Like a Mafia Don protecting his “family,” the Fed is implementing another layer of “protection” from collapse for the Too Big To Fail Banks. This latest deal will prevent bank counter-parties from pulling collateral from a collapsing bank. The installation of this law is a warning signal that the global banking system is barreling toward another devastating financial collapse.
The cover story for this scheme is that it will prevent another “Lehman” event from taking down the entire financial system. But it wasn’t Lehman, per se, that caused the 2008 collapse. Bear Stearns lit the fuse, Lehman was selectively thrown into the explosives mix and AIG/Goldman sprayed napalm into the explosion.
My source for this information of this is this article from Bloomberg: More Fed Protection For Big Banks. I had to read the article carefully a few times to fill-in between the lines, as Bloomberg kept referencing the new rule as a “proposal” and either white-washed or misrepresented the facts.
The new rule will prevent the TBTF bank counter-parties from taking their collateral away from the bank when the bank is collapsing. When a fund enters into a derivatives trade with a bank the fund is required to put up collateral, generally in the form of Treasuries. The bank is then free to hypothecate that collateral, or make use of it for its own purpose. But if the bank collapses and the fund is in a “winning” position on its derivatives trade with the bank, it’s in the fund’s best interest to withdraw its collateral. The new Fed rule will prevent this. The rule extends beyond derivatives, to securities lending agreements and repo transactions. But the truth is that this Fed rule is aimed squarely at derivatives.
The implementation of this new regulation, at best, extends the bail-in concept to TBTF “big boy” counter-parties, like hedge funds, insurance companies and pensions. The wellspring for this new banking rule is the Financial Standards Board, a key policy arm of the BIS. The FSB is the entity that drafted the bail-in regulation, which has been largely implemented in Europe. Bail-in regulations are now methodically being installed in the U.S. banking system.
In its essence, this “collateral freeze” regulation will eventually morph into a de facto bail-in mechanism and serves the purpose of transferring wealth from the banks’ counter-parties to the banks. At the very least, this collateral freeze regulation adds yet another layer of moral hazard into the banking system, as banks are incentivized to underwrite even riskier derivatives transactions with knowledge that the risk of collapse is further minimized.
Interestingly, this new law is “asymmetrical.” If the bank fails, it gets to keep all counter-party collateral locked-up. But if the bank’s counter-party fails, that counter-party has no ability to freeze the collateral it put up with the bank. The bank has possession of that collateral. This is what happened in the MF Global collapse, where JP Morgan seized all of MF Global’s collateral, at the detriment of MF Global’s customers. At the time JPM’s move was illegal but the judicial system looked the other way.
While the funds doing derivatives business with these banks will suffer irreconcilable damage from the new rule, at the end of the day, it will be the investors who have their money with hedge funds, insurance companies and pension funds that will bear the greatest expense of this de facto bail-in law. That would be you, the public. Once again the public gets screwed by the financial system in a way that is being enabled by the Government.
The only way to protect yourself from this is to remove as much of your wealth from financial custodians as possible. Not only is the new regulation a clear warning bell of another financial collapse coming, the Fed and the Government are making it even easier to trap your wealth. The financial system is one giant roach motel – you can check-in but eventually your money will never check-out.