Is the pendulum beginning to swing back?

Too-Big-to-Fail Takes Another Body Blow

I am reading a lot less news because I got booted out of my nice cushy half office and into a shared space with only a single access to the ‘net. Since I get in early I have a brief period where I can look at some news, but I expect my already tepid rate of posting to decrease still further. This article, though, says that there are glimmers of hope that at least one facet of our corrupt public/private ‘government of the people’ might be starting to erode. I advocate reading the whole article (it is nice to read an optimistic article, they are so rare for me lately), but here is a snippet as a teaser…

But the craziest part of the S&P report, to me, is the conclusion. “It is tempting to assume that we would raise credit ratings because higher capital increases creditworthiness to bondholders,” the agency writes. “However . . .”

Here the S&P is saying: “You might think, just because we’re a ratings agency that’s supposed to always think safety and security are good things, that we think increased safety and security for these banks is a good idea. However . . .”

So what’s the “However”? Well, it talks about the banks having a lessened ability to lend (although they’re not lending now – they’re still sitting on over a trillion and a half dollars in excess reserves just in their Fed accounts!), about the growth of shadow banks, about decreased profitability of the big-six banks. But then they come to their big money-shot conclusion:

Under our methodology, we would potentially no longer factor in government support if we believed that once large banks are broken up, we would not classify these banks as having high systemic importance.

Translated into English, what they mean is: If this bill passes, these banks would no longer be Too Big To Fail. So we’d probably have to downgrade them.

Well – duh!

Not only is this an explicit admission that Dodd-Frank didn’t fix the Too-Big-To-Fail issue (Wall Street has long insisted that Dodd-Frank was more than sufficient to deal with the “moral hazard” problem), it’s a crazy thing to say out loud. S&P writes about having to factor out the implicit government backing of big banks as though that would be a bad thing. But if implicit government support is the only thing keeping the ratings of these companies even as high as they are now, that means they really should be rated lower, in a true free market.

Author: Tfoui

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