Below, you’ll find the Reasoning & Rationale to what we call a Bill-Request. Once certain milestones are met, as defined HERE, lawyers will be called upon to draft what will then become a Bill-Demand to Congress and the President.
What you’re voting for, in a nutshell:
The Crisis of 2008 was the front-end of a Category 5 hurricane. The eye of the hurricane followed in its aftermath, an eye of blue sky and false comfort, distended by central bank intervention and coordination, whose design was to band-aid bank balance sheets in tatters and lift executive compensation in freefall.
All hyperkinetic hurricanes have a back-end to them, and the back-end tends to be far more destructive than the front-end. And, by all our measures, there’s much more to the wrath of the coming storm, than the one that passed.
The economic cycle of expansion and contraction is natural to any free market, but what we have transpiring in our market, is anything but free. For that distortion of the natural order of things, there’ll be a severe price to pay, up ahead. Some feel its advent already. All who don’t feel it yet, will feel it soon enough.
Yet, at our disposal are solutions to end all the pending banking, financial, and sovereign crises cascading our way, solutions to consistently produce budget surpluses and reliably reduce the national debt, to resolve the most intractable federal and state problems of ours with a solution that lasts, to restore to our grandest public and private institutions a trust that lasts.
In voting for this bill-request, you are saying “Let’s implement those solutions.”
The following was first published in 2012, and updated in 2017.
The answers to the problems we have, are interspersed at various intervals on this page, with the answer to the Too Big To Fail problem — call it the “the Fisher proposal, as amended by Main Street Gov” — placed at the end towards the bottom of this page. But, first, there are some things you need to know. So let’s get to them…
There’s a time-tested maxim out there, to sensing what might be coming down the pike: Extreme pessimism signals the likelihood of an economic upturn ahead. Extreme optimism signals the likelihood of an economic downturn ahead — it’s akin to the old market adage, observed like mantra by the most savvy of investors, which is: buy into a market when near-everyone thinks it’s dreadful (like when the Dow Jones hit a market low of 6,000-and-change in early March of 2009) and sell into a market when near-everyone thinks it’s unstoppable. (And, no, the Dow at 26,000-and-change in Jan 2018 has not yet entirely procured the sentiment of ‘unstoppability’ — at least not on a widespread basis. For reasons to be enumerated later, on this page, the Dow may cross the 30,000 mark and possibly the 40,000 mark in the years ahead, with volatility-driven 10-20% corrections in between, before ‘unstoppability gets fully baked in).
Buying into dreadful sentiment, and selling into unstoppable sentiment, may sound counterintuitive, if not outright illogical, to most folks. But then try to remember this:
In 2007, business confidence, consumer confidence, confidence overall, crested upon a crescendo. Expectations were high. Everything looked good. Things looked on the up-and-up. Blue skies and smooth sailing seemed ahead.
For in that 2007 year of exuberance, Lehman Brothers was a corpse, desperately seeking out buyers for its body, to no avail. In that 2007 year of exhilaration, hedge funds of Bear Stearns imploded in what should have been taken as premonition. In that 2007 year of cheer, multinational financial institutions, around for centuries, watched their balance sheets disembowel. And by the end of that 2007 year of all-clear, the most acute recession since the great depression began.
The nation’s economy peaked in 2007, with the Great Recession beginning in December 2007, said the National Bureau of Economic Research, one year later, in December 2008.
Within months, Bear Stearns went kaput. And, within months after that, the economic world as we knew it, set itself alight.
Fast forward now to 2017…
In 2017, confidence has again crested upon a crescendo. Expectations are high. Everything looks rosy, cheeky.
Because, across the pond, multinational financial institutions, around for centuries — one of them around for five-and-a-half centuries — are watching their balance sheets disembowel.
Meantime, stateside, everyone’s mingling in the trees. But there’s a forest to those trees. If one were to step out to see that forest, one would find a fire burning at its periphery, with the wind sweeping in.
In late 2018, latest 2019, the economic world as we know it, will not just set itself alight — it will ignite in a way that will not extinguish. In no time, the blaze will swell into an inferno that cannot be contained.
Point of ignition to the conflagration: the central banks, nation states, and mega banks in the eurozone.
Consider the following development announced by the German government on Aug 23 2017:
Ahead of schedule, and in a rush it appears, Germany repatriated 674 tonnes of gold to its central bank headquarters in Frankfurt. (1 tonne or metric ton = 1,000 kg)
The concluded project to re-domicile specific German gold holdings, held abroad, left only 1,236 tonnes stored at the New York Fed and 432 tonnes stored at the Bank of England.
“This closes out the entire gold storage plan — around three years ahead of the time we were aiming for,” said Carl-Ludwig Thiele, a member of the Bundesbank’s Executive Board, in reference to the project first publicized on Jan 16 2013, when officials of the Bundesbank acknowledged that the plan to import German gold was a “preemptive” act to counter the possibility of a “currency crisis” overrunning the European Monetary Union, aka Eurozone.
“…there are no longer any German gold reserves in Paris,” declared the Deutsche Bundesbank’s Aug 23 2017 press release.
Yes, Germany most definitely does not want any of its gold sitting in France especially, were the Eurozone to fracture, which it will.
For here’s how we see it at Main Street Gov:
The euro, as we now know it, will not survive. Why? For myriad and manifold reasons, from the social all the way out to the fiscal, such as the anti-Muslim-migrant alliance developing between political parties in Italy, Spain, Portugal, Greece, Ireland, Austria, the Czech Republic, Hungary, Poland, Slovakia, and Slovenia, to (among other matters of German self-interest, AND SELF-PRESERVATION) the trajectory of Berlin’s Target-2 balances.
The former is to be expected. The ultra-conservative European media is incessant in its coverage of migrant crime, and, as a result, nationalist right-wing parties are on the rise in the aforementioned countries of Europe.
But the latter is less well known and, consequently, less anticipated. In essence, the German Target-2 tangent is the epitome of unsustainable. The math alone will tell you why… By early 2017, Germany’s Target-2 claims (for simplicity, think of it as money owed to Germany by Italy, Spain, and other effectively bankrupt debtor nations) was fast approaching one-third of German GDP. In Feb 2017 alone, it rose by €20 billion. On the flip side: in March 2017, Spain’s Target-2 liabilities surged to a record €374 billion; in March 2017, Italy’s Target-2 liabilities surged to a record €419 billion.
Across the board, across the Eurozone, these numerals, from both the debtor and creditor perspectives, are deteriorating, not ameliorating, at least not consistently — consider: in 2006, German claims totaled just €5 billion; in 2016, that number rocketed past €700 billion; July 31 2017, per the Deutsche Bundesbank, it’d surpassed €856 billion. It’s political suicide for any politician, be they in the Reich Chancellery or the Deutscher Bundestag, to allow such a tangent for too long.
