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January 23, 2014

The U.S. Bailed Out Foreign Banks in 2008 & Shouldn’t Have to Do That Again

The New York Times has a terrific article today about new rules that will close a loophole that foreign banks have exploited to avoid complying with new U.S. rules to make large banks safer and bailouts less likely. The Federal Reserve is close to completing rules that will require foreign banks operating in the U.S. to have sufficient capital to cover their own losses in the event of another financial panic, rather than depending on U.S. taxpayers to bail them out.
This is critically important because it was the U.S., not London, Paris, Bonn or anywhere else, that bailed out the global banking system in 2008 and 2009. This backdoor bailout of foreign banks also bailed out foreign governments, who didn’t have to bail out their own banks. This has enabled some foreign banks to misleadingly claim that they did not need to be bailed out, when in fact banks like Deutsche Bank and U.S. subsidiaries like Deutsche Bank’s Taunus were bailed out by the U.S. government.
Here are three important facts to remember about the U.S. bailout of foreign banks:
  • When the U.S. bailed out AIG in September 2008, the insurance giant’s counterparties were inexplicably paid off at 100 cents on the dollar on AIG’s reckless derivatives bets. Ten of AIG’s top 16 counterparties were foreign banks, and the number 2 recipient of U.S. bailout funds via AIG was Deutsche Bank, as shown on slide 26 of a Better Markets presentation on cross-border derivatives threats to American taxpayers. (That information is based on the table on page 24 of the SIGTARP report entitled “Factors Affecting Efforts to Limit Payments to AIG Counterparties.”)
  • Nine of the top 20 largest users of Fed emergency lending facilities were foreign banks, and Deutsche Bank was the 9th largest recipient (as shown on slide 43, with Deutsche Bank’s borrowings alone being the focus of slide 45, of the Better Markets presentation, all using Bloomberg data).
  • At year-end 2008, Deutsche Bank’s U.S. subsidiary Taunus was one of the top 10 bank holding companies in the U.S., but it had negative capital (on an accounting basis), as discussed in the New York Time Economix column, “How a Big Bank Failure Could Unfold.”
As of June 2013, foreign banks were 7 of the 13 largest banks in the world (using international accounting standards for all banks, as shown on slide 31). Without proper regulation, U.S. taxpayers will once again end up bailing out the global banking system, including the big foreign banks. That’s why this issue is so important and why the Fed should quickly finalize its rule and protect the American people.


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