Banking Collapse: From Too Big To Fail to… Even Bigger

On May 1st, the U.S. Federal Deposit Insurance Corporation announced that it had struck a deal with JPMorgan Chase for the latter to take over the deposits and assets of the failing First Republic Bank. The FRB is the latest shoe to drop in the collection of victims of the Federal Reserve’s interest rate policies. In the first quarter, it had lost $100 billion of deposits and its stock had fallen from $120 to $8 on April 25. A few conclusions can be drawn from the otherwise expected bailout action.

• JPMorgan was already the largest U.S. federally insured bank and the most bankrupt bank in the United States. Now it is even bigger and more bankrupt. Following a similar case in Switzerland, where UBS took over the failed Credit Suisse, the trend is that “Too Big To Fail” becomes even bigger (cf. next item).
• Similar to the Swiss scheme, the FDIC granted a loss-shared transaction on FRB assets to JPMorgan. The FDIC estimates that the entire operation will cost $13 billion in taxpayer money, but this is not credible.
• With the FRB bailout, the U.S. banking system has now experienced it own cumulative “Credit Suisse” case in terms of the combined volume of bank assets bailed out in recent weeks: $550.8 billion (Silicon Valley Bank $211.8 bn; Signature Bank $110 bn and First Republic $229 bn);
• The underlying motivation for the bailouts is the attempt to rescue the four quadrillions of derivative debt owned by “too big to fail” banks.

According to a quote attributed to Einstein, insanity is doing the same thing over and over again and expecting different results. Regardless of the author, it fits to what financial authorities have done before, during and since the 2008 financial crisis. So, expect a worsening of the problem, because the solution is not inside the system but outside. In other words, the Wall Street system of financial casino must be shut down and replaced with a credit system that finances the real economy.

The first step must be the separation of commercial banks from investment banks, along the lines of the 1933 Glass-Steagall Act in the U.S. Ohio Congresswoman Marcy Kaptur, who had drafted such a bill in 2009, has just reintroduced a similar one in Congress (cf. SAS 17/23). A campaign for bank separation was also begun in Switzerland after the Credit Suisse debacle, pushed by the same forces who had attempted to have it implemented after the 2008 financial crisis.