The next financial crisis is inevitable, is coming soon and will be of unprecedented scale and damage, says the former LTCM general counsel. The election of Donald Trump does little to change that, and investors need to prepare.
Wall Street’s gambles and risky borrowing directly led to the financial crisis, causing the collapse and near-collapse of megabanks and greatly harming millions of Americans. But thanks to government bailouts, those megabanks recovered quickly and top executives lost little.
In response, Congress passed the Dodd-Frank regulatory law to ensure that no failing bank ever receive such special treatment again. But legislation that favors very large banks and undermines those reforms is in the works again. The bill is called the Financial Institution Bankruptcy Act, or FIBA. The measure already has been passed by the House, and the Senate may take it up soon.
In theory, the bill attempts to solve a major issue in the Bankruptcy Code that prevents failing megabanks from restructuring through traditional Chapter 11 bankruptcy protection. In effect, though, FIBA offers banks an escape route, creating a subchapter in the Bankruptcy Code through which the Wall Street players who enter into these risky transactions will get paid in full while ordinary investors are on the hook for billions of losses. Not only is that deeply unfair, but it will encourage Wall Street to gamble on the very same risky financial instruments that caused the recent crisis.
Under Chapter 11, a failing company can get a reorganization plan approved to keep its business operating while paying its creditors over time. It then can emerge from bankruptcy as a viable business. During Chapter 11 bankruptcy protection, creditors are prohibited from suing the debtor to collect on their debt, a key provision that ensures all creditors are treated fairly and enables the business to reorganize. This is known as an “automatic stay.”
But Chapter 11 bankruptcy protection has never worked well for large banks. One reason is that, thanks to a series of special laws that Congress passed prior to the financial crisis, the automatic stay does not apply to specific financial instruments — technically called derivatives and repurchase agreements, or “repo”— which are largely held by Wall Street banks. In other words, while most creditors must wait out the Chapter 11 process to receive payment, financial institutions holding these specific financial instruments can sue immediately. Ordinary creditors must sit idly by, restrained by the stay, while the other financial institutions drain the assets and value of the failing bank.
Congress tried to address this problem in Dodd-Frank in two main ways. First, it required megabanks to have “living wills” under which they would limit their derivatives and repo exposure in advance so that they would be able to resolve themselves in Chapter 11 without putting the financial system at risk. Second, if the megabank is failing and its collapse in Chapter 11 would put the financial system at risk, the government can put it into an FDIC receivership, which allows the FDIC to wind down a failing megabank outside a bankruptcy court.
Republicans on Capitol Hill consider these changes unworkable and have proposed the new bill. The theory behind FIBA is that, if we can just tune up Chapter 11 bankruptcy law by enacting a new subchapter V to the Bankruptcy Code, then a large, failing financial institution will be better able to resolve itself in bankruptcy just like any other company. But in fact, FIBA’s subchapter V doesn’t do this. It just stacks the deck even more thoroughly in favor of Wall Street.
Here’s how it would work: Under the legislation, within 48 hours of a failing megabank declaring bankruptcy, a court would hold a hearing to allow the bank to transfer selected contracts and liabilities, consisting mostly of its derivatives and repo agreements, to a newly formed company. This so-called bridge company’s sole purpose is to take on the liabilities owed under these financial contracts and loans. The bridge company will be required to pay 100 percent of those liabilities, without any writedown, even if the property transferred to the bridge company is worth only a fraction of the debt. Once the transfers are made, the bridge company is outside of the jurisdiction and supervision of the bankruptcy court.
At the same time, Main Street creditors — such as the 401(k)s, pension plans and other businesses that extended credit or invested in the failed megabank the old-fashioned way — would receive no payment at all. Instead, the bankruptcy process would wipe out those debts and give the former creditors stock in the newly formed, post-bankruptcy bridge company. As the bridge company emerges from bankruptcy and restarts its businesses, those shares could be valuable. But the new entity’s very first job would be to pay back Wall Street banks 100 percent of their money — thus likely wiping out much or all of its value to its unfortunate new owners. Only after Wall Street gets paid would average Americans receive anything. And if those Wall Street liabilities exceed the new bridge company’s assets, then the stock held by Main Street creditors would be worth nothing.
