why the Fed had no choice but to bail out the biggest banks and how derivatives played a poorly-understood, but equally important role in the crisis. In simple terms Emily Eisenlohr walks with those who live on Main Street down Wall Street's darker alleys.

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