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My son-in-law is a portfolio manager for a New York investment management company (a hedge fund), and his job is to second-guess what will happen to stock prices of two companies involved in a successful merger. If one or both candidates are banks, they never touch it. He said, “Bank accounting information tells us nothing about what is actually going on.”

So, I wasn't surprised to read a New York Times editorial citing Thomas Hoenig’s assertion that the level of capital at the nation’s eight largest banks was not the 12.9 percent of assets claimed by the Federal Reserve but rather, it was a paltry 4.97 percent. Mr. Hoenig ought to know. He is the vice chairman of the Federal Deposit insurance Corporation.

Who knows what the real number might be? What we have learned from recent history is that while the Federal Reserve’s Alan Greenspan once assured us that the banks were fine, a single Federal Reserve governor at the time warned of mounting risks and was ignored.

It’s deja vu all over again. The problem continues to be derivatives and how they are valued. International accounting rules require that we count them as assets making the banks’ own capital a smaller percentage of the total amount of money under the banks’ control. By comparison, our rules allow banks to just ignore their derivatives thereby making their own capital a higher percentage of what appears to be “on the table.”

The scale is astounding. According to Bloomberg Business Week, Wells Fargo holds $5 trillion in derivatives. Morgan Stanley has $39 trillion in derivatives. These banks insist that their arcane financial bets can be ignored because they all offset each other. Mr. Hoenig and other industrialized countries apparently feel that this makes sense only until one of them blows up --- like real estate did in the last decade and like, for example, the “London Whale” episode involving currency-related derivatives that cost J.P Morgan Chase $6 billion in one fell swoop. These “bets” were not included on the balance sheet because they were supposedly canceling each other out and involved no risk.

This begs the question: “If they involve no risk, why bother?” If they make it impossible for us to know what a major bank is worth, why do we allow it? We had a window of opportunity to nationalize all the “too big to fail” banks that were truly insolvent and we lost our chance. Instead, we let them live long enough to buy the political will they needed to go back into what is business as usual.

Creating a national, publicly-owned bank when private banks fail has an historical precedent that was amazingly successful. In the 30’s and 40’s, President Roosevelt expanded the Reconstruction Finance Corporation started by Herbert Hoover--- a bank owned by the public --- that was the nation’s largest corporation and the world’s largest bank. It created money, which is what central banks do, and funded over $50 billion worth of public works and war-time expenses (several trillion in today’s dollars). Unlike our recent TARP program, all this money went directly to people who used it productively rather than to private banks who largely just sat on it to look healthier.

In the end, the RFC paid back what it owed public savers and the treasury and turned a profit. “Roughly” $690,017,232 was the government’s profit alone on the money they lent.

For those who feel queasy about the safety of their money in banks, it is reassuring to know that we have an option, as possibly beleaguered citizens someday, to start another RFC. There are plenty of industrialized countries, starting with Mainland China, whose banks are owned and operated by the government, and this would be our option if the major banks fail us again. In the meantime, there are hundreds of well-run community banks that just take deposits and loan money. Consider using them if you want to sleep better at night.