Supporters of the bill argue that a Chapter 11 bankruptcy case is a tried-and-true way for a distressed company to restructure its debt, in a transparent proceeding governed by rules of law, in which creditors, shareholders and other parties can negotiate and advocate for themselves and their interests. But in practice, FIBA would take away all of this, and just leave Main Street vulnerable while putting Wall Street at the front of the line. Main Street creditors wouldn’t be able to protect themselves in this process — and in a big change from current law, most would not even know they were being ripped off. Under current Chapter 11, transfers of a debtor’s property must be in the best interests of creditors, at a fair price and, notably, after notice to creditors so that they can appear at the hearing and object. Under FIBA, only the largest creditors would even receive notice of the hearing. The ordinary creditors would not receive notice.
Even if they do know about the hearing, they wouldn’t have the representation and expertise necessary to object. Under the Chapter 11 bankruptcy law, the failing company pays for an “unsecured creditors committee,” which advocates for all unsecured creditors. But under FIBA, that committee would not even have been formed by the time of the 48-hour hearing. Main Street creditors would only find out what was done to them later, once they see the losses in their 401(k) or when their pension plan becomes underfunded.
FIBA thus represents a huge change to current Chapter 11 law. The negotiations with creditors and the deliberative process by which the debtor and its creditors advance their positions before the bankruptcy court wouldn’t happen. In effect, FIBA’s subchapter V would create a kind of fake bankruptcy case staged for the benefit of the holders of derivatives, repo and other Wall Street debt, while putting Main Street investors at the end of the line.
Even worse, though, is that FIBA would make the financial system more unstable for two reasons. First, FIBA also would give special, new protections to the megabank’s directors, by shielding them from liability — to creditors, shareholders and bank regulators — for their actions, however risky and destructive, taken in good faith if “in contemplation of” the subchapter V filing and the transfers to the bridge company. This represents a dramatic change from rules under Dodd-Frank which require directors and senior management of a failing megabank to forfeit bonuses and other compensation. In effect, FIBA would encourage excessive risk-taking by directors, who would be sure to argue that their damaging actions taken in the months leading up to the bank’s failure were in contemplation of the bankruptcy, and thus that FIBA’s good faith standard would protect them from Dodd-Frank liability.
Second, the wholesale transfers and special protections for Wall Street creditors would weaken the bridge company’s balance sheet, thus decreasing its ability to obtain the financing that it would need to remain viable. That wouldmake a run on the new bridge company only more likely.
The Bankruptcy Code is a key element of the U.S. economy. A good bankruptcy bill for large financial institutions would be a welcome addition, if it enabled a megabank to effectively restructure its debts and maximize the value of its assets and the distributions to all creditors. A bill such as FIBA would do none of these things. Instead, it favors Wall Street over Main Street, provides the prelude to the repeal of the FDIC receivership authority under Dodd-Frank and sets the stage for the next financial panic.
Bruce Grohsgal is a visiting professor in Business Bankruptcy Law at Delaware Law School, Widener University; he recently testified on FIBA before the House Judiciary Committee. Simon Johnson is a professor at MIT’s Sloan School of Management. In 2007-08, he was chief economist at the International Monetary Fund.
With unpaid bills surpassing $15 billion, Illinois’s financial crisis is so dire, Gov. Bruce Rauner said the state has become like a “banana republic” and the comptroller is warning it “can no longer function.” Even the lottery is at risk if a budget package isn’t passed soon.
A top financial official just warned 100 percent of the state’s monthly revenue will be eaten up by court-ordered payments. Rauner is calling a special session of the Democrat-led General Assembly in a bid to pass what he hopes will be the first full budget package in almost three years.
And Illinois will – literally – lose the lottery if the budget fails.
The state lotto requires a payment from the legislature each year. The current appropriation expires June 30, meaning no authority to pay prizes. In anticipation of a budget deadlock, the state already is planning to halt Powerball and Mega Millions sales.
