We have to wait and see just how the banks are truly put in their proper place as utilities that serve the people, not just themselves.
Fed Governor Speaks Out For Stronger RulesRead the full article here
By Simon Johnson - The Baseline Scenario
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These structures are intended to benefit from association with federally guaranteed deposits as well as the broader but more nebulous protection that comes from being perceived – by officials and by markets – as too big to fail. A commercial bank gives trading operations huge financing advantages, in part because they have the implied backing of depositors and taxpayers; this is why so many banks have put their enormous derivatives trading operations in their insured banks.
Goldman Sachs this week announced that it will expand its regulated bank as a way to obtain lower-cost financing. The federal insurance on deposits is a great deal for a high-risk trading operation like Goldman’s, lowering its financing costs by perhaps 200 basis points (two percentage points, an enormous amount in today’s markets).
Without government guarantees, creditors to Goldman would want to be compensated for the risks they are taking. As things now stand, Goldman is receiving a large implicit government – and taxpayer – subsidy. The same is true at all the other large banks.
Marc Jarsulic of Better Markets points out that, during the height of the financial crisis, the largest financial institutions in the country received a great deal of emergency financing to support their securities operations. At its peak in September 2008, this financing amounted to around $430 billion (per day).