It’s already been too long for the Bundesbank, which is why we hear, through a grapevine we consider reliable, that agents of the Germany’s central bank have drawn up ‘exigent’ ‘contingency’ ‘protocols’ for a sudden and unannounced German exit from the euro and a concurrent German re-entry into the Deutsche Mark, over a long weekend that extends a banking holiday ‘at least 2 days into the workweek’ in a government-mandated ban on cross-border transactional activity.
Thus, as we see it, in 2019 (perhaps toward the latter part of the year) Germany will exit the Euro and revert to the Deutsche Mark. Creditor nations, like Finland, will follow Germany’s lead and leave the Eurozone as well. For a while thereafter, until 2021 or thereabouts, the Euro will be retained by Latin Europe and other debtor nations in what remains of the Eurozone. France may lead that remnant of a monetary union for a while, until it too realizes its own amassing exposure to foreign debt, and quit, the way Germany did. In 2021 or thereabouts, the Eurozone’s status as an economic power-bloc will finally come to an end. Whether a severely devalued currency still called a euro survives past 2021 in Greece, Portugal, Spain, Italy, Ireland, or elsewhere, remains to be seen.
Back at the White House, President Trump’s own disdain for the EU and contempt for the eurozone are well known and widely reported. There’s no love lost between him and every eurocrat in Brussels.
A twister in all this, is the paradox lost to the Administration, which is that a breakdown in the EU or breakup of the euro spells doom for the European banking system. Doom for the European banking system, spells doom for all of Wall Street. Means taxpayers being held out on a platter again, except this second platter will be way bigger than the first.
Trump gets protested in the streets, and stomped in the press, for as little as misspoken words. Imagine a monumental crash, a multi Trillion dollar bailout, and the start to a deep depression on his watch.
The end to the euro as we know it, will coincide with the beginning of the end of the Trump Administration.
The German exit (in 2019) will crash the € in its exchange rate against the US$. A €-denominated sovereign bond crisis will precede, accompany, and follow the €-crash. Systemic bank interconnectivity, by way of the derivatives daisy chain, will see to it that Wall Street melts down.
The Journal’s reminiscences like Trump Chips Away at Post-Crisis Wall Street Rules, will come back to haunt the Administration. Specific bills that floated around in the House and the Senate, ghostwritten (i.e. authored) by the lawyers and lobbyists of megabanks, will come back to haunt the Wall Street wings of the Republican and Democratic parties in Congress. (Never forget, the Wall Street wing of the Democratic party is what runs the party — ask Chuck Schumer and the delegation of Democrats from New York if you have any doubt about that.)
There will be bailouts of the megabanks, and throngs of protest. Civil unrest — bloodshed — will grind metropolitan centers of high finance, like Manhattan, to a halt. Chaos will reach for an apex by September 2019.
If Donald Trump is still president, hearsay of Mike Pence taking over as caretaker, will exceed rumor and surpass chatter.
With the Republican Party in tatters by 2020, the Democratic Party will think it’s their turn. The Democrats will be sorely disappointed. For that’s when a new generation of political leaders will wrap the worthless dud and pointless fraud, that the Dodd-Frank Act was, around their necks, with Wall Street’s Chuck Schumer and K Street’s Nancy Pelosi tethered to the ends of their decades of legislative malfeasance. The legislative content, ghostwritten/authored by Citigroup, on pages pages 250-251 in Public Law 113-235, will shut down all escape routes from blame for the Democrats.
In the aftermath of the Euro-borne crisis, U.S. national debt will begin an ascent up a new incline, far steeper than anytime in history. In short order, the U.S. Treasury bond market will begin to respond, and the sovereign bond crisis will go global. The fabric of social safety nets, the poor and the elderly depend on, will fray. In the ensuing carnage, governments will fall, new parties will rise.
Meanwhile in America, in search of — and in a final quest for — a “government of the People, by the People, for the People” as Abraham Lincoln envisioned, the nation’s electorate will vote for ACTUAL change like never before.
If in 2016 you were to ask any of the major presidential candidates what the biggest threat to humankind was, each would drum up a canned answer — Bernie Sanders might’ve said it was man-made climate change, Donald Trump might’ve said it was ISIS, and Hillary Clinton would probably have said that the biggest threat to not just humankind, but all lifeforms on Earth, was none other than Donald Trump himself.
In the interface between 2018 and 2019, all of them will prove to be wrong. Because what they’re missing is a perfect storm brewing in the bond markets.
As perfect as the one that engulfed and consumed a fishing vessel and its crew in the movie The Perfect Storm. Except, this storm in the bond markets will impact EVERYONE, and change EVERYTHING.
Referencing the fear over defaults that was gripping the bond market for months in 2015, on Aug 25 2015 Damian McBride, the former chief of communications for the British treasury and special adviser to former British Prime Minister Gordon Brown, would predict:
“We were close enough [to those defaults] in 2008, but what’s coming is 20 times that scale.”
So when will this perfect storm arrive? In 2018, the outer bands will push in, as a confluence of devolving factors finally converge, with everything from national bonds in emerging markets and the debtor nations of the eurozone, to junk bonds, to those structured “collateralized” debt obligations that Santander Holdings USA (and others) are bundling subprime auto loans into, all entering a world of hurt, like hurt’s never been experienced before.
In 2018/2019, the inner bands of the hurricane will strike — when exactly in 2018/2019, will depend on the behind-the-scenes plots & ploys of Donald Trump, Paul Ryan, and Mitch McConnell, and the under-the-table actions & machinations of Wall Street planted personnel at the Fed, the Treasury, and the White House National Economic Council.
If they decide to delay the day of reckoning, for the euro, until after the midterms on Nov 6 2018, in order to defend the GOP’s majorities in Congress, with all sorts of hustles to extend the continuity of the euro, well then, theoretically, it’s possible the eurozone could stay intact — albeit stressfully bound together — a bit longer.
Now, a few words about the dimension of this coming storm… On Jan 16 2013, the president of the Federal Reserve Bank of Dallas, Richard W Fisher, would write:
“The next financial crisis could cost more than two years of economic output.”
In 2016, the Bureau of Economic Analysis estimated U.S. gross output to be $32.4 Trillion and U.S. net output to be $18.7 Trillion. That ought to give you a visual of what “more than two years of economic output” can be, in gross and net dollars.
The last crisis is assessed to have cost the U.S. economy at least $10 Trillion in lost output over just 8 years. Now imagine something of a magnitude that will be (as Damian McBride said) several times that scale.
As consumer demand and tax receipts crater from the next crisis, the size of the hit to the national debt will get measured in the tens of Trillions of dollars.
By 2016, the 2008 crisis had catapulted our debt past 100% of GDP. The next will pole vault it past 200%. In addition to all the agony that such a milestone will inflict upon the Treasury Bond markets, and thus interest rates, watch for all assortments of taxation of the People, and taxation of small to medium business enterprises (SME’s) in particular, to escalate in proximity.
Many observers assume that the next relentless crisis to come in the U.S. will be in the private securities markets, like the corporate stock and bond markets. Sure, they’ll bleed at times, and hemorrhage heavy on occasion — in the small-to-mid-cap end in cyclicals, and in the heavily-indebted end of “high yield” sectors, there may even be considerable carnage. But, no, the next relentless crisis to come will be the most violent in the public securities markets — in select muni’s and, in time, in select Treasury’s.