After the General Assembly failed to pass a budget earlier this month, Rauner said the state is “like a banana republic.”
“We can’t manage our money,” he added.
Echoing these remarks, the state’s comptroller, Susana Mendoza, warned over the weekend that Illinois is in “massive crisis mode” because it is “effectively hemorrhaging money.”
“The state can no longer functionwithout a responsible and complete budget without severely impacting our core obligations and decimating services to the state’s most in-need citizens,” she continued. “We must put our fiscal house in order. It is already too late. Action is needed now.”
Rauner says Republicans do have a plan to get the situation under control.
“Republicans in the General Assembly have laid out a compromise budget that I can sign,” Rauner said, noting it’s a “true compromise.”
The plan incorporates reforms like property tax relief, term limits, and spending caps, which have caused an “ongoing confrontation” between Madigan and the governor, one Republican leader told Fox News, adding that the two have been in a “stalemate” since Rauner took office two years ago.
His proposals have faced resistance from Democrats, however.
Steve Brown, press secretary for Illinois House Speaker Michael Madigan, said he’s not making enough concessions.
“He’s not walking many back—the financial issues are serious enough, and he’s forcing things that have nothing to do with state government,” Brown told Fox. “The biggest problem here is that the governor keeps associating a lot of things that do not have anything to do with the budget.”
Thus far, the state has been functioning by passing a series of stopgap spending packages, which is an option if the General Assembly again fails to pass a budget. But taking that route is not ideal, lawmakers argue.
“We have a very real deadline looming,” Senate Republican Leader Christine Radogno told Fox News. “The alternative to not finding a compromise will be devastating to Illinois.”
National Geographic is developing How To Survive A Plague: The Inside Story of How Citizens and Science Tamed AIDS, as a scripted miniseries.
Sorry Dragon, the disaster was created by Bush and the kenyan, bin Bama. Trump was handed the shit pie by them and will do his best to correct it.
So don’t be another Euro-Shithead.
Really?! you created negaive bond rates and Trump is the one that will bring it all down?! Best tactic is always to blame your opponent for your own shortcomings…….not sure how these folks can even look themselves in the mirror honestly.
So what they’re admitting is that the “Big Reset” is coming? OK. Blame it on whoever you want so long as it happens. ‘Bout fucking time we get around to finishing the business that was started 8 years ago.
well, we’ver been wondering how exactly they were planning to finesse this one for years.
no finesse, just, “He did it!”.
C’mon you dry fuck, Draghi. is that the best you tits up fuckers can come up with? after trillions in QE and corporate buybacks and secret corporate bailouts and the mis-management of sovereign debt…..
let me translate the skype speech
financial crisis = slight reduction in HOLIDAY bonus pool. instead of 31 billion, 30.5 billion
World economy is on PALLIATIVE care since 2008 !!!!
Draghi’s “Whatever it Takes ” QE and NIRP just gave the euthanasia/mercy shot into the economy
MORON MORON MORON MORON MORON MORON MORON MORON MORON MORON MORON MORON MORON
Wait Vlad is not guilty as well ?????
come on Mr. Dragui please find a guilt to adress to Mr Vlad
Today is raining maybe is Trump fault
Makes me sick these NWO RETARDS I wouldn’t buy a USED CAR from these Fucktards !!!!!!
It’s got to be nice to be able to print as much money as you want to buy shit. It doesn’t matter that the price is so god damn high that nobody else wants to buy. You’ve got infinite supply.
It’s good to be king, but even better to be a central fucking bank!
If Trumps support drops with the S&P dropping, I suspect it’s because the average joe doesn’t understand that this reset is baked in the cake. Trump can’t fix this without a crash but he does need support so I hope people wake up to the facts.
I think there is more to this than “DRAGHI LOOKING FOR AN EXCUSE TO PRINT”. HE IS LOOKING FOR A SCAPEGOAT FOR HIS FAILED KEYNESIAN POLICIES.
This guy is a DESPOT with a REPROBATE MIND like the rest of the CBs.
Everyone blaming Trump for the economic meltdown = after 40 years, even the smart guys don’t think we can kick the can that much farther…..so, let’s blame the new guy!!
