We have explained how the next worldwide financial crisis will be solved by looting savers’ bank accounts, in order to save the big banks. The European Bank Recovery and Resolution Directive (BRRD) shall take care of that, and the idea is gaining ground in other countries.
This will to protect big banks come what may, even if it means ruining their clients, reached a new phase. In the United States the Fed just allowed a defaulting bank to keep its clients’ collateral. In other words, when a fund, such as a hedge fund, transacts with a bank on derivatives, it must put up a guarantee toward said bank, some sort of “collateral”, generally Treasuries, a recognised and liquid asset. This is quite normal since derivatives may generate losses, and the bank wants some insurance. But if that bank is about to implode, it will be allowed to keep that collateral, even though the transaction itself does not generate any losses! This is what the Fed just decided.
The objective is thus to protect the “Too Big to Fail” banks by whatsoever means. Large U.S. banks such as Goldman Sachs, JP Morgan or Morgan Stanley do not manage retail banks with their millions of accounts, and all the money that comes with it. So the collateral in deposit at these business banks, very high, will then be used as a buffer should a crisis arise. For ubiquitous banks like Citigroup or Bank of America, this will constitute a supplementary resource. And given the size of the hedge fund industry in the United States, the amounts in play are staggering.
We can thus perceive clearly the objective of the large commercial and central banks: they would rather ruin the savers and investors than let a “Too Big to Fail” institution crash and relive the 2008 Lehman Brothers bankruptcy nightmare. Instead of trying to treat the root of the problem, i.e. avoid the constitution of “Too Big to Fail” banks, politicians and regulators would rather over-protect these titans... this is crony capitalism at its best.
Some could say, “After all, if the eventuality of a major crisis disappears, why not?” Though it would be a mistake, because the risk does not disappear... it is simply hidden and disseminated. With zero-rate policies interest rates have lost their capacity to evaluate risks, but those haven’t really disappeared. They have morphed into liquidity risks or moved to other markets (commodities, currencies). Moreover, the over-protection which large banks enjoy pushes them to take even bigger risks on other markets, notably derivatives, which they have a great appetite for. Totalling over $493 Trillion worldwide at the end of 2015, according to the Bank for International Settlements, those derivatives way exceed the central banks’ capacity of intervention... Generally, wishfully negating risks always leads to bubbles that, one day or another, end up blowing. And some of these bubbles are with the large international banks.
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.