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 #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…