Tag: banks

The zero-reserve banking system

Unbelievable. They certainly didn’t teach this in our economics textbooks. From Ben Bernanke’s testimony to the House Committee on Financial Services:

Given the very high level of reserve balances currently in the banking system, the Federal Reserve has ample time to consider the best long-run framework for policy implementation. The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

Those who have RGD will note that this elimination of reserve requirements would theoretically permit the former fractional-reserve banks to make an infinite amount of loans regardless of what deposits they hold. This would also theoretically provide a rational basis for the hyperinflation scenario, but as I have pointed out many times before, even an infinite money multiple will require an infinity of borrowers.

If this does not make it clear to you that the financial authorities are getting desperate, I don’t know what will. The ironic thing is that most people still believe that the fractional-reserve system is based on a 10% minimum reserve requirement.

The blade is sharpened

And time is fast running out:

The war over mark-to-market accounting is about to get hot, again. In coming weeks, the Financial Accounting Standards Board is likely to propose that banks expand their use of market values for financial assets such as loans, according to people familiar with the matter. That departs from current practices in which banks hold loans at their original cost and create a reserve based on their own view of potential losses.

This has to be done, but the banks are going to fight it with everything they’ve got. The reason is because, by my estimate, the values of those loans, as well as the securities and derivatives based on those loans, are around 41% overvalued. That means that marking to market rather than marking to fantasy will eradicate about $15.6 trillion from the credit markets.

Even in an economy with a $14 trillion GDP, this is likely to have an impact.

Congress, led by Barney Frank, forced the FASB to permit what has been little more than legalized accounting fraud in order to keep the banks out of bankruptcy. But because the so-called financial rescue plan has failed, the important question now is whether the politicians are determined to go down fighting alongside the banks or whether they will finally break ranks and try to save themselves by sacrificing the banksters to the vengeance of an angry public.

Above the law

It’s a “gimmick” when banksters do it. It’s criminal fraud whenever anyone else does:

Lehman Brothers Holdings Inc used accounting gimmicks and had been insolvent for weeks before it filed for bankruptcy in September 2008, but there was not extensive wrongdoing, a court-appointed examiner has found.

In a 2,200-page report made public on Thursday, examiner Anton Valukas, chairman of law firm Jenner & Block, reported the results of his more than year-long investigation into who could be blamed for the firm’s collapse, which deepened the global financial crisis.

The examiner said that while some of Lehman’s management’s decisions “can be questioned in retrospect” and the firm’s valuation procedures for its assets “may have been wanting,” those responsible for the firm had used their business judgment and were largely not liable for the firm’s collapse.

So, Lehman’s management ran the company into insolvency, then committed weeks of fraud to hide that fact, but somehow they “were largely not liable” for the collapse of the company? How is that even remotely credible? Especially in light of how the FDIC has made it perfectly clear that most banks are fraudulently hiding their present insolvency by assigning hugely exaggerated values to their assets. Even by the FDIC’s overly conservative measure of “estimated losses”, it is obvious that there is a huge gap between reported assets and actual assets.

This can be computed by subtracting the average FDIC-seized bank’s deposit liabilities from its reported assets, then adding the estimated losses. In 2009, this average asset gap was $505 million against reported assets of $1,229 million, or 41.1%. In 2010, the average asset gap is presently running $272 million against reported assets of $638 million, or 43.7%. This indicates that the smaller banks are every bit as insolvent as the bigger banks. As are the giant banks; Karl Denninger explained the probable extent of their balance sheet fraud a few days ago:

So let’s be generous and assume that the “big banks” are over-valuing their assets by 25% – the lower end of the range of what the FDIC says is, through actual experience, what’s going on, and add it all up.

Bank of America shows $2.25 trillion in assets.

Citibank shows $1.89 trillion in assets.

JP Morgan/Chase shows $2.04 trillion in assets.

And Wells Fargo shows $1.31 trillion in assets.

This totals $7.49 trillion smackers.

