Your Tuesday Morning Dose of Doom & Gloom
In the event of a euro banking crisis, brace yourself for unbraced American banks:
Personally, I’m most worried about the balance sheets of the really big banks. For example, in recently released highlights from its so-called living will, JPMorgan Chase & Co. revealed that $50 billion in losses could hypothetically bring down the bank. (All big banks must provide their regulators with a living will to show how they could be shut down in an orderly fashion if near default.)
JPMorgan’s total balance sheet is valued, under U.S. accounting standards, at about $2.3 trillion. But U.S. rules allow a more generous netting of derivatives — offsetting long with short positions between the same counterparties — than European banks are allowed. The problem is that the netting effect can be overstated because derivatives contracts often don’t offset each other precisely. Worse, when traders smell trouble at a bank that has taken on too much risk, they tend to close out their derivatives positions quickly, leaving supposedly netted contracts exposed.
Weren’t we assured that our banks had gone through all the stress testing they needed to assure us there would be no more panics like 2008? Isn’t anybody in DC paying attention to this stuff?
Oh, well — at least Obama got health care passed.
It seems to me that all this complicated, expensive, and largely useless regulation needs to be replaced by reform of antitrust laws. That’s the real issue here.
I don’t think it’s controversial these days to assert that “too big to fail” is too big to exist. Why do we care if JP Morgan fails? Why do we spend hundreds of billions protecting banks from the consequences of their poor decisions? Because they are too big to fail. And because they know they are too big to fail, they are free to flirt with failure. Privatize the gains, socialize the losses.
The cure for this ailment is to make sure nobody gets that big. Keep them small and then let them live or die on their own talents.
The trick is coming up with a workable legal definition of “too big to fail” and I admit that I have no definition to propose. But that doesn’t mean it can’t be done and it doesn’t mean we shouldn’t try.
If you need to brighten the doom ang gloom a little:
https://twitter.com/#!/search/%23QuestionsThatStumpObama
best one so far:
rob b@rovibe71
#QuestionsThatStumpObama “Does burying the Fast and Furious story count as a ‘shovel ready’ job?”
Via Small Dead Animals