For more than 2 years all the basic indicators pointed to a slowing US economy and a recession on the horizon.
And now that we are there, it’s Trump’s fault?
But the policies that Trump has said they are working on do have the potential to get the US out of the recovery first, while the rest of the world get’s left behind in neutral or reverse.
And I can live with that.
No shit. Hank Paulsen, Jamie Dimon, Blankfiend, Bernanke, Yellen, and now Dragi. THOSE are the assholes that held the levers and “guided” this mess called an “economy” and “markerts”.
NOPE, not Trump’s fault at all. They will try to blame him. I think more blame needs to go to those above and SOROS, before blaming Trump. These other assholes were the meddlers and the “brain trust” with ZIRP/NIRP/ and the shit show they managed.
Big difference though the smart guys have brainwashed snowflakes.
Trump got the deplorables 🙂 Who realise WTF has been going on.
However you want to call it, the last couple of decades is solely the responsibility of the globalists / liberals.
“The Don” is obviously just too preoccupied with himself to figure this out then?
Cog-dis runs deep around here.
Why don’t we ask the real question?
Who is DJT? Who made him? Who paid him? Who owns his ass? I don’t care for the MSM which is deliberately not zeroing in on DJT’s background. They fight their little battles in the open which mean absolutely nothing. It’s all a distraction. He’s part of the machine. Another cog in the wheel.
Looking more and more like The Donald was (s)elected to be the fall guy.
The upcoming train wreck has been decades in the making.
Only someone who is willingly blind-stupid-uninformed wouldn’t see through this.
There aren’t that many blind-stupid-uninformed people around, are there?
Central Bank of EU manifest :
First, rig the System. Then, spend loads of other peoples money. Print some more money. Rig the system some more. Buy financial investments nobody wants. Disrupt the economic system, tilt the system some more, print more money. As soon as the system starts to shake, blame Trump or anyone else who had zero to do with it. If nothing else, one can always blame the Russians.
Trump, PLAY NARRATIVE JIU-JITSU!
“This Financial Crisis, like all those before them, are the principal making of the Globalist Bankers — or ‘Banksters’, as most people on Main Street call them. If they are unable or unwilling to deal eith their oen mess, then id be happy to do it for them. Let me know.”
He just jumping on the George Soros express to destruction. Far to many finger prints on these issues to blame President Trump.
Willing to bet President Trump already has the low down on who did what so comes the day of blame he will say “Well, lets look at these reports and see who is involved”
We can all sleep nights, now. Draghi has found his scapegoat (Pay no attention to the 2.5 times Global GDP in debt that has been amassed with the instigation of Central Banks everywhere).
Draghi still thinks that GDP can pay off the debt. It cannot.
Only profits are available to pay off the principal and interest of the debt.
That’s the first thing that camew to my mind. How can this fucking moron blame someone who just stepped into the game 2 weeks ago.
Earlier today, the portfolio manager of the world’s biggest hedge fund, Mario Draghi, whose total assets held by the European Central Bank’s special situations fund amount to €3.72 trillion, or 36% of the eurozone’s GDP…
… said that it is not his gargantuan “portfolio”, or the roughly $14 trillion in global central bank liquidity sloshing around (as lamented earlier today by Bill Gross) that would be the catalyst for the next market crash, but rather that it was Donald Trump’s deregulation of the banking industry that has “sown the seeds of the next financial crisis.”
Cited by Reuters, Draghi argued that lax regulation had been a key cause of the global financial crisis a decade ago, and said the idea of easing bank rules was not just worrying but potentially dangerous, threatening the relative stability that has supported the slow but steady recovery.
“The last thing we need at this point in time is the relaxation of regulation,” Draghi told the European Parliament’s committee on economic affairs in Brussels. “The idea of repeating the conditions that were in place before the crisis is something that is very worrisome.”