The FDIC’s experience with seizing banks thus far suggests quite strongly that all four of these entities are lying about these valuations, and that were they to be seized the loss embedded in them (and for which you, the taxpayer would be responsible) is somewhere between $1.49 and $2.99 trillion dollars.

Based on the last two years of data, the actual gap between the assets and liabilities of the Big Four is actually more like $3.2 trillion, or roughly the size of Citibank and Wells Fargo put together. Despite their failure to act, the FDIC obviously knows about this. By way of evidence, here was the FDIC’s response to one of the Market Ticker’s readers who asked about the difference between bank-reported assets and FDIC-reported estimated losses: “That’s the value the bank had them on their books on their year-end financials, but the true value is much less. It is similar to someone in Las Vegas saying that their house is worth $300,000 because that’s what they paid for it three years ago, but the reality is, if they had to sell it in today’s market, they’d only get $250,000 for it. The FDIC has to sell assets in today’s market.”

WND column

The Cross of Debt

Ordinary people, farmers and fishermen, taxpayers, doctors, nurses, teachers are being asked to shoulder through their taxes a burden that was created by irresponsible greedy bankers.
– Iceland President Olafur Grimsson, March 5, 2010

In October 2008, polls showed that the majority of the American people, 56 percent, were opposed to the $700 billion TARP bill that funded the bank bailouts at the cost of $2,334 to each and every 300 million of them. Despite some initial resistance shown by the Republicans in the House of Representatives, the bankers succeeded in overriding the will of the American people, thanks to their elected officials who purport to represent them. So much for democracy in America.

The defaults cometh

Commercial bank loans continue to collapse amidst signs that the banks are about to undergo a crisis of confidence and a large wave of FDIC seizures. Total loans and leases at U.S. banks have already contracted more in the first seven weeks of 2010 than they have over the course of any year since 1947 excluding last year; $132 billion in loans have defaulted or been paid off.  At 14.7%, the pace of annual credit contraction is still running more than twice that of 2009’s record decline.

The red bars show the cumulative percentage decline by week since the beginning of the year.  The light blue bars show the cumulative percentage decline by week since the financial crisis began to appear in the loan statistics on October 22, 2008; this is now in excess of 10.2%.  The bank problem is not solely an American one. In fact, as Sam explains at the RGD blog, a number of European economies are facing even more serious debt problems.

Arrest the banksters

At this point in the depressionary spiral, I’d just about be willing to settle for the “stop” sense of the word. Karl Denninger correctly points out that the American people absolutely will not accept another AIG bailout, this time of sovereign debt of European countries:

Yes, I know all about the stock market rally from last March. I know all about the claimed GDP “improvement.” But I also know that we got both by adding more than $2 trillion in debt to the United States – or roughly 14% of GDP – over the space of the last 18 months. That’s about 10% of GDP annualized, and incidentally, a 10% GDP contraction is the common economist’s definition of an Economic Depression.

So let’s cut the crap – we are in a Depression right now. We are pretending we are not, just like you can pretend you didn’t really lose your job so long as your credit card does not reach its limit. We have been in that depression for about 18 months and there is no evidence that we will exit it, as we have yet to find a way to pull back the deficit spending without an instantaneous collapse in the economy.

Yet at some point we must and will stop. We will either do so of our own volition, or we will do so when the cost of borrowing skyrockets, as others get tired of funding our profligacy. If we attempt to “print” our way out of it the cost of petroleum products will shoot the moon and destroy our economy anyway.

You haven’t seen the half of what happened though – not yet. It appears that AIG – the company we have bailed out (thus far) to the tune of some $100 billion plus, in fact isn’t done. It appears they may have written credit protection on Greece. If this allegation by the German equivalent to The New York Times is true Americans are going to be asked to pay billions of dollars – or more likely, hundreds of billions (since Greece is almost certainly not the only place – try Spain, Portugal, Ireland, etc) to bail out a bunch of FOREIGN NATIONS.

