Tags: Bair | banks | swaps | Dodd-Frank

Sheila Bair: We Still Haven't Lowered the Boom on Big Banks

By John Morgan   |   Thursday, 13 Jun 2013 11:04 AM

Former U.S. banking regulator Sheila Bair, a champion of forcing big bank breakups, used a self-interview in Vox to attest that protecting taxpayers from the reckless behavior of financial behemoths is far from completed.

In a sometimes humorous exchange with herself, Bair, former head of the FDIC, said the ideal American banking system would be smaller, simpler, less leveraged and aimed at meeting real credit needs.

"And oh yes, we should ban speculative use of credit default swaps from the face of the planet," she wrote.

Editor's Note:
Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Even five years after the 2008 financial meltdown, Bair said Washington must still beware that banks' less-regulated, non-core activities do not under any circumstances have access to the safety net of taxpayer-funded bailouts. Trading of derivatives in non-customer accounts is generally regarded an example of a non-core activity.

In addition, none of the current proposals before Congress "fully address the problem of excessive risk taking by non-bank financial institutions like AIG," Bair noted.

"For some reason, the [Federal Reserve] and Treasury Department were able to figure out that AIG and GE Capital were systemic in a nano-second in 2008 when bailout money was at stake, but when it comes to subjecting them to more regulation now, well, hey we need to be careful here," she said mockingly.

Bair believes a prudent minimum capital ratio for big banks to maintain would be 8 percent, but 10 percent would be even better. The current international Basel III capital requirements call only for a 3 percent ratio, according to Reuters.

"You don't have to be very efficient to make money by using a lot of leverage to juice profits then dump the losses on the government when things go bad," she explained, referring to big banks that took bailouts to salvage their bottom lines.

Congress should not give up efforts to solve the "too big to fail" conundrum by which megabanks are viewed as so intertwined with the economy that they cannot be shut down even if they fail, Bair asserted.

"We have to solve it. If we can't, then nationalize these behemoths and pay the people who run them the same wages as everyone else who works for the government," she stated.

According to Bair, the banks themselves are managing the financial reform process in Washington by outgunning the efforts of government regulators.

She noted the industry is already trying to undermine a Dodd-Frank requirement that lenders be exposed to 5 cents of every dollar of loss on mortgages they securitize, and that opaque inter-connectedness between mega-banks is still a reality.

Office of the Comptroller of the Currency sent letters this week to seven banks, including JPMorgan Chase, Citigroup, Bank of America, granting them two more years to comply with a Dodd-Frank requirement that they eliminate some derivative swaps trading, Reuters reported.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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