The “ghost banks” are back and still too big to fail

A decade later, these full impacts have become clear. AIG, which had become a gigantic shadow bank, had – unbeknownst to many – unwisely agreed to be the counterparty to a multitude of credit default swaps, against which it held little capital. When things went wrong, the government had to stabilize the financial world by accepting responsibility for all of AIG’s reckless loans, essentially taking on the role of the FDIC for a financial entity that taxpayers were never supposed to support. In the aftermath of the financial crash, it was revealed that there were a number of grotesque shadow banks like AIG, such as Metlife, Prudential and GE Capital. These were so important that they could be considered, under the Dodd-Frank banking reform bill, as “systemically important financial institutions” or SIFIs. Yes, that’s another euphemism for “Too Big to Fail”.

Dodd-Frank created new regulators, like the Financial Stability Oversight Council, to prevent this kind of devastating financial disruption. One of the powers of the FSOC was the ability to attach the designation “SIFI” to any type of business it wanted, which in turn would require that business to provide more reporting and keep more capital in its reserves. . These efforts, however, have largely failed when it comes to shadow banking. For example, in 2013 the FSOC attempted to classify colossal asset managers like BlackRock (which manages nearly $ 7 trillion in assets under management and whose operations are funded by products similar to money market funds). and obscure financial products such as repo agreements) as SIFI. Asset managers retreated and won.

In addition, says Graham Steele, finance expert at Stanford University, the Federal Reserve has also “never really taken the time to set the ground rules for doing [the shadow banks] safer, ”before the arrival of the Trump administration, by removing and removing regulatory requirements from a number of shadow banks, including insurers Metlife and Prudential. GE Capital and AIG downsized to get rid of their post-crash scarlet letters, but Metlife and Prudential are still big, not designated, and less regulated than it should be.

Finance, especially after 2008, works because the state guarantees that the worst of what we’ve been through before will not happen. Not paying for these insurances is tantamount to fraud. Because shadow banks are financed by loans and lines of credit from the big banks, the failure of one is inseparable from that of the other. Considering the size of most financial institutions, shadow banks included, there isn’t really a part of the financial sector that is not systemically important. Plus, as Steele noted, size wasn’t the only factor that Bill Dodd-Frank said could make a business systemically important. Another such condition was whether the institution in question had significant financial activity, as housing finance could easily be considered. Bailouts and backstops, Steele says, must be paired, at a minimum, with requirements to divide those large entities into smaller, less risky companies with more returns and higher capital requirements. It is even possible that some of these companies must be transformed into public services. “When the going is good,” he says, “we find out that we are ensuring the survival of all these shadow banks.”

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