Do you both think Americans can and will pay that bill? A bill that has been forced on us, and yet benefits not The United States economy, but foreigners?

Wars – big wars – start over much less, my friends.

It’s time for the federal government to start arresting and jailing the banksters, now, because I suspect the alternative to being prosecuted for their criminal financial rape of America is going to be even less pleasant . The sense of popular fury is palpably building even though Washington is still managing to hold things together through this last-ditch gigantic spending spree. Once it becomes obvious that it has failed – just to give one example, the FDIC reported today that in Q409 it managed to lose nearly half the $45 billion in three years of pre-paid fees it collected – it is likely to get very ugly indeed.

This isn’t rocket science. It really isn’t. Because it is simply not possible to shift from a manufacturing economy to a “service” economy wherein the services consist of little more than gambling with imaginary numbers and still expect a society to remain stable. The apparent failure to understand that bread and circuses requires not screwing around with the reliable delivery of bread and circuses is really astonishing. The Romans understood this; the one place they didn’t let the provincial governors use as a tool for personal enrichment was Egypt, for the very good reason was that it was Rome’s granary.

I’m not a fan of unaccountable ruling elites, but as long as we’re stuck with one, is it really too much to expect them to be at least a somewhat competent?

Bankocracy and the consequences of moral hazard

I strongly suspect that this widespread fury and total disrespect for the ruling bankocracy that passes for “law” is on its way to America. And it will probably be much sooner than anyone imagines:

The country is sliding into psychological despair within a cocoon of unrequited desires that have been inflamed and legitimized over the years. Anger is rampant. Yesterday on the bus a student gave his ticket to a lady, telling her that she should use his ticket because he was getting off. Someone called out that this was shameful “thievery” to which the youngster responded: “I am stealing 50 cents but the government and the banks have stolen 50 billion!” Many nodded in approval.

Prime Minister Papandreou was on television last night, white as a ghost. He was telling the Greek press that he was thankful that the IMF was “offering” their technical expertise (technognosia) to Greece. Yes money is not coming, but how sweet of the IMF to be sending its experts to dictate terms over the next few weeks. It seems that someone in Europe gave him the unexpected news that the party is over. This reality has not yet even remotely begun to set in here. The media are giving the message that “the Europeans can’t afford to let Greece go under….that Europe stands to lose too much….that Merkel and those stuffy Northerners will have to come to Greece’s aid.”

When the reality does start seeping in—hold on to your hats….

The unmitigated evil of TARP, the nationalization of Fannie and Freddie, and the banking bailouts really cannot be exaggerated. The total fiction of the necessity to guarantee bank profits, the total disregard for the rule of law involved in the sorcerous transmutation of Goldman Sachs and Morgan Stanley from leaden insolvent investment banks into golden government-backed bank holding companies, and the utter contempt for the will of the American people has planted the seed for a number of extraordinarily negative consequences that will far outweigh the costs of a few big banks going out of business and a few thousand banksters losing their jobs.

I always wondered why the peasants didn’t recognize that the medieval aristocracy was shamelessly feeding off them without offering them anything substantial in return. That historical mystery is much easier to understand now, as people are losing their jobs, losing their homes, struggling to feed their children, and facing an increasingly bleak future while banksters are paying themselves literal billions for successfully defrauding the government, the politicians, the taxpayers through selling the myth of their societal necessity. This is not the result of the free market, this is not capitalism, and this is most certainly not human liberty, this is nothing more than bankocracy every bit as oligarchic, dishonest, and terminally short-sighted as the nominally socialist Soviet nomenklatura system.

And it will fail, as such systems always fail, because the final generations of the ruling aristocracy are so much more short-sighted and greedy than their fathers. They are too blinded by their misguided belief in their own importance to realize that the system will only work so long as the workers, the middle class, and the entrepeneurs receive a sufficient share of the wealth to play along with the game. Once the productive masses of society realize that the deck is stacked so heavily against them, they’ll not only quit playing, they will begin imitating their betters and turning to theft in the place of hard work and fraud in the place of frugality. Naturally, the praetorian authorities will crack down hard; witness how the bureaucratic leeches in the UK have blatantly – and suicidally – ignored UK law in order to attempt expanding their tax reach while simultaneously attempting to hide from the public how much they are paid.