What Draghi did not mention is that it was his former co-workers at Goldman Sachs – in this case led by Trump’s chief economic advisor and former Goldman COO Gary Cohn – who forced this particular “”deregulation” precisely with the intention of sowing the seeds of the next financial crisis, so that when the next Lehman happens, it will be yet another global taxpayer-funded bail out of the financial system, allowing banks to sweep massive accumulated bad books under the rug a la 2008, and come out clean once again, merely at the expense of the “next Lehman”, whoever that may be.
Better yet, they will have Trump to blame for all of it.
Draghi’s words are among the strongest reactions yet from Europe since U.S. President Donald Trump ordered a review of banking rules with the implicit aim of loosening them. That raises the prospect of the United States pulling out of some international cooperation efforts.
And just as we predicted on the day Trump was elected, Draghi has now defined who the scapegoat for the next crisis will be – the man who has been in charge for less than a month – while absolving Trump’s predecessor Barack Obama of all economic, monetary and financial sins.
To be sure, it had to be a collective effort, and so other central bankers – who know that without someone to blame the next crash on, it will be their heads (metaphorically we hope) – chimed in:
Andreas Dombret, a member of the board of Germany’s powerful central bank, the Bundesbank, said that reversing or weakening regulations all at once would be a “big mistake”, because it would increase the chance of another financial crisis. “That is why I see a possible lowering of regulatory requirements in the U.S., which is under discussion, critically,” said Dombret, who is also a member of the Basel committee drafting new global banking rules.
Roberto Gualtieri, chairman of the European Parliament’s economic and monetary affairs committee, also criticized Trump. “Some first concrete confirmations of a new more unilateral policy stance by the new U.S. administration, including on sensitive financial markets regulatory issues, raise concerns and require both thorough reflection and action from the EU side,” he told the committee.
Meanwhile, Draghi deflected accusations lobbed at him over the weekend by German finmin Schauble, who said not Germany, but the ECB and Mario Draghi, are responsible for the undervaluation of the euro:
Draghi rebuffed accusations by Trump’s top trade adviser that Germany, the euro zone’s biggest economy, is using a grossly undervalued currency to take advantage of the United States. He argued instead that economic weakness is the main reason for the weak euro.
Germany runs a massive trade surplus with the United States and Trump trade adviser Peter Navarro said it was now exploiting this to America’s detriment, de facto accusing Berlin of currency manipulation. But Germany does not set monetary policy and has repeatedly complained that ECB policy is actually too easy, calling on Draghi to end its massive stimulus program.
“First and foremost: we are not currency manipulators.” Draghi said. “Second, our monetary policies reflect the diverse state of the (economic) cycle of the euro zone and the United States.” “The single market would not survive with continuous competitive devaluations,” Draghi said.
But the ECB chief also said no policy tightening was coming as growth was still weak and faced with risks, while the inflation spike is still temporary, all indicating that monetary support is still needed. In other words, Trump may have sown the seeds of the next crisis, but the ECB will continue buying up roughly 0.3% of the outstanding stock of European corporate debt held in private hands every week, not to mention gradually nationalizing Europe’s entire sovereign debt market.
“Our monetary policy strategy prescribes that we should not react to individual data points and short-lived increases in inflation,” Draghi said. “We therefore continue to look through changes in (harmonized) inflation if we believe they do not durably affect the medium-term outlook for price stability.”
Good thing the ECB is not “data-dependent” then.
It remains unclear if this jawboning between Draghi and Trump, who are both effectively manipulated and played by the same bank, Goldman Sachs, is just a charade, or if this is setting up as a preamble to Trump accusing the ECB of manipulating the euro, perhaps preceding a similar crackdown on the Fed itself, as the Vice Chair of the Senate Financial Services committee Patrick McHenry hinted last week when he said that “It is incumbent upon all regulators to support the U.S. economy, and scrutinize international agreements that are killing American jobs.”
If, indeed, this is nothing more than theater, we hope Trump is aware that his support level will vaporize should the S&P proceed to crash, something which many say is long overdue after the S&P never even had even one bear market for the duration of Barack Obama’s tenure.
