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

By Emily Eisenlohr | June 12, 2017

  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

By Emily Eisenlohr | June 12, 2017

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.…

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

By Emily Eisenlohr | June 12, 2017

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…

BREAK ‘EM UP Reason #2: Dodd-Frank’s Resolution Authority is Too Little Too Late

By Emily Eisenlohr | June 12, 2017

After passing Dodd-Frank, Congressional leaders claimed both “no more bailouts” and that Dodd-Frank’s “resolution authority” was a primary tool in solving “too big to fail”. These two claims are polar opposites. The former states there will be no further government bailouts of big banks, and the latter involves strengthening the government’s ability to do just…

BREAK ‘EM UP Reason #1: Dodd-Frank Suffocates Both Commercial and Investment Banking

By Emily Eisenlohr | June 12, 2017

Congress may have removed Glass-Steagall barriers for all engaged in banking, but it sure didn’t create an even playing field. In fact, legislation in 1999 and 2008 suffocated two key financial sectors: investment banking and commercial banking. Comparing two giants from each sector — JPMorgan Chase and Goldman Sachs — shows how. Humans set the…


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