But such efforts are always doomed to failure and the mere fact that governments are engaging in them is a strong indicator of a coming structural collapse. And the harder that they try to grip, the more people will slip out of their control by the mechanism of simply abandoning their roles as honest, productive members of society. After all, how can one possibly object to those who steal cents when the bankocracy is stealing billions?

The tide rolls out

The pace of credit contraction continued to increase according to the first February report.  Nearly $100 billion in bank loans were paid off, pulled, or defaulted in January.  At 1.42% of the total, this increases the estimated 2010 contraction from 10% to 15%, more than twice as much as the 2009 record.  This is a new chart going back to 1947, in order to better show the unprecedented nature of the ongoing loan shrinkage.  Keen observers may note that on this larger chart, 1975 does not show up as a negative credit year as it did in the previously displayed 1973-present graphs.  This is because the 1973+ numbers are weekly, while the 1947+ numbers are monthly.  This was enough to change what was a 0.9% contraction into 0.2% growth.  If you’re interested in understanding more about the significance of these credit statistics, The Vulture Lurks has a new review of RGD up:

The book is eminently readable, even for those lacking economics training. Vox was able to describe the economic mess in which we find ourselves, the steps that got us into that mess in the first place, and the likelihood that the steps currently being taken by our ruling class will exacerbate the situation, in terminology that wasn’t overwhelming. This book is understandable by ANYONE, regardless of economic background, prior study, or existing expertise. I consider this to be quite an accomplishment on Vox’s part.

Also, in what would appear to be the first review from Malaysia, GKE has a recommendation up on Amazon:  “I recommend this book for anyone interesting in a non-simplistic, but readable analysis of the current economic situation. I should also mention that I bought this book for Kindle and the price was perfect for a digital book.”

Goldman Sachs: destroyer of economies

The Vampire Squid is draining the global economy, one nation after another:

Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country’s already bloated deficit.

Is anyone going to be surprised when the next time there are reports that a bank has been involved in some suicidally destructive financial shenanigans that have its victimpartner on the verge of bankruptcy, it will turn out to be Goldman again?

They’re going to need a bigger bar

I tend to suspect that the Fed’s recession bar on the TOTLL graph shown below is going to need to be widened in the relatively near future. As is clear from the graph, total bank loans are falling at an increasing rate; the January 27th report is down 9.25% from the October 2008 peak and in the first month of 2010, deleveraging is occurring at a pace that would lead to the first double-digit credit contraction since the Fed began keeping records in 1947. Keep in mind that this does not take into account all of the loans that have effectively defaulted already but have not yet been recognized as doing so.

If the default situation is as grave as debt-deflationists such as Mike Shedlock, Steve Keen, and Karl Denninger have been warning, there could be a 20% bank credit contraction over the course of this year. Such a credit collapse would completely overwhelm Washington’s present strategy of substituting government debt for private debt; as we’ve seen, the Obama administration had to produce a record $1.4 trillion deficit in 2009 in order to keep the overall debt level from falling more than one percent. A further 20% contraction in bank credit, (which makes up about 15% of total credit market debt), would require an additional $1.34 trillion in government debt to replace it and keep the economy “growing”. It should be obvious that this is not a stable or sustainable situation.

Of course, when your GDP is made up of nothing more than borrowed G, you don’t have a free market economy. You don’t really have anything that can even be reasonably described as an economy. On a related note, Steve Keen brings to our attention the Real-World Economic Review’s Dynamite Prize poll where one can vote for the economist most responsible for the Great Financial Collapse of 2008. You can cast up to three votes; I voted for Alan Greenspan and Paul Samuelson.