Two Ways Trump Could End Too Big To Fail

Two Ways Trump Could End Too Big To Fail

Editor: Vlad Rothstein | Tactical Investor

Differrent Views

Who cares? To which most will respond what, how can you say that? To which the observer will respond, remember the point is to polarise the crowd. The objective here is not to provide real revelations to the masses but to agitate them. When the crowd is agitated, you can fleece them, and they will not even notice what is going on.  On a separate note, there is no conclusive evidence to support these allegations. Observer Vs regular perspective regarding Russia’s alleged hacking of US elections

Dodd-Frank doesn’t end ‘too big to fail’

Dodd-Frank has imposed huge regulatory burdens that are sapping economic growth, but it has not ended TBTF or the possibility of taxpayer bailouts.

When investors believe an institution is TBTF, they lend it money at reduced interest rates. Investors believe that the government will keep a TBTF institution from failing, including by, if necessary, injecting taxpayer money to help the institution repay its loans.

Data on bank funding costs provides clear evidence that Dodd-Frank has not ended TBTF. In the years prior to the financial crisis — 2005, 2006, 2007 — the largest banks, those with assets greater than $100 billion, paid a higher average cost for their funding than did smaller banks. After the financial crisis and passage of the Dodd-Frank Act — 2012, 2013 and 2014 — the largest banks have lower average funding costs compared to smaller banks. In each of these years, large banks enjoyed a funding cost subsidy of more than 22 basis points.

But how can Dodd-Frank reinforce investors’ belief in TBTF when it was supposed to end it?

Under Dodd-Frank, the largest institutions are subject to enhanced prudential supervision and regulations by the Federal Reserve Board. They now must meet stricter capital and leverage requirements, file detailed annual orderly resolution plans and pass the Fed’s annual macroeconomic stress test examination. Full Story

The Art of Dealing With Too Big to Fail

For Donald Trump, this would be a “Nixon goes to China” move, particularly given the way he’s advocated for the elimination of the Dodd-Frank banking rules imposed after the 2008 crash that toppled – or came near to toppling – a number of prominent Wall Street firms.

There are, of course, a number of problems with Dodd-Frank. Some say it goes too far, while others argue it did not go far enough. The principle concern, which Trump was apparently trying to address, is the way in which it enshrined “too big to fail” as a concept in the American private economy.

As in just about every industrialized country, there are certain companies, financial institutions and manufacturers in the United States whose failing would produce repercussions throughout the economy that could lead to a major, perhaps even total, collapse. It was the fear that just such an event had been triggered by the discovery of how much bad paper was circulating through the sub-prime mortgage market that led to major interventions by assorted agencies of the U.S. government, as well as the Federal Reserve.

It is not the government’s job to break up what, for the sake of argument, could be called “the big banks” and other financial service sector companies whose collapse could take others down with them. It’s also not the government’s job to keep them from failing; that’s what creates the moral hazard that got us in trouble in the first place and will get us in trouble again and again until it is removed. Full Story


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