Tag Archives: financial industry net worth

Derivative Debacle Persists

By Barry Elias | Friday, 13 Nov 2015 06:53 AM

Taxpayers remain the backstop for risky swap derivative investments held by financial institutions.

In December 2014, the Congress rolled back provisions of the Dodd-Frank legislation as part of a must-pass government spending bill to prevent a total government shutdown. The original Dodd-Frank rules were designed to prevent future taxpayer bailouts of banks that arise from improper management of derivative contracts, including inadequate capital requirements for swaps.

The Federal Deposit Insurance Corporation (FDIC) recently estimated approximately $9.7 trillion of swap derivatives remain on the balance sheets of 15 banks that are registered as swap dealers. This represents roughly 4.4 percent of the total outstanding derivative contracts at these institutions and is comprised of $6.1 trillion in credit derivatives, $2.6 trillion in equities derivatives. and $1 trillion in commodity derivatives.

If the taxpayers did not insure these swap products, counterparties would require banks to hold more collateral to offset potential losses, and this would undermine bank profit margins. Swap trades enable financial institutions to exchange payment streams, typically to lower interest rates or currency risks.

Sheila Bair, the former chair of the FDIC, has stated the swaps repeal represented a “classic backroom deal.” “There’s no way this would have passed muster if people had openly debated it, so [the banks] had to sneak it on to a must-pass funding bill. For an industry that purports to want to regain public trust, it was an extraordinary thing to do,” said Bair.

The net worth of the financial industry has been negative for most of the past 20 years, reaching a nadir of negative $1.46 trillion in April 2007 prior to the financial crisis. Following an injection of approximately $29 trillion in credit by the federal government in the form of asset purchases, guarantees, and loans during the crisis, the financial industry reached a peak net worth of $1.93 trillion in March 2009, only to see it plummet with the end of quantitative easing: It stood at negative $809 billion in June 2015.

The financial industry has been greatly subsidized by the taxpayers for many decades. It’s time we implement the bank bail-in rather than the bank bail-out.

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