As we now know, Cyprus is a small island country with a financial sector that has run amok, following in the footsteps of Ireland and Iceland. The assets of its banks were eight times the size of the country's economy.
This meant that when the banks' big bets went bad, there was no way Cyprus' government could afford the price of the bailout. As a result, Cyprus was forced to go hat in hand to the European Central Bank and accept whatever offer was put on the table. However the Cyprus crisis is finally resolved, it is not likely to be a pretty picture for the citizens of Cyprus.
As the Cyprus crisis was unfolding last week, we also got to see the report of the Senate Permanent Subcommittee on Investigations (pdf) on JP Morgan's losses at its "London Whale" trading division. The report chronicles a series of bad bets on derivatives that were compounded by traders doubling down their stakes. They concealed the size of their losses both to bank officers and regulators. The end result was a $6bn loss.
JP Morgan is a huge bank and can swallow $6bn in losses, but the incident showed as clearly as possible that the Dodd-Frank reforms are not working. The London Whale's losing trades were all done in the Dodd-Frank era. The bill's provisions did not prevent JP Morgan from making massive bets and misleading regulators about their nature and the risks involved.
Baker führt weiter aus, dass es für eine Bankenreform, die auch ein Aufbrechen jener Banken beinhalten müsse, die "Too Big To Fail" sind, einen politischen Schulterschluss zwischen einflussreichen Republikanern und Demokraten brauche, um die jeweiligen Parteiführungen, die derzeit vom Finanzsektor und dessen finanziellen Parteizuwendungen abhängig seien, von der reformblockierenden Linie abzubringen.
