I have been wondering what we, as a democratic nation, are going to do about this. Are we going to rule banks, or are bankers going to rule us?
My curiosity got the best of me. To find the answer, I slipped off in my time machine to the near future. While I was there, I learned that (yeah!) we had ended Too Big to Fail, eliminated taxpayer liability for reckless speculation, and freed hedge funds and investment banks from onerous regulations. In short, in the future, they seem to have figured out how to make the entire financial system safer and more stable. All this, based on a simple rule change from the FDIC.
I managed to sneak back home a copy of the letter behind that fascinating development. That letter from the office of the Federal Deposit Insurance Corp.’s chairman, circa 2015, follows:
June 3, 2015
Thank you for your cooperation in our most recent series of bank stress tests. We had hoped that these would not be necessary, but after the credit crises of 2007-08 and the banking crises of 2014, the FDIC simply had no choice.
The results of these stress tests, especially as applied to our largest banks, are terribly troubling. Trading losses of billions of dollars have made it apparent that nearly every major depository bank is in a far more precarious financial condition than previously believed. It is as if many of our largest banks never fully recovered from the earlier crisis and now lack sufficient capital to withstand any further pressure.
This is especially concerning if the economy takes yet another turn for the worse or housing begins its third leg down.
Capital reserves are insufficient to support the trillions of insured deposits at these banks. Ever since interest rates hit record lows and the 10-year Treasury bond broke 1.5 percent, leveraged speculation has become the primary business of the largest FDIC-insured banks. We have grave concerns about the safety and soundness of these insured depositories. The ongoing collapse in Europe, the wild currency swings around the world, and that recent turmoil in China have all made the current state of finance extremely risky.
Following the most recent bank failures, the reserve position of the FDIC Deposit Insurance Fund (DIF) has fallen to perilously low levels. This pool of capital is the backstop for public money deposited in demand accounts at large and small banks around the nation. Given these exigent circumstances, the FDIC cannot sit idly by while speculation in derivatives and other complex financial instruments exhausts the DIF, thus putting taxpayers’ money at great risk. Nor can we assume unlimited liability in guaranteeing deposits at firms where trading in derivatives is creating additional liabilities to the FDIC (and taxpayers) that is measured in the trillions of dollars.