Commodity Trade Mantra

The Next Big Bank to Fail Will Get Liquidated into… Another Big Bank


The Next Big Bank to Fail Will Get Liquidated into… Another Big Bank

The Next Big Bank to Fail Will Get Liquidated into… Another Big Bank

You know the old saying “You are what you eat.”

Well, what if you eat, you know… crap?

Unfortunately, we already know what comes out of that set-up. More of the same.

And even more unfortunately, that’s exactly what we’re going to get when the next big bank fails (and it’s only a matter of time). More of the same.

Last week, the FDIC put out a new plan for handling big bank liquidations.

You’ve got to see this.

Under Title II of the Dodd-Frank Act, the “orderly liquidation authority” gives the FDIC the power to liquidate grossly faltering, insolvent, or failed “systemically important financial institutions,” or SIFIs.

The FDIC, which really did one helluva of a good job during the financial crisis, calls its overall strategy for handling a big bank liquidation its “single point of entry” (SPOE) plan.

The “SPOE” means the FDIC will go into the bank’s parent or holding company and orchestrate its orderly liquidation, wiping out shareholders, haircutting creditors, and borrowing from the new Treasury Orderly Liquidation Fund to keep the bank’s subsidiaries and affiliates operating, so as to not disrupt the rest of the world.

That’s because the Federal Deposit Insurance Corporation (FDIC), which will have the authority to liquidate miscreant banks, will just rearrange them.

Here’s what’s rancid on that menu.

The subsidiaries and affiliates are likely to be where the real trouble actually is. Bank holding companies are shells. They just manipulate the puppets on the stage where we all play.

So under this new strategy, the shareholders in the parent are going to get wiped out. And creditors are going to end up with new equity in, guess what? The same subsidiaries and affiliates. Those are going to just be “restructured” or “reorganized” into a “successor firm less risky to the system.”

Somebody stick a finger down my throat, please. Doesn’t that make you sick?

So what if the new big bank – maybe a good bit more svelte from puking up its guts – gets new owners and new management? It will still have to have the backstop of taxpayers who will ultimately fund the Treasury’s fund. It will still be a big bank. It will still be systemically important. What will have changed?

This kind of “liquidation” is a bailout.

It’s not the FDIC’s fault. They’re being asked to be the stooge for the big banks, to keep them going in another wolf’s set of lambskins.

The FDIC will set up a “bridge” company that will orchestrate and support (with taxpayer money) the subs and affiliates (hmmm, wasn’t AIG’s catastrophic derivatives business in a subsidiary, and didn’t JPMorgan’s London Whale loss occur in a subsidiary?) that need to be kept going. Because, you know, they’re systemically important. The bridge company can last as long as necessary. That means the newly reshaped, old, failed bank will be protected by the government while it lipsticks itself up again for its next trick.

Last week the FDIC put out its new plans for comment. The public has 60 days to submit comments.

Here’s mine: The plan is crap. The single point of entry will result in just another crappy big bank coming out the other end.

This is all smoke and mirrors. The only way to make systemically important financial institutions safe is to not have systemically important financial behemoths in the first place.

We have a bankruptcy code. Banks should be allowed to fail. And they should never get so big that it makes the world shudder or come to a standstill if they blow themselves up.


Courtesy: Shah

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