what follows is an extended version of the OP (that connects the dots),...
Personal Asset Safety in Financial Institutions
While "asset" accounts at banks and brokerages offer convenience, they aren't entirely risk-free. Understanding the potential issues is crucial in a second TRUMP administration.
Lessons from the 2008 Crisis
The 2007-2008 subprime mortgage crisis exposed vulnerabilities in the financial system. Banks readily issued loans to borrowers with shaky creditworthiness, motivated by short-term profits and regulatory loopholes. This risky behavior fueled a housing bubble, masked by complex financial instruments like credit default swaps (CDS). CDS are essentially insurance contracts on bonds, but unlike traditional insurance, sellers weren't always required to hold sufficient reserves to cover potential losses.
The film "The Big Short" depicts characters who recognized the unsustainable situation. They saw the "house of cards" built on subprime mortgages and profited by betting on its collapse. These bets involved buying CDS from institutions like Lehman Brothers, which ultimately failed due to the unsustainable practices.
Regulations: A Balancing Act
Financial regulations are implemented in response to past crises. The history of "bucket shops" demonstrates the dangers of unregulated derivative markets. These were essentially gambling dens where investors gambled on stock prices without actually owning any shares.
en.wikipedia.org
The Glass-Steagall Act, enacted in 1933 after the Great Depression, aimed to prevent banks from engaging in risky investment practices. Its repeal in 1999, through the Gramm-Leach-Bliley Act (GLBA), allowed for increased financial institution consolidation. While deregulation can spur economic growth, it also carries risks. Proposals to loosen regulations, particularly regarding FDIC insurance, require careful consideration of potential consequences. Former FDIC chair Sheila Bair, for example, warns against eliminating FDIC protection.
The Looming Threat of "Bail-ins"
Another cause for concern is the possibility of "bail-ins," where banks might seize a portion of depositor funds during a financial crisis. This practice, while controversial, is legal in some situations.
A bail-in provides relief to a financial institution on the brink of failure by requiring the cancellation of debts owed to creditors and depositors.
www.investopedia.com
Additionally, the use of complex financial derivatives like CDS remains widespread, creating a potential global "ticking time bomb" estimated to be worth trillions of dollars.
Learn how different calculations can reduce the estimate of the total derivatives market by as much as 90% to 95%.
www.investopedia.com
Conclusion:
Financial literacy regarding personal asset safety and potential risks within the system is crucial.