Many observers assume the blue chip equity markets to be overvalued, but they overlook the money in exodus from euros, yuans, rubles, reais, pesos, South African rands and even Turkish lire, converting into U.S. dollars to buy staples like Proctor & Gamble in the Dow Jones. The Swiss National Bank is buying Dow components. The largest pension plan on the planet, the Government Pension Investment Fund of Japan, was gobbling up on the Dow.
Most of us can fit all the money we have under a mattress, but there are a good many around the world that can’t fit all the money they have, filling up a basement or an attic. So that money goes, in droves, to where it’s liquid and relatively safe, and someday (that’s not too far out in the future) U.S. blue chips may look the safest, relative to even U.S. Treasury bonds, especially Treasury’s with maturities on the long end.
(President-elect Trump’s appointments of Mnuchin and Mulvaney, to Treasury and the Office if Management & Budget respectively, and their open-mindedness to issue 50-year and 100-year U.S. government bonds to (quote) “lock in low interest rates” ought to tell you a bunch of things. A willful technical default on the 30-year Treasury, by the Trump Administration, whereby 30-year Treasury’s are forcibly exchanged/extended out to some mixture of 50-year Treasury’s and 100-year Treasury’s, would not surprise us in the least.)
If the Trump Treasury fails to reign in debt and deficits to ‘manageable’ levels, defined as those not exceeding the breaking point or comfort zone of bond vigilantes, then there will come a juncture when its credibility will crumble. Were that to happen — and we do think it will happen, by 2020 at the latest — the quality elements of the S&P 500, and more so the Dow Jones, could experience meteoric stock price appreciation, propelling the indices to heights that defy all valuation metrics, including the most generous.
Yes, the Dow especially could break to the upside like never before — to 30,000+ or even 40,000 — if faith in U.S. Treasury bonds are put to the test.
As the evidence on this page, and HERE, will demonstrate, late 2018 will present the start to a banking + sovereign, financial + economic series of crises, that’ll intensify into 2019. In 2019, the storm winds will accelerate, until they are gusting with a vengeance. At its peak intensity, the series will make the sequence of 2008/2009 pale in comparison. And for the second time in a decade, Wall Street will enter full-blown cardiac arrest, with the banks destined for defibrillation by the taxpayer once again.
The Republicans and Democrats will cry foul and shed alligator tears, but like we said elsewhere, the Republicans will always be the Bankers’ Party, and the Democrats — under the tutelage of Senator Chuck Schumer, in particular — will always be the Bankers’ Other Party.
For the last go-around, there were characters like Goldman Sachs CEO Henry Paulson in place, to see to it that bailouts were a done deal. For the next go-around, placements like Goldman Sachs ex-president Gary Cohn have been positioned.
By March 2017, both the Secretary of the Treasury and the Deputy Secretary of the Treasury were from Goldman Sachs. By mid-March 2017, Goldman Sachs stock accounted for almost one-fifth of the appreciation of the Dow Jones since Trump’s election — Goldman stock had skyrocketed from about $181 to a 52-week high of $252, a staggering gain of almost 40% since the election.
By mid-March 2017, megabank stocks became the biggest beneficiary, by far, in the Trump-bump to the equity markets. As the month progressed, the market capitalization of the four biggest U.S. banks by assets — namely JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup — topped $1 Trillion for the first time ever. Trump had bumped them up by an astounding 30% since his election.
Anyway, both Republicans and Democrats brewed the last crisis, as they have the next.
Make no mistake about it, the complicity is wholly bipartisan and profoundly ambidextrous, making General Election year 2020 quite the spectacle.
In the preface to the collapse of energy trader Enron, Managing Director for Research, Vincent Kaminsky, raised repeated objection to the accounting practices of Enron CFO, Andy Fastow — practices that constituted nothing less than accounting and securities fraud by the way — and Mr. Kaminsky would go on to say:
“Many companies that have eventually gone bankrupt have been very successful at projecting the image of unstoppable success for a long time.”
Well, nowhere is this more true than on Wall Street, and its merry band of domestic and foreign Systemic Banks.
Except, for one caveat: a good number of global Systemic Banks are bankrupt as we speak.
Now, we like to tell anybody who bothers to listen that there are at least a dozen megabanks insolvent already, but while he or she may listen to us, hearing does not come easy. So we remind him or her of some oft-forgotten cardinal rules:
Believe it, especially if it is officially refuted — the rule of rules to the interpretation of denials by central banks vis-a-vis systemic banks
Believe it, especially if they refuse to admit it — the rule of rules to the interpretation of denials by government officials vis-a-vis the general public
But how can megabanks be bankrupt if, on their balance sheets, all of them are showing: capital?
And so we take the lady or gentleman on a tour of a class called Creative Accounting 101F — F being for Fiction.
As in: the Fiction writer’s guide to maximizing executive compensation, by minimizing (1) the perceptibility of legacy assets and (2) the visibility of catastrophic losses.
Abracadabra, You’ve Got Capital
Reports of transactions between systemic banks and shadow banks intensified through 2015. Capital Relief programs to alleviate regulatory capital deficiencies, and to capitalize entirely uncapitalized balance sheets, called “legal but shady” by regulators, intensified through 2016.
Earlier, in March 2013, the Basel Committee on Banking Supervision produced a name for the game that the megabanks were playing to conjure up much needed regulatory capital. The Committee called it “regulatory arbitrage.”
Which takes us to the fiction of modern-day regulatory capital, derived by gaming the formula: Assets minus Liabilities equals Capital.
Wave the Magic Wand to inflate your assets, deflate your liabilities, and — presto — you’ve got capital.
Overstatement of earnings is one way to provide for capital enhancement. Non-recognition of losses incurred on impaired assets, is another.
Serious delinquencies, long defaulted mortgages not foreclosed upon, home equity lines of credit worth nothing (yet carried on the books of the banks at 93 cents on the dollar), commercial real estate loans that’ve been evergreen’ed with new loans issued to service the old loans, false appraisals, overrated collateral, exaggerated values attributed to recovery, have all been entertained from time to time to rose-tint balance sheet well-being.
In Jan 2014, Forensic Asia would produce a report entitled HSBC Holdings: End of the Charade. In it, senior analysts would accuse the Fed-designated systemic bank, HSBC, the third largest in the world by assets, headquartered in London, of having between $63 billion and $89 billion in “questionable assets” on its balance sheet. (We think the Hong Kong based forensic accountants were being too kind with their estimate.)
The Forensic Asia analysis would also accuse HSBC of being “one of the largest practitioners of capital forbearance globally.” Meaning, HSBC was paying the ‘minimum due’ to service its debts, rather than digging into capital to pay more. When capital is sparse or non-existent, that’s what you do, you pay only the minimum due.
