be_ixf;ym_202106 d_16; ct_50

Select Page

The “Too Big to Fail” Concept – Are U.S. Banks Over leveraged?

The “Too Big to Fail” Concept – Are U.S. Banks Over leveraged?

Ten years ago, the largest bankruptcy filing in U.S. history was one day away from being filed.

The tagline from the 2008 crisis that was set off with this now-famous bankruptcy was “too big to fail.”

Lehman Brothers, a 158-year-old financial institution with $600 billion in assets, evidently was not too big to fail.

Two weeks later, after several one-off bailouts, the U.S. government passed a $700 billion rescue plan for the financial sector.

With disregard to the issue of moral hazard, the government began buying up risky, nonperforming debt, like mortgages, auto loans and college loans, from various lending institutions

Lehman was just the largest casualty of the toxic debt crisis.

But the “too big to fail” concept, where America has to bail out an overleveraged Wall Street, is supposed to be a distant memory thanks to regulations.

That’s just not the case…

The “too big to fail” concept, where America bails out Wall Street, is supposed to be a distant memory thanks to regulations. But that’s just not the case…

While the capital ratio, pictured above, has improved some, it’s starting to head in the other direction.

This is basically the amount of cash the banks are holding on their balance sheet. For example, if they kept $20 at the bank and lent out $100, it would be 20%.

It’s around 7.6% right now. So the banks are keeping in a safe about $7.60 for every $100 they lend out.

Right before the global recession, that was at just 3%.

So we have come a long way, but steps taken recently are seeking to go in the other direction.

European banks avoided increased capital ratios. And in the U.S., President Donald Trump is starting to roll back some of the pieces to 2010’s Dodd-Frank bill, which added rules to protect consumers, and create a warning system for financial issues.

Regards,

Chad Shoop, CMT

Editor, Automatic Profits Alert

Newsletter Sign Up

Sponsored

MEET OUR EXPERTS

WHAT READERS ARE SAYING..

“Paul, your investment research has been a godsend. Our portfolio was just a tad over two million dollars. I paid my daughter's legal fees, my wife's medical expenses, helped my wife's stepmother with home repairs, loaned our son money for real estate. I also bought two used vehicles, one for our daughter and one for our eldest grandson. All told, these expenses added up to well over a quarter million dollars. I am happy to report that we have profits left over!”

- Taylor M.

“I'm very Happy with your services. I hope you don't plan to retire any time soon! My retirement portfolio depends on your expert guidance. Keep up the great work! Thanks.”

- Randy

"You have done once again!! You are reminding me of the GREAT Joe DiMaggio with your consistent hitting!! You knocked this one out of the park!"

- Keith S.

Share This