Will Trump cause a stock market crash? The market dove after the latest news in the Trump scandal. Here’s what you need to know about a market crash in 2017…
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The financial crisis created a precariat army of RV-nomad seniors who serve as Amazon’s seasonal workers
U.S. Federal Reserve Chair Janet Yellen said on Tuesday that she does not believe that there will be another financial crisis for at least as long as she lives, thanks largely to reforms of the banking system since the 2007-09 crash.
“Would I say there will never, ever be another financial crisis?” Yellen said at a question-and-answer event in London.
“You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be,” she said.
Yellen said it would “not be a good thing” if reforms of the financial services industry since the crisis were unwound, and urged those who had helped manage the fallout at the time to be vocal in preventing such a dilution.
U.S. President Donald Trump has said during his election campaign that he would cut banking regulation. The U.S. Treasury Department earlier this month proposed easing up on restrictions big banks now face in their trading operations.
Yellen declined to comment when asked about her relationship with Trump but said she had a good working relationship with U.S. Treasury Secretary Steve Mnuchin.
She also reiterated her view that the U.S. central bank would continue to raise interest rates only gradually.
“We think it will be appropriate for the attainment of our goals to raise interest rates very gradually to levels that are likely to remain quite low, although there is uncertainty about this, to remain low by historical standards for a long time,” she said.
She said the stockpile of bonds the Fed amassed to help the U.S. economy through the crisis would be shrunk “gradually and predictably.”
Asked about share price valuations by a member of the audience, Yellen said “by standard metrics, some asset valuations look high but there’s no certainty about that.”
Newspapers published in the Kashmir valley are struggling to survive and remain in business as they are facing an acute financial crisis with their advertisement revenues dried up due to unrest and a shutdown since early July,.
Hit hard by decreasing advertising revenue, an English language daily, ‘Kashmir Observer’, has decided to go digital with a multimedia edition and widen its reach in the virtual world.
Its editor, Sajad Hyder, told IANS: “As Kashmir battles another bout of unrest, now in its fifth month, media houses in the valley are facing a financial crisis as advertisement flow from the market has virtually been zero.
“We’re now diverting a major chunk of our resources for digitisation to reduce the print costs.”
As businesses remained mostly shut for the last five months, both big and small business houses have drastically cut down on their costs, including advertisements.
“We find it difficult even to pay our staff. Investing in advertisements is a luxury we cannot afford unless our businesses recover,” said the owner of a hotel that has remained closed almost for the entire summer, the peak tourist season in the valley.
The government has also reduced its daily flow of advertisements for newspapers because everything was at a standstill after the July 8 killing of a militant commander that led to a public stir and violent protests and shutdowns spearheaded by separatist leaders.
Bashir Manzar, editor of the Kashmir Images daily, said there has been a little or no developmental work in the valley for the past five months and as such “the government had very little to publicise”.
“Most of the advertisements are about developmental works and naturally when everything was halted, we had no reason to demand more,” Manzar told IANS.
He, however, added that the government was holding back their previous dues, which “further complicated the crisis”.
Manzar has not yet thought of alternate revenue generation but admitted that “continuing with what is being done (relying only on print for revenue) cannot even let us survive”.
Hyder agreed and said remaining in circulation through just the print edition is a challenge local newspapers may not be able to meet for long.
“The main objective of going digital is to diversify channels to generate badly needed revenue.”
Devang Shah, executive director of Kashmir Observer Digital, said the edition would feature videos, people’s views, conversations, debates and analyses “that will go beyond the obvious and the apparent”.
The editor said this was being done to exploit the untapped market, both nationally and internationally, that craves for visual media from Kashmir.
What is true of Kashmir Observer holds good as well for other big and small vernacular and English language dailies and weekly newspapers.
English dailies with large circulations like Greater Kashmir, Rising Kashmir, Kashmir Monitor, Kashmir Images and Urdu dailies like Kashmir Uzma, Aftab, Srinagar Times and Chattan have so far not purged staff, but have cut down heavily on their print runs.
Tahir Mohiuddin, editor of Chattan, told IANS: “All newspapers in the valley are facing one of their worst crises at present. The state government advertisements to newspapers have also been cut to mere 10 per cent of what these used to be before the unrest.
“It is a crisis situation a publisher or the editor simply does not know how to get out of.”