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TBTF is the acronym for "too big to fail."
It's the crazy notion that certain banks are so large and systematically important (which really means so threatening to financial systems) that they must be kept alive by the government, because their failure would wreak havoc on the economy.
How will they be saved from their own greed? And how will we be saved from their greed so we can kneel at their altars another day?
Central banks and governments, who are not as powerful as central banks, will backstop them with printed paper and taxpayer blood. That's how they'll be saved, grow bigger, and one day rule the world.
Oh, that already happened… never mind
But wait. Now there's a new TBTF on the block. And it's even crazier than the first.
Last week Senator David Vitter (R-LA) and Senator Sherrod Brown (D-OH) introduced their own TBTF bill; it stands for "Terminating Bailouts for Taxpayer Fairness." I'm not kidding.
The Brown-Vitter Bill, as it's known – I much prefer the "TBTF Act" official title – is a thing of beauty.
It's so "in your face" (if you're a TBTF bank) that it's got a lot of those smirks on bankers' faces frozen (momentarily), making them look like the Jokers they are.
Here's what it says….
Brown and Vitter are pretty sure that the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is still mostly unwritten, is too ambitious to succeed.
Dodd-Frank is a joke because it is so unwieldy and so theoretically expansive. Not only will it never be completed, it was designed to be unwieldy so loopholes woven through all aspects of it would give banks the backdoor relief they need from it.
Brown and Vitter know this. So they've proposed legislation that leapfrogs the "molasses approach" to safeguarding the economy and the citizenry. Instead it attacks the very castles that are the TBTF banks.
They want to break them up. And they've come up with a simple way to do it.
The TBTF Act calls for banks with between $50 billion and $500 billion in assets to maintain an 8% capital ratio. Basically, that means they have to have 8% of their assets in equity, which amounts to an 8% buffer against all their assets losing 8% of their value.
Beyond that, it gets scary.
Because the too-big-to-fail banks are so much bigger and so much more of a threat on account of their size and interconnectedness, the TBTF Act calls for them (those with more than $500 billion) to maintain a 15% capital reserve ratio.
According to Goldman Sachs, who looked at the B-V bill, the big banks have raised their capital levels to $400 billion since the financial crisis, but will need an additional $1 trillion in capital if the B-V bill becomes law.
In other words, it's such a tall order, and one they won't be able to meet now, that they will have to sell assets and essentially break themselves up in order to comply.
Oh the humanity!
And that's not all the TBTF Act calls for.
It calls for bank holding companies (BHCs) to separately capitalize their affiliates. (BHC entities, by the way, are a device to manipulate regulations and capital requirements…yeah, that's what I said, because that's what they are.) That means no more shuffling assets and liabilities to play dangerous parlor games.
The Act also calls for banks to count off-balance sheet obligations (for real) and incorporate onto their balance sheets the counterparty risks they face with the trillions of dollars of derivatives exposure they routinely want regulators and us to assume is all kosher.
And what I especially like is that BHC affiliates that are not depository institutions, which will have to have their own capital, won't be granted any FDIC backstopping and won't have access to the Fed's Discount Window. Of course, they'll have to expand those ring-fence plans so the Fed doesn't create backdoor help by other means.
There's more to the TBTF Act, but suffice it to say, it essentially calls the breakup of too-big-to-fail banks and simpler, more straightforward "laws" that – to my greatest hope and enthusiasm – essentially reconstitute that old, venerable humpty dumpty… Glass-Steagall.
Will the TBTF Act have a snowball's chance in Hell?
No. Not without our support.
I look forward to hearing what you all think about the proposed bill – please leave your comments below. And I'm going to see what I can do about creating an avenue here, for us to reach out to our Congress, and everyone who needs to hear our footsteps, so we can be cause in the matter.
That includes telling them that we want TERM LIMITS.
We are watching them.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
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