Saturday, October 13, 2012

In the News: Going Nuclear: Too Big to Fail, Redux?

Derivative levels are higher than they were at the height of the financial crisis, and they are concentrated among four big banks: JPMorgan Chase, Citigroup, Bank of America and Goldman Sachs.

by Robin Goldwyn Blumenthal, Barrons Review, October 13, 2012

In case anyone cares whether Dodd-Frank or the Volcker Rule defused those financial weapons of mass destruction known as derivatives, they can start worrying. Not only have the rules failed to curtail the risky FWMD, but they are larger than at the height of the financial crisis. And they are concentrated in four banks: JPMorgan Chase (ticker: JPM), Citigroup's Citibank (C), Bank of America (BAC), and Goldman Sachs (GS).

That's according to the second-quarter derivatives report of the Office of the Comptroller of the Currency. It tallied $222.5 trillion of notional derivatives held by insured U.S. commercial banks and savings associations, compared with $203.5 trillion in the second quarter of 2009.

"It's outrageous," says Lawrence Parks, executive director of the Foundation for the Advancement of Monetary Education, who included the statistics in a recent presentation. "If these guys were making bets with their own money, go to it. But don't come to me after you've lost and say, 'I'm too big to fail, give me money without limit.' "

To be sure, new Dodd-Frank rules on swaps dealers just took effect on Friday. But Sheila Bair, the former head of the FDIC who now chairs the Systemic Risk Council, says in an e-mail that, while some derivatives are ordinary hedges, their sheer magnitude, complexity, and opacity "creates an almost impenetrable web of interconnections that makes our global financial system vulnerable to systemic shocks." Her advice? Rules to get risky derivatives out of federally insured banks.

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