By: Tyler Durden
Two months ago, Fed governor Jeremy Stein caused a major stir among the very serious excel-using economists and other wannabe ”scientists”-cum-voodoo witchdoctors, when he hinted that it was the Fed’s actions that were leading to “overheating” in the markets. It took quite a bit of rhetoric by other very serious people to talk down his comments and give the impression that the S&P is not about 50% overvalued. Today, Stein has managed to stick his foot in his mouth for the second time in a row, and do what virtually nobody in the status quo is capable of: tell the truth.
In a speech titled “Regulating Large Financial Institutions” Stein made something very clear: if and when a TBTF fails, and since this time is not different, and a failure is only a matter of time, depositors will lose everything (courtesy of some $300 trillion in gross unnetted liabilities which once there is a counterparty chain failure, suddenly become very much net and immediately marginable – a drain of cash), which now that Cyprus is the template, is to be expected. Not only that but Stein makes it all too clear that part of the Dodd-Frank resolution authority guidelines, a bailout is no longer an option.
Perhaps more to the point for TBTF, if a SIFI does fail I have little doubt that private investors will in fact bear the losses–even if this leads to an outcome that is messier and more costly to society than we would ideally like. Dodd-Frank is very clear in saying that the Federal Reserve and other regulators cannot use their emergency authorities to bail out an individual failing institution. And as a member of the Board, I am committed to following both the letter and the spirit of the law.
At least he can’t say Americans weren’t warned when the Cypressing(sic) hammer finally falls.
Oh, and as a reminder…
Share and Enjoy