CNN headlines, “Fed Ends ‘Too Big to Fail’ Lending to Collapsing Banks”.
Sounds good …
But CNN quickly backtracks:
“There are still loopholes that the Fed could exploit to provide another back-door bailout to giant financial institutions,” [Congresswoman Elizabeth] Warren, a Democrat, told CNNMoney.
It’s important to note that the new rule allows the Fed to judge by its own measures whether a firm qualifies for its emergency aid.
The idea is the Fed can still lend to banks during times of emergency, but the bank must be able to pay it back. Yet the true health of a bank in turmoil can be very difficult to assess.
“It’s very hard to judge in real time whether a firm is insolvent or just having liquidity problems because it becomes impossible to price assets,” says Paul Ashworth, chief U.S. economist at Capital Economics, a research firm.
That’s why Warren wants clearer guidelines.
“It’s up to Congress to close those loopholes and ensure that Fed emergency lending is limited to protecting the economy and not to saving a few favored banks,” Warren says.
The Fed performs “stress tests” on banks to see how they perform in a mock financial crisis scenario. It’s also forced banks to increase the amount of cash they have stashed away to weather the next rainy day.
As we reported in 2009, the stress tests are a sham:
- Time Magazine called the previous stress tests a “confidence game” and Geithner a “con man” for running them deceptively
- Paul Krugman called the stress tests a mere “self-esteem class” for banks that no bank would be allowed to fail
- Nouriel Roubini said the stress tests “fail the basic criterion of a reality check”
- William K. Black called them “a complete sham”
- FDIC head Sheila Bair didn’t believe they were credible
- The stress tests were a P.R. stunt devised by the banks themselves
We noted in 2011 that the the heads of the Federal Reserve and Treasury Department lied about the health of the big banks in pitching bailouts to Congress and the American people:
The big banks were all insolvent during the 1980s.
The bailouts were certainly rammed down our throats under false pretenses.
But here’s the more important point. Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy, when they were not. They were insolvent.
Tim Geithner falsely stated that the banks passed some time of an objective stress test but they did not. They were insolvent.
In addition, the $700 billion 2008 bailout was just one aspect of the government’s ongoing bailouts of the too big to fail banks. A leading banking analyst says that the giant banks are receiving $780 billion dollars each and every year through various types of hidden bailouts.
In other words, the “end” of the type of bailout discussed by CNN doesn’t touch the other massive, ongoing bailouts of the big banks.
Moreover, the powers-that-be may be setting us up for “bail-ins”, where banks simply grab our deposit money and use it to plug the holes in their balance sheets.
The bottom line: Beneath the headlines, the truth is that the financial reform legislation has NOT really ended the bailouts … and things are only getting worse.