“Last week, Senators Sherrod Brown (D-OH) and David Vitter (R-LA) introduced the first bipartisan legislation aimed directly at putting an end to “too big to fail” financial institutions and preventing future bailouts of America’s behemoth banks.
“Protecting Taxpayers by Strengthening Capital Requirements
“Too big to fail banks are so enormous and so intertwined that governments are likely to go to extreme lengths to ensure that they do not fail. These banks enjoy an implicit government guarantee that has been quantified by economists as a hidden taxpayer subsidy that disadvantages smaller banks. Bloombergrecently pegged this subsidy at some $84 billion, a number roughly equivalent to the profits of the nation’s largest banks.
“The U.S. Treasury likes to call these banks, “systemically important;” a better phrase is “potentially catastrophic.” With mergers and buyouts, America’s behemoth banks only got bigger during the financial crisis. While the austerity crowd is up in arms about a federal budget deficit projected to be 2.4 percent of GDP in 2015, JPMorgan Chase alone has assets in the range of 25 percent of GDP, under accounting rules that provide a better measure of derivatives contracts. If you add in Bank of America, Citigroup and Wells Fargo — that gets you to 93 percent of GDP. The failure of any one of these behemoth banks could rock the economy and trigger another massive bailout.
“Limiting the Government Safety Net to Traditional Banking Activities and Creating a More Level Playing Field
“The bill cracks down on the Wall Street casino and limits the government safety net (such as FDIC insurance for depositors) to traditional banking activities, not risky derivates trading in the broker-dealer arm of the big banks.
“Dennis Kelleher of Better Markets explains: “The bill prohibits the transfer of the liabilities of nonbank subsidiaries onto the balance sheets of insured depositories.” Last year, for instance, it appeared that Bank of America was moving trillions in derivatives trades into its FDIC insured bank holding company with the apparent blessing of the Federal Reserve.”
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