British and American Dinosaurs Fight
Over Who Will Pay for the Next Crash
Nov. 6, 2014 (EIRNS)With a new crash and economic depression looming in the European precincts of the trans-Atlantic banking system, a clear split has emerged between British and American banking regulators over who is going to payvery dearlyfor this crash.
A Nov. 5 all-day conference of bank regulators, analysts, and economists at George Washington University in Washington, D.C., on "Have We Ended Too-Big-To Fail?" (TBTF), made this clear. British and EU banking authorities insist on "bail-in" for insolvent megabanksalso known as "orderly liquidation authority" or here as "Dodd-Frank Title II"which U.S. Federal Reserve and FDIC officials know will not work. The latter, in turn, are preparing for putting an insolvent megabank through Title I bankruptcy, Lehman Brothers-style but based on liquidation plans, "living wills", prepared by each giant bank in advance. European banking authorities know that this, too, will not work. Both are right. Glass-Steagall breakup of the TBTF banks, which will work, has been pushed off the table of these officials by a ferocious two-year attack by the biggest City of London- and Wall Street-centered banks themselves.
Richmond Federal Reserve president Jeffrey Lacker and FDIC Vice-Chairman Thomas Hoenig, the keynote speaker, represented the U.S. regulators' view, which is obvious: "Bail-in" is a monstrous concoction of a gigantic "orderly default" by a megabank combined with bailouts to try to keep its subsidiaries operating; it will spread risk and potential panic throughout the financial system and fail completely in a situation of broader bank panic.
But as to bankruptcy, they could not hold out more than "hope". With banks much bigger than the resources of the FDIC which is supposed to take them over, incredibly complex and interconnected through hyperleveraged securities markets, and in many European cases bigger than the GDP of their "home" countries, bankrupting the bank rather than selling it to an even larger bank and/or giving it a huge taxpayer bailout, has never been attempted.
Former Bank of England deputy governor Paul Tucker represented the bail-in policy of London, Brussels, and the Basel Bank for International Settlements. Tucker was provoked by panel moderator Simon Johnson, who has quietly supported Glass-Steagall, and by EIR and other interventions from the audience, into a blunt and brutal outline of "bail-in." Its rules will be "finalized" this month at the Brisbane G-20 meeting, Tucker said. It will demand that megabanks build up their "risk-weighted capital" ratio to 20-25%, more than double what it is now. How?: by selling contingent capital bonds, also known as "bail-in bonds", which are made to absorb enormous losses when megabanks become insolvent and default. Selling to whom? Pension funds and insurance funds. Not to other banks or shadow banks, Tucker said; that will spread a wildfire of risk in the financial system. The pensioners and insurance policy holders have to become the indirect owners of the masses of banks' "contingent capital" which they are going to default on in the crash. "Ultimately there are only households," he said.
Early in his panel, Tucker said, "If this ["orderly liquidation"] doesn't succeed, then the banks will have to be broken up, that is certain."
But Tucker later responded aggressively to intervenors from the audience.
"You sound like you'd like to break up the banks. Well, there wasn't support for that among the G-20 elected, and unelected, leaders. So we are doing something else. There are only households: Do you want all the risk to fall back on Wall Street firms? If you want the banks broken up, then get that politically," he dared.