In Jan 2013, Deutsche Bank (DB) announced it had raised its capital ratio despite losing billions of dollars in the reported quarter. Using unspecified hedges (dubbed “risk mitigation optimization” by DB), and modifying its math to how it aggregated its risk-weighted assets, and a “roll-out” of of something the bank called “advanced models,” and the utilization “data improvement exercises,” “portfolio optimization,” and a bit of collateral “activation,” DB created the equivalent of $8 billion in fresh capital in the most fabulous of ways.
Of course, regulators (who blessed the magic) took the stardust at face value. Why not? Revolving door etiquette demanded it. At the FDIC, however, Tom Hoenig remained an exception, calling DB’s escapade of regulatory compliance “ridiculous.” Didn’t matter, the stock of DB soared on the ridiculousness, to the glee of DB’s management.
There are systemic banks in Europe, that got bailed out in 2008, that haven’t made any money — net — since. There’s one bailed out systemic in Europe, that’s got $1.5 Trillion in all sorts of risk exposures now ($1.5 Trillion per International Financial Reporting Standards, or IFRS, that is), equal to more than one-half of its home country’s GDP, that — by the end of 2013 — had lost all the money it was bailed out with, and has kept losing money, by the tens of billions, every year since. It’s lost money 8 years in a row. It’s lost so much, for so long, even the government that bailed out the bank, was jumping sinking ship.
In April 2010, reports surfaced of at least 18 banks, including the biggest banks in the US, making moves (over at least 5 quarters) to dramatically understate debt levels before quarterly-financial-results-reporting-time, only to raise them after reporting-time. But as the New York Fed would argue, it’s “legal but shady” and thus A-okay.
Ways to dress-up Assets can easily run into the dozens. Just as ways to dress-down Liabilities. The bigger the bank, the easier the masquerade. Balance Sheets with between $1 Trillion and $4 Trillion in assets, per IFRS, are especially ideal for the connivance. (By the way, $1T to $4T is pretty standard for Who’s-Who on the systemic list.)
Off-balance-sheet contrivances, entailing the use of Special Purpose and Special Investment Vehicles, help in the con.
Megabank managements have increasingly sought out new ways to divert inconveniences (from a regulatory perspective) or undesirables (from an impairment perspective) — that had turned rotten on their balance sheets — onto all sorts of vehicular constructs, kept off their books.
In Nov 2008 Citigroup would announce that it would reel $17 billion in “assets” back onto its balance sheet from, of all places, the Cayman Islands.
(In many a case, the manhandling found balance sheet malcontent being shifted onto inadequately capitalized counterparties or affiliates of the bank. The shift often produced a transfer of portfolio risk, onto an entity that was unable to absorb losses equal to the risk-based capital requirement, for the amount of risk transferred.)
Through 2008, Lehman Brothers was diverting many tens of billions of inconveniences and undesirables into various boats that Lehman’s bankers would then sail out to sea just before reporting quarterly results, only to bring them back to shore after reporting.
These putrid sailboats were often substantially Lehman-owned and Lehman-staffed by former Lehman employees, all to make the firm’s balance sheet look palatable for the reporting period.
These practices did not die with Lehman. They merely metamorphosed.
Which is why megabank execs embrace the complexity and opacity that comes with being a super-sized financial institution.
If one were to put the CEO and CFO of a systemic bank in a room together, with their multi-Trillion dollar financial statements, spread out across thousands of subsidiaries, across nearly a hundred countries — which is not atypical for a megabank by the way – both the CEO and the CFO would not be able to make head or tail of their balance sheet.
One could put a dozen senior staff in the room with them, and give them all the time in the world to figure things out, and they’d still be unable to make head or tail of their finances.
Why, because CEO and CFO want it that way, so no one can make head or tail either, making it impossible for even investors to know what the bank’s bonds are worth or what the bank’s stock is worth, except for what they’re told its worth, by the very insiders who are as clueless as the outsiders.
Sometime in early 2016, Bethany Dugan, the Deputy Controller for Operational Risk at the Office of the Comptroller of the Currency, wrote the following in complaint to the big banks:
“The OCC has become aware of technology … recently made available to banks … that could prevent … or impede … OCC access … to bank records…”
It doesn’t take rocket science to figure the assertion underlying her complaint… that the banks were INTENTIONALLY obscuring their balance sheets from oversight.
But Ms Dugan was being polite. The technology to obscure bank balance sheet data, from regulatory oversight, was not “made available to the banks.” In many an instance, the banks in fact financed the development of such technology. One such technology, financed by one megabank, even got pitched to other megabanks under the slogan: “Guaranteed Data Deletion.”
Derivatives, structured to produce the desired objective of either overstatement or understatement, often come to the assist. Complexity to the derivative, adds a layer of masking tape to the masquerade.
Quarter-end Repo maneuvers, and other window-dressing stylistics, oft times assisted by the New York Fed via Reverse Repo tactics, are other favorites in the abundance of gimmicks.
And just as there are ways to invent capital by working the left side of the equation, there are also methods to start on the right side, with ways found for the left side to fall in line.
Capital Creation is all about illusionism. Irish banks, for example, were known to have produced capital by very generously financing straw buyers of its fresh equity.
The way executive compensation works these days, it pays to do voodoo.
When it comes to balance sheet manipulation, auditors — who happen to be the biggest accounting firms in the world — condone the manipulation, because:
1. the manipulation practices are that rampant on Wall.
2. Wall’s alleged principal regulator, the New York Fed, has repeatedly demonstrated either a willingness to look the other way, or furnished an outright assist in the manipulation.
Case in point, the secret recordings of former NY Fed examiner Carmen Segarra in Jan 2012… in return for a $40 million fee and the likelihood of hundreds of millions in related income, Goldman Sachs got to fix the deficiencies on the balance sheet of the eurozone’s biggest bank by market cap in 2014, i.e. Banco Santander, in ways that even a senior official at NY Fed considered “fraudulent.”
Megabanks have been providing balance sheet fixes like these to bankrupt companies, like Enron, and bankrupt countries, like Greece, for some time now.
After painful political fallout from Enron, in 2004 the Securities & Exchange Commission would, to the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency, document the following:
1. “actions [regulators] could take to stop banks and securities firms from helping U.S. companies engage in deceptive structured finance transactions” and
2. “potential liability [for financial actors found] aiding and abetting violations of Section 10(b) of the Securities Exchange Act of 1934.”
The irony of it all… Prior to 2008, bankers embraced Mark-to-Market and sang its praises, because the housing bubble had inflated market prices way past cash-flow reality, allowing for record-low loan loss reserves, record-high bank profits, and record bonuses.
But, alas, after 2008, with the great big balloon shrunk to the size of a dried-out condom, and loss reserves on the incline, profits on the decline, and bonuses shrinking fast inside, bankers got the submissive in our government to shift to a formula that would once again shorten loan loss reserves, heighten bank profits, and fatten bonuses.
