Equities of Mega Banks - Avoid Forever
Too Big to Fail—Then Who Needs their Stock
..... large banks will not be allowed to go bankrupt.

The Lehman and J.P. Morgan Fiascos
....The American officials....realized in horror that the entire global financial sector was lined up to go down next. One hundred years of coddling and risk backstopping – starting with the creation of the Federal Reserve in 1914—had created a financial industry that wasn’t ready to be released in the wild.... the financial sector is the nervous center of capitalism. No modern elected government anywhere can allow its financial sector to have a nervous breakdown.... government’s implied guarantee to these banks creates a major case of moral hazard. If the government is going to pick up the losses, why, mega bank managements may ask, not take more risks on less capital? Of course that is what happened over the years...Over the years, large commercial banks gave the public an illusion that they were safe and protected by their governments. The banking crisis in 2008 shattered this illusion.

The LIBOR Issue—Another Reason to Go to Law School
The banks apparently gamed the system. The London Interbank Offered Rate or LIBOR is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. It turns out weaker banks reported rates to LIBOR that were below that which they were actually paying. The idea was to conceal weakness. Apparently the professionals and the regulators knew what was going on. So from an economic point of view (as opposed to a legal), the wholesale market adjusted and no big deal.

But LIBOR has been used for pricing many loans around the world by borrowers that didn’t know the system was not what it appeared. For example mortgage loans in East Los Angeles or Fresno made to overleveraged minority borrowers who had no business borrowing in the first place. That was not a good idea. LIBOR wound up being used for purposes it was not intended.


........... Peter T Treadway