Shocking but true: all 11 of Wall Street’s biggest too-big-to-fail banks just flunked a key test, proving that they still pose a huge, needless and unacceptable risk to US taxpayers, the financial system and the economy as a whole: A major reform after the financial crash of 2008 was requiring the most gigantic Wall Street banks to go bankrupt like every other business in the US if they fail. That’s why they are required to have a “resolution plan” (often called “living wills”): it’s a roadmap created before a huge bank fails so that it can be resolved in bankruptcy in an orderly fashion so that the next financial crisis is avoided and, most importantly, so that bailouts are not required in the future.
The problem is that Wall Street’s biggest banks don’t want to have to go into bankruptcy if they fail. They want US taxpayers to bail them out like happened in 2008-2009. They want to keep their jobs, bonuses and reckless gambling like happened in 2008-2009. That’s very profitable for Wall Street: All gain, no pain for them as they shift the pain and expense of their failure to the taxpayers.
Who wouldn’t want that deal? But, no one else in the US gets that deal and Wall Street’s biggest banks shouldn’t get it either. A fundamental principal, indeed, an essential feature of the free market and capitalism is failure and bankruptcy. That’s why this handful of Wall Street’s too-big-to-fail are being required to have resolution plans, but it is also why they don’t want it and are not going to do it without a fight…….a really big fight.
That is why they all failed this key test: it’s like asking a bank robber for a road map to the next bank they are going to rob. Here, it’s asking Wall Street to provide a plan that would make them suffer the consequences of their own recklessness, including losing their big bonuses, their jobs and reputations. They don’t want to be accountable. They don’t want bankruptcy to be an option for them. They want to stay so big, complex, interconnected and dangerous that their failure threatens to crash the global economy and cause a Great Depression next time unless they are bailed out like last time. A workable resolution plan might prevent that, which is why all 11 banks submitted grossly deficient plans.
Bravo to the federal regulators at the FDIC and the Fed for having the courage and conviction to flunk all 11 banks and calling them out on this, saying the plans make “unrealistic or inadequately supported” assumptions and failed “to make, or even identify, the kinds of changes in firm structures and practices that would be necessary to enhance the prospects for orderly resolution.” Think about that: they brazenly didn’t even bother to “even identify” they key elements!
The New York Times and the Wall Street Journal nicely spelled out what was really going on here. Make sure to also read FDIC Commissioner Tom Hoenig’s powerful statement, observing that “Despite the thousands of pages of material these firms submitted, the plans provide no credible or clear path through bankruptcy that doesn’t require unrealistic assumptions and direct or indirect public support” – that means that the banks are really counting on bailouts next time.
Everyone saw in 2008 what happens when the “implicit” federal support for Wall Street becomes “explicit”: trillions of dollars in taxpayer and government bailouts ladled out to Wall Street and the entire global financial system, largely unconditionally. Those bailouts and the economic devastation caused by the crash are going to cost the US more than $12.8 trillion. To prevent that from ever happening again, the Dodd Frank financial reform and consumer protection law was passed in 2010, but those very same Wall Street banks, their unlimited resources and innumerable purchased allies have fought endlessly to kill, weaken or gut that law.
The fight over these resolution plans is only the latest battle in that ongoing war to kill financial reform. No one should be surprised by this: while unregulated reckless gambling by Wall Street caused the worst financial crash since 1929 and the worst economy since the Great Depression of the 1930s, it was hugely profitable to them. Financial reform is all about protecting taxpayers and preventing bailouts. Wall Street wants to protect profits and receive future bailouts. The FDIC and the Fed stood tall against Wall Street power and for Main Street pocketbooks.