The most subservient of those servants, Ben Bernanke, would on March 9 2009 tell bankers at their temple — the Council on Foreign Relations — that while he “would not support any suspension of mark-to-market” … “further review of accounting standards governing valuation and loss provisioning would be useful, and might result in modifications to the accounting rules.”
Bankers at the Temple, their public $$$ervants and their government consorts, of course ate it all up.
And, less than 4 weeks later, they shat-out those bonus enhancing modifications.
So, in April 2009, America’s Financial Accounting Standards Board relented to intense political pressure (from the White House and the Congress, in the most bipartisan fashion) and allowed the big banks to value securities, particularly those sitting distressed on their balance sheets at depressed market values, at prices elevated to levels above and beyond reality, in some instances to match regulatory capital requirements.
Thomas Linsmeier was one of the Accounting Board’s few dissenters to the rule change. As he rightly stated, the old accounting rules already allowed the “fiction that all banks are well capitalized,” but the new rules made “them seem [even] better capitalized [than the old fiction].“
Basically, the new rules legally green-lighted the banks to value their assets at Mark-to-Fantasy.
(We’d bet Bernie Madoff, the high-priest of Ponzi, in prison for 150 frigging years for printing bogus financial statements, probably now wishes, near every day from jail, that he’d incorporated his outfit with the appropriate banking license.)
“Today’s decision should improve information for investors by providing more accurate estimates of market values,” celebrated the head of the American Bankers Association, Edward Yingling, that day, with a straight face as crooked as the line walked by a terminal drunk registering a near-fatal 0.45 blood-alcohol in a field sobriety test.
(In case you haven’t noticed, the American Bankers Association’s got our otherwise tone-deaf politicians on hearing-aids, and their wallets on direct-deposit.)
The FASB was not alone in the tactic that would’ve made Charles Ponzi proud — at the insistence of the President of France (yes, the French, of course), the International Accounting Standards Board (IASB) too convened an emergency meeting to change its rules as well.
But what about the stress tests, conducted by the Federal Reserve and the European Central Bank? Don’t they validate the solvency of all systemic banks?
Yep, uh-huh… For your information, after Bear Stearns went poof, the Federal Reserve Bank of New York, under the titular leadership of Timothy Geithner, would begin stress-testing Lehman Brothers. Since Lehman failed both the ‘Bear Stearns stress test’ and the ‘Bear Stearns Lite stress test’, the New York Fed tried an Ultra-Lite version, which Lehman again failed — yes, trying to extract a heartbeat from something that had been dead near 2 years, got that hard. So what did the NY Fed do in response to Lehman’s multiple Fail grades? — it asked Lehman to come up with its own stress test and, lo and behold, that it passed.
THINK THE ECB’s AND THE FED’S STRESS TESTS ARE ANY MORE CREDIBLE NOW ?!
People are prone to think that the accounting illusions that Lehman Brothers pulled off were the exception and not the rule, and that somehow what Lehman did was in the past and not the present. Wrong! While the tricks on Wall Street have changed post-Lehman, the purpose and end-result of those tricks remain the same.
Before announcing financial results for a quarter, Lehman Bros represented repo transactions as final sales, even though an “obligation to repurchase” was inherent in the definition of repo. No law in the US had legalized Lehman’s Repo-105. The logging of repo activity as final sales could only be legitimized in Liarland … or London.
And London, it was, as Anton Valukas, Lehman’s bankruptcy court examiner, discovered. Because a law firm in London had somehow passed the gambit as legit on behalf of Lehman (and presumably other banking clients).
Despite London’s lawyers having no jurisdiction to legalize anything on our soil, in 2011 the SEC would walk away from any prosecution of the matter, with Enforcement co-Director George Canellos leading the push to absolve Lehman executives of all wrongdoing.
And, with that, Canellos and others shelved the core of the Valukas report in the gutter.
On Sep 15 2008, Lehman would finally buckle under a fiction of capital so creative and imaginative, that Danielle Steel — with over 800 million copies of fiction sold — would’ve been impressed. Yet, with only days of zombie-life left in Lehman, Lehman execs kept insisting their firm was adequately capitalized.
Confronted by the blatancy of the lie (and, no doubt, the fraud) Lehman’s head honchos told its bankruptcy examiner, Mr. Valukas, that it provided regulators, including the Federal Reserve, “full and complete” financials, and that no objections were raised, or corrective action ordered.
Given the stress test shenanigans that the New York Fed was allowing Lehman at the time, NY Fed had to know Lehman was cooking the books. But why prosecute Lehman’s CEO or CFO, when the CEO and CFO could just turn around in court and, under oath, implicate regulatory officials including Timothy Geithner of “full and complete knowledge” of everything illegal they were doing?
And, so, the banks and their regulators ring-fenced themselves into a circular squad, such that no one pulled a trigger, much less wagged a tongue.
Most people don’t know this, but Lehman tried to sell itself in 2007. But when the other banks, thinking of buying Lehman, looked under the covers at Lehman’s books, they pretty much ran for cover, screaming.
Don’t be fooled by stock prices. In the eurozone, for instance, never forget that the ECB and its leader, Mario Draghi, a former vice-chair of Goldman Sachs International, have (in nuance) issued an implicit threat to buy bank stocks if necessary, to defend them from the “nefarious” motives of short-sellers.
Look, when Lehman tried to sell itself in 2007, and found prospective suitors running for cover, screaming, the stock of Lehman was in the 60s. In March 2008, after Bear Stearns went poof, Lehman’s stock nosedived to near 30. Then, in the weeks after, it ramped up to almost 50. Just months later, Lehman stock was zero.
On August 23 2000, Enron stock was 90. On December 2 2001, only 1 year 3 months and 10 days later, Enron stock was zero.
When you’re cooking the books, you can make your stock be 60 like Lehman did, or 90 like Enron did, until the pressure cooker that’s doing the cooking, explodes.
Banks & the Monkey on their Backs … the first monkey, actually, because there are others …
Integral to any crisis of confidence unfolding, is asset mis-pricing, specifically asset inflation, or saying a securitized product is worth more than it actually is. In relation to housing, and to real estate in general, there is much securitization. So let’s take a peek at the state that housing is in…
According to TARP Inspector General Neil Barofsky, Timothy Geithner (who was Barack Obama’s first Treasury Secretary and George Bush’s Chief Bailout Officer before that) once told Elizabeth Warren that a specific mortgage modification program of the federal government, labeled HAMP, would (quote)“help foam the runway for [the banks, as they cope with] 10 million foreclosures over time.” (Source: Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street, a book by Mr. Barofsky.)
10 million foreclosures in the pipeline sounds high, but will in the end prove low, because forgotten in the so-called housing “recovery” are the following plethora of inconvenient facts, laid bare by 2014:
While lots of investors and all-cash buyers experienced capital gains on their housing bets, and while hundreds of thousands of foreclosed properties had price-appreciated off a low that had been deep-discounted for the benefit of politically-connected institutional private-equity players, the reality is: the price of owner-occupied homes, where the preponderance of mortgages were, had barely budged off the bottom in most instances.
