The FDIC was set up to
ensure the safety of deposits. Now it, it seems, its function will be the
confiscation of deposits to save Wall Street. In the only mention of
"depositors" in the FDIC-BOE directive as it pertains to US policy, paragraph
47 says that " the authorities
recognize the need for effective communication to depositors, making it clear that their deposits will be
protected. " But protected with
what? As with MF Global, the pot will already have been gambled away. From whom
will the bank get it back? Not the derivatives claimants, who are first in line
to be paid; not the taxpayers, since Congress has sealed the vault; not the
FDIC insurance fund, which has a paltry $25 billion in it. As long as the
derivatives counterparties have super-priority status, the claims of all other
parties are in jeopardy.
That could mean not just the "unsecured
creditors" but the "secured creditors," including state and local governments . Local governments keep a significant portion of
their revenues in Wall Street banks because smaller
local banks lack the capacity to handle their complex business. In the US, banks taking deposits of public
funds are required to pledge collateral against any funds exceeding the deposit
insurance limit of $250,000. But derivative claims are also secured with
collateral, and they have super-priority over all other claimants, including
other secured creditors. The vault may be empty by the time local government
officials get to the teller's window. Main Street will again have been plundered
by Wall Street.
Super-priority Status for Derivatives Increases
Rather than Decreases Risk
Harvard Law Professor Mark
Row maintains that the super-priority status of derivatives needs to be repealed.
He writes:
. . . [D]erivatives
counterparties, . . . unlike most other secured creditors, can seize and
immediately liquidate collateral, readily net out gains and losses in their
dealings with the bankrupt, terminate their contracts with the bankrupt, and
keep both preferential eve-of-bankruptcy payments and fraudulent conveyances
they obtained from the debtor, all in ways that favor them over the bankrupt's
other creditors.
. . . [W]hen we
subsidize derivatives and similar financial activity via bankruptcy benefits
unavailable to other creditors, we get more of the activity than we otherwise
would. Repeal would induce these burgeoning financial markets to better recognize
the risks of counterparty financial failure, which in turn should dampen
the possibility of another AIG-, Bear Stearns-, or Lehman Brothers-style
financial meltdown, thereby helping to maintain systemic financial
stability.
In The New Financial Deal: Understanding the Dodd-Frank Act and Its
(Unintended) Consequences, David
Skeel agrees. He calls the Dodd-Frank policy approach "corporatism" -- a partnership
between government and corporations. Congress has made no attempt in the
legislation to reduce the size of the big banks or to undermine the implicit subsidy
provided by the knowledge that they will be bailed out in the event of trouble.
Undergirding this
approach is what Skeel calls "the Lehman myth," which blames the 2008 banking
collapse on the decision to allow Lehman Brothers to fail. Skeel counters that the
Lehman bankruptcy was actually orderly, and the derivatives were unwound
relatively quickly. Rather than preventing the Lehman collapse, the bankruptcy
exemption for derivatives may have helped precipitate it. When the bank appeared to be on shaky ground,
the derivatives players all rushed to put in their claims, in a run on the
collateral before it ran out. Skeel says the problem could be resolved by
eliminating the derivatives exemption from the stay of proceedings that a
bankruptcy court applies to other contracts to prevent this sort of run.
Putting the Brakes on the
Wall Street End Game
Besides eliminating the
super-priority of derivatives, here are some other ways to block the Wall
Street asset grab:
(1) Restore the
Glass-Steagall Act separating depository banking from investment banking. Support Marcy
Kaptur's H.R. 129.
(2) Break up the giant
derivatives banks. Support Bernie
Sanders' "too big to jail" legislation.
(3) Alternatively, nationalize
the TBTFs, as advised in the New York Times by Gar Alperovitz. If taxpayer bailouts to save the TBTFs are
unacceptable, depositor bailouts are even more unacceptable.
(4) Make derivatives
illegal, as
they were between 1936 and 1982 under the Commodities Exchange Act. They
can be unwound by simply netting them out, declaring them null and void. As noted by
Paul Craig Roberts, "the only major effect of closing out or netting all
the swaps (mostly over-the-counter contracts between counter-parties) would be
to take $230 trillion of leveraged risk out of the financial system."
(5) Support the
Harkin-Whitehouse bill to impose a financial transactions tax on Wall Street
trading. Among other uses, a tax on
all trades might supplement the FDIC insurance fund to cover another
derivatives disaster.
(5) Establish postal
savings banks as government-guaranteed depositories for individual savings.
Many countries have public savings banks, which became particularly popular
after savings in private banks were wiped out in the banking crisis of the late
1990s.
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