The major Bank Holding Companies (BHCs) were at the heart of the credit crisis of 2008, and they are involved in a long, drawn out workout process that will probably continue for a number of years. For some of these holding companies, a breakup is possible.
Watchers of the arc of the crisis are in some agreement that the eventual workout or even the taking of the real measure of the loss in wealth that is on the hook has not happened, even as the risk has shifted to the sovereign balance sheets through the lender of last resort function of policymakers.
The more speculative firms that failed during the crisis have either been merged with, bought or have had their portfolios cordoned off, both with and without policymaker backing.
Thus, parts of the “shadow banking system” that were attached to the speculative firms have been integrated into the large BHCs. The BHCs are now even larger and more “vertically integrated” or if you prefer the pejoritive, even more incoherent. These colossal BHCs are attempting to maintain cash flows and to generate revenues. A big part of recent revenue has been in the trading divisions of the BHCs; they are trading in public exchanges and markets and in OTC markets. Insiders have taken to joking that the new banking revenue policy is “borrow short” and “buy or trade anything” as large sources of revenue of late have been in trading and/or one time subsidy.
Forebearance and changes in accounting rules have given them time to trade, relever up, and raise some capital through the issuance of bonds and equities, as well as maintain revenue generating business, surely. But is the capital raised enough and are the revenues enough?
They have also led a rally in the equities markets on the recent boost of some one-time “trades”, accounting magic, and “unreliable” earnings. At the same time that they are in the slow, grinding process of working out failed and failing loans or decomposing distressed securites tied to loan portfolios, they are also putting significant value at risk in complex trades.