Yes, at the high end of the market, prices had gone up regionally, but that’s only looking at a slice if not sliver of where exposures lay in the housing market.
Banks had severely curtailed the number of re-possessed properties (in their bank-owned real estate, REO) that they’d listed “for sale” in order to sharply constrict a supply that could dent the price action being reported.
In short, there’d been no house price recovery where it mattered most, where the plurality of mortgages were, where the exposures lay — and what was underwater in 2012, was still underwater in 2014. [Zillow, which one would assume has every reason to paint a rosy picture, had this graphic to show in the summer of 2015, revealing how dark and dismal even their rose had become: Housing Prices Still Falling for Working-Class Families]
1-in-3 mortgaged homes in several concentrated housing markets, and 1-in-4 in numerous well-to-do (somewhat-affluent) counties, were behind on the mortgage, i.e. delinquent. A great many had been living in their mortgaged homes well past default, with lots of folks having done so for years.
In New York state alone (and this is happening elsewhere, albeit differently mechanically) countless Notices of Default, active for 3 years — repeat: on the books for 36 months already — were being re-filed by lawyers for the banks for another 3 years.
Stories of judges confronting some of those lawyers for delaying their foreclosure proceedings multiple times, despite pleas of no-contest from homeowners looking to move on, abounded.
So, forget foreclosure proceedings starting after 90 days — think 900 days being a probability, and even 1900 days being a possibility.
Foreclosures in the millions would’ve thrown a wrench into the price manipulation process — that much REO forced onto the MLS would’ve sent the “recovery” figures the wrong way.
Furthermore, to foreclose on an underwater residence is to bring the first mortgage up short and to wipe out the second; second liens, unlike firsts that were largely securitized and sold, are mostly on the books of banks.
None of the officially endorsed and promoted statisticians reporting the “recovery” are reflecting what’s actually happening on the ground. Of course, these number-crunchers are endorsed and promoted for good reason: reports of “recovery” entice potential buyers into the market, to the “don’t miss the rally” fool’s gold (demand is good); reports of “recovery” keep potential sellers out of the market, and their inventory in the shadow, in anticipation of even higher prices than those reported (supply is bad); and, importantly, reports of “recovery” at least tempt the millions of inadvertent delinquents and wannabe delinquents (strategic defaulters) to get/stay current on a mortgage that’s been reported to them as no longer underwater, when in fact it’s still as underwater as it ever was.
(Wall Street’s learned to manipulate every market known to man — think housing’s any different?)
On March 26 2013, Robert Shiller, co-author of the Standard & Poor’s Case-Shiller Index remarked, perhaps reluctantly, that: “We’re living in a totally artificial real estate economy.” He may see the artificiality differently than we do, but — no doubt — housing is brimming with more head-fakes than anyone can shake a stick at.
By 2013, under a barrage of media-driven propaganda, more than 8 out of 10 homeowners in several metropolitan markets, and more than 9 out of 10 homeowners in many others, looking to sell their homes, believed home prices would appreciate considerably in the foreseeable future.
Barely any of these looking-to-sell homeowners believed prices would decline. This led to an obvious build-up, of a shadow-inventory of sorts: millions of homes awaiting sale, on standby, remaining on the sidelines for better prices to sell at.
It’s safe to bet that most of these owners lack the resources for the proverbial ‘long haul’, and would run for the exits were their herd mentality — that prices are going up — tested, because that’s how the momentum trade works behind any herd mentality.
As we’ve asserted, the number of mortgage delinquencies nationwide is woefully understated. Admitting near 1-in-5 mortgages to be delinquent by 2012, the Federal Housing Authority (starting Aug 2011) re-defined delinquency in an interesting way: an unemployed mortgagor can miss a near full year’s payments and not be classified “delinquent” (up from what was 3 months before) provided 1 monthly payment is made before the 12 months is up — then the mortgage is considered current and the 12-month clock starts again.
In 2013, mortgage-modification measurer HOPE NOW was reporting 18 million+ mortgages as modified in some way or the other. The modified were re-defaulting, in the months and years after, almost without exception. Yet the modified got taken off the delinquency counter without a murmur of accountability for what was happening after.
2004 thru 2006, as summit-plummet for housing formed, some 27 million mortgages, either a first or second lien, got refinanced in some manner. In 2007, millions more got refinanced. A solid majority of these properties are still underwater in 2014 — in many a housing hotspot, owners trying to sell into the so-called “recovery” have been quick to find that out, as they got to witness recovery-less prices being offered for the sale of their homes.
As of the original date of this writing, there are about 15 million second mortgages out there, as home equity lines of credit, or HELOCs, and installment second’s — pretty much all these properties are still underwater in 2014. (FYI: In 2004 and 2005 the average HELOC in California was ~$145,000; banks charged non-use fees to coerce homeowners to use the credit; homeowners refinanced HELOC’s to extract much more than their original allowance; homeowners took the California HELOCs to buy properties outside Cali, frequently in neighboring states where the “recovery” price manipulation got the most glaring.)
Most of the first-lien loans made at a purported 80% loan-to-value, accorded to subprime borrowers at the height of the bubble, got 20% on the second lien. 80% + 20% = 100% sounded good in theory at the point of inception, but many of these loans were never fully collateralized to begin, because appraisers were invariably pressured by controlling officers at banks to generously inflate the value of the home being bought, to get the high-risk loan looking less risky for resale to securitizers and beyond, and to entice the subprime borrower to borrow big with all that inflated equity allegedly “built-in”.
Heck, the fraudsters doing the loan origination were even convincing borrowers to “borrow the downpayment” with the sales-pitch that there were gains built into the purchase as evidenced by the (fake) appraisal.
By 2006, fraud-incidence (income documentation fraud included) had reached pandemic proportions, exceeding 2 million mortgages per year. And, as the Financial Crisis Inquiry Commission also learned from testimony, the fraud-incidence rates accelerated in 2007.
Just because the mortgage origination and rep/warranty frauds were never prosecuted, doesn’t mean their nefarious after-effects are not there. They are very much resident on institutional balance sheets, and increasingly festering.
The real estate agents pushing the “recovery” meme will tell you otherwise, but the reality is: the hundreds of billions of dollars of HELOCs and second mortgages, valued in the hundreds of billions on the books of the big servicers, are actually worthless, because a HELOC/second mortgage sitting under an underwater mortgage is worth zero/zilch.
As a result, bank Allowances for Losses on Loans & Leases (ALLL’s) for Junior Liens are pathetically insufficient on the books of Systemics. (Unfortunately, even the little there is, gets juggled around then siphoned off by CFO’s and CEO’s to create much-needed income on the P&L, quarter after quarter, to finance opulent executive compensation and bonus schemes for the inhabitants of corner offices and their immediate underlings.)
At a number of Systemics, second-lien portfolios exceed those banks’ reported Tier-1 capital, sometimes by a sizable margin, and we stress “reported” because we doubt a lot of that is even real capital, since (as we’ll get into later) the Systemics have increasingly figured out ways to manufacture capital out of thin air.
Mark-to-Model accounting, or as we call it make-it-up-as-you-go accounting, in combination with complex structured finance, can conjure up capital by the billions of dollars with just one swing of the magic stick.
Whether to meet regulatory needs or to fulfill some heart’s desire, capital is way easier to make up nowadays than when Enron was around.
A Global Head of Credit Strategy at Citigroup, named Matt King, once put out a series of charts he called “the most depressing slide I’ve ever created”. The slide charted real house price indexes, against population dependency ratios, in the US, UK, Ireland, Australia, Spain, and Japan. (Japan was the best example given that (a) its property bubble popped more than two decades ago, and that (b) in its aftermath, QE became as ubiquitous to the Japanese as sushi.) What the charts consistently showed was what common sense would dictate: Rising ratios of dependency to entitlements, welfare, etc, coincided with falling real house prices. Anyone think US dependency ratios are not rising?
Municipals are going bankrupt. Their pensions are going bankrupt. Solution by the munis’ bureaucrats who want to keep their comfy jobs and plush pay intact: raise taxes, including real estate taxes. Recipe for more carnage in housing markets.
As of the original date of this writing, U.S. housing inventory totals ~134 million units. Renter-occupied: ~42 million. Owner-occupied: ~79 million. Do the math and you got about 13 million units VACANT!
Factor in the empties, the modified’s, the incurable delinquents, the curable delinquents that are curing only because they think “prices are rising”, owners “waiting for higher prices” to sell, the REO kept off MLS, the institutional real estate holders (“banker landlords” to many) vying to rent to a narrowing pool of creditworthy renters, the millions of people leaving the work force (giving up on looking for jobs), the trendline in multi-individual/multi-family house-sharing, college grads moving back in with their parents, the ongoing erosion in real income, the deterioration in job quality, the deep disdain for anything Wall Street (including sales gimmicks translating into ballooning payments at the worst moment), the deep distrust for what’s increasingly appearing to be a Wall Street beholden government claiming to care about “keeping distressed homeowners in their homes”, and you see the elements of the Housing Crisis that’s continuing.
All of the above, of course, makes no mention of what’s happening outside the residential space and in the commercial real estate sector.
If Geithner had said not 10 million, but at least 20 million — and possibly 27 million — potential 90 day+ delinquencies (technical foreclosure starts) coming down the pike, we’d be more likely to concur with him.
But no amount of Timmy’s foam on the runway will save the seemingly high-flying banks from crash-landing and burning under that scenario.
Under the covers of fabricated capital, the megabanks have become thinly capitalized or negatively capitalized, partly because they’ve not retained earnings to shore up capital and, instead, distributed those earnings in largesse to insiders, as dividends, bonuses, executive comp.
2008 Redux? Yes, but worse — because, in the years since the Crisis, the book-cooking (to appear solvent) has got intercontinentally worse. Which is why:
- the Federal Reserve did its Large Scale Asset Purchases (or LSAP’S, aka QE) for so long
- ex-Chairman Ben Bernanke admitted — at his $250,000-pay-per-view dinners with Wall Street bigwigs — that he does not expect the Fed Funds Rate to normalize, possibly even in his lifetime, and that the Fed does not need to reduce its humongous balance sheet by even “a dime” if and when it does normalize down the road
- you keep hearing about deferred-prosecution and non-prosecution agreements, and criminal complaints directed solely at institutions but not their managers, lest any criminal prosecution of a megabank CEO/CFO were to set off the mother of all (finger-pointing) crises, as he/she rats out every other megabank CEO/CFO, to show that the crime was not just his/hers alone, but endemic to every systemic management team on the planet.
After all, finger-pointing crises (i.e rat-out crises) on this scale can fast turn into full-blown global financial crises.
May 13 2015, it was reported that the Justice Department was readying itself to announce that 5 megabanks, all on the Fed’s list of Systemic Banks, namely Barclays, JPMorgan Chase, Citigroup, the Royal Bank of Scotland, and UBS would plead guilty to criminal antitrust violations for rigging the price of foreign currencies and/or the all-encompassing go-to benchmark of interest rates known as LIBOR.
By the May 20, the mighty JP Morgan Chase (and the others, slightly less mighty) had become admitted felons.
Ever wonder why, years after the countless felony frauds that led to 2008, the bankers are still committing felonies, still rigging and manipulating everything they can get their hands on, and still laundering money, effectively keeping their banks on course to remaining as criminal cartels? A look back at 2008, yields an answer:
As liquid funding for the systemic banks ran dry in the run-up to the Financial Crisis of 2008, the managements at those systemics banks resorted to an intensification in their life of crime to bridge the funding gap. “Inter-bank loans were funded by money that originated from the drugs trade” said Antonio Maria Costa, then head of the United Nations office on drugs and crime, adding “There were signs that some banks were rescued that way.”
The headlines relating to the life of crime are many, but let’s just make space for one. In April 2011, the British news source, The Guardian, would headline a story: How a big US bank laundered billions from Mexico’s murderous drug gangs .
Laundering money for drug lords and drug cartels … Wire-transferring funds for state sponsors of terror … Transacting for organizational financiers of terror … all of these (and more) are documented crimes that’ve been directed at multinational banks.
But since banks themselves cannot commit felonies (much like a knifes or guns themselves cannot commit homicides), and only people who run banks can, because no ‘lone wolf’ inside a bank can perpetrate such far-reaching crimes without a wink-wink by higher-up’s, the question that must be asked is:
Why do megabank C-suite execs enjoy prosecutorial immunity, despite a multitude of criminal violations of American and International law being linked to them, year after year?
Answer: A Criminogenic Carte Blanche issued to Wall Street by governments across the world.
When the President of the United States swears to the American People that “There will be no more taxpayer-funded bailouts, period” (quote, Barack Obama, July 15 2010, in celebration of his pseudo Wall Street Reform Act), it’s a good idea that at least that President’s two terms in office are over before there are any more bailouts.
And since the pledge of “no more taxpayer bailouts, period” wasn’t worth the Presidential carbon dioxide it was issued with, it appears the enforcers running justice, at our Department of Justice, have got this President’s back, and that of the next, at the expense of justice.
Hence the joke by some D.C. insiders that the designation of ‘SIFI’ by the Federal Reserve — translating to ‘Systemically Important Financial Institution’ — actually stands for ‘Save If Failure Imminent’ or ‘Save If Failure Impending.’
Therefore, count on Get Out Of Jail Free cards to continue to be issued in abundance, and Too Big To Jail to remain the rule of law, until sometime after Inauguration Day 2021.
In 2013, you’d have to come up with a minimum of $10 million if you wanted Goldman Sachs to manage it, in its Private Wealth Management portfolio.
The minimum to have an account, even if you’re an employee, is a million bucks.
Yet, by 2016, as the eurozone began to show itself for what it was always, i.e. a lost cause, Goldman decided it would let Joe Blow open a savings account with the firm with no minimum.
Goldman even held out a better interest rate, for Joe, than most other banks held out, despite Goldman having to pay the FDIC to have that account insured by the FDIC.
Around the time, (against its stated capital at risk) Goldman had the highest derivatives exposure of the four most politically connected megabanks in America. According to the Office of the Comptroller of the Currency, as of December 31 2015 Goldman’s exposure was 147 percent more than JP Morgan Chase, 211 percent more than Citigroup, and 507 percent more than the Bank of America.
Thus, Goldman Sachs, the investment house/hedge fund that it is, will need Uncle Sam to be particularly nice to it when the next crisis burns through its balance sheet.
To have a Goldman Sachs Savings Bank associated with it, could do wonders towards finding that niceness, especially if the Government Sachs Savings Bank also had lots and lots of little John Doe’s and Jane Doe’s and Joe Blow’s having accounts in it.
An account with ten dollars here, and another account with twenty dollars there, would not only make for good optics from a public relations standpoint, it could also be good for business if someday (God forbid) all hell broke loose — because Title 2 of Dodd-Frank will only save a financial institution, with taxpayer money, if that financial institution also looks like a bank (even if it does not smell like one).
“Oh, don’t be so hard on the banks. Even if they do need bailouts again, because the euro falls apart, what’s the big deal? — they did pay the taxpayer back the last time, with interest, after all.” Yeah, we hear that from time to time. Problem is, the government dished out so many tax credits and tax favors to the banks after 2008, that the bailout money the banks returned to the taxpayer “with interest” became not just net-negative but very-very net-negative.
(Main Street Gov’s Corruption & Cure bill-request will itemize some of those tax credits and tax favors for you to stomach, if you can.)
By December of 2009 we counted so many handouts and giveaways to the banks, that we wondered why bankers didn’t go out looking for April Fools cards to send out to everyone, instead of Christmas cards.
As we noted in our publication The Reason To Be:
Few have grasped the “crisis of confidence” characteristic that defined the Crisis of 2008. In that crisis, it was not depositors who lined up to get their money out of banks, but non-depositors. The run on financial institutions came from wholesale, not retail. The more sophisticated the money in the wholesale funding market, the faster it fled.
Why? Because, in the run-up to the crisis, the “smart money” in capital markets knew that financial institutions, and Systemic Banks specifically, were either top-to-bottom cooking their books, or left-to-right stretching their numbers, and that the seemingly solvent on paper were (in fact) effectively insolvent in reality.
Well, it’s happening all over again. Except, this time, the megabanks are bigger and a good number are more bankrupt now than they were in 2008, sovereign debt worldwide is much higher now than it was in 2008 (not to mention, nearing several pivotal tipping-points), and the Fed and central banks across the globe are near all-out of ammo.
A disintegration, followed by a fragmentation of the eurozone, will melt the European Union’s banking system, bringing all of Wall Street down with it, with of course America’s Big Five (JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley) in meltdown alongside.
But won’t the Wall Street Reform Act of 2010 (aka Dodd-Frank) be there to take care of affairs, you might ask. No! It won’t! Because the banking Resolution Conference of 2013, convened by the Federal Reserve Bank of Richmond and the Board of Governors of the Federal Reserve System on Oct 18 2013 in the Colonial Room of The Mayflower Renaissance Hotel in Washington DC, amplified the certainty of a taxpayer backstop to Systemic Banks at the next financial crisis.
With attendees (at that conference) citing the absence of cross-border resolution agreements between nations as reason, everyone with any semblance of a degree in Jurisprudence there at the conference, be they bank-affiliated or government-affiliated, pretty much unanimously agreed that Systemic Banks could not — repeat, could NOT — undergo any bankruptcy proceeding currently known to man, rendering the crux of Dodd-Frank dead-on-arrival.
With Dodd-Frank’s core rendered DOA, things got pushed out towards the periphery, to “resolution mechanisms” involving (of course) the Treasury and the Federal Reserve, and the authority of the former to“bridge-loan” assist, and of the latter to “liquidity-loan” assist all distressed parts of the bankrupt institution in need of assistance, which was another way of inviting a bailout of the parts that were the most politically connected — a dirty road we’ve been down before in September 2008 when we recall Treasury and the Fed insisting they were only loan-assisting otherwise “healthy” Wall Street houses, when they were in fact bailing out insolvent ones, and exhuming already interred ones, for another round of rinse & repeat.
That fateful September of 2008, and in the months and years after, the Fed assumed as much of the bankrupting material on bank balance sheets as it could, and found ways — then and thereafter — to make what remained, that could not be consumed, re-accounted for in ways that hid their bankrupting nature.
Thus the regimen of rinse & repeat will come home to roost in 2018 thru 2020.
The next crisis will be no different from the last from a causal standpoint — that being an absence of capital, or a cushion of any material capital, on bank balance sheets to withstand an ‘unforeseen’ economic shock. A fracturing of the eurozone, happening already (in 2017) to anyone that’s both looking and seeing, would constitute such an ‘unforeseen’ economic shock.
Despite what overstated assets and understated liabilities might make claim to, in the financial statements systemic banks file, the “smart money” in capital markets is well aware of what’s really there in quantifiable tangible capital.
So, once again — as before — accounting & securities FRAUD will be at the root of the next crisis. The next crisis will, however, be different in its degree of magnitude. Because, since 2008, accounting and securities fraud at banks are up by many orders of magnitude.
Remember: the U.S. Government’s net interest on the national debt held by the ‘public’ will multiply if the Federal Reserve loses control — and the Fed will lose control at the next crisis.
If the U.S. Treasury has to pay an annual $1 Trillion, or thereabouts, to ‘outside’ investors in its Treasury bonds, as interest, and if the tax base contracts sharply alongside in co-incidence — two things that will happen in the sequel to the next crisis — then a number of government programs that feed, clothe, shelter, and medically aid those in need, will come under a blade, a knife, or an axe.
However they get sliced, diced, or axed, it’ll be lights out for much of society.
And, no, the International Monetary Fund printing up many trillions of a new global reserve currency, to save the day, will categorically NOT save the day. The IMF’s Special Drawing Rights, printed to the extent they’ll need to be printed, will NOT bring the lights back on. They may even extend the blackout.
So consider this:
- A design to preempt future banking crises in the US, and the inevitable bailouts and cover-ups that follow
- A template to forever end cataclysmic hits to the US economy, and generational setbacks to American well-being
- A formula to revoke and rescind Wall Street’s Government-issued Criminogenic Carte Blanche
THE FISHER PROPOSAL, AS AMENDED BY MAIN STREET GOV
There are 2 components to this. But, first, a consolation to all rank-and-file bank shareholders who fret the very thought of messing with the megabanks: The sum of the parts of a megabank can be worth more than the whole, especially if that megabank is thinly cushioned by capital and thickly exposed to risk.
Component 1. The ‘Bail-in’
In light of Alan Greenspan telling the Financial Crisis Inquiry Commission that “with 15% tangible equity capital, neither Bear Stearns nor Lehman Brothers would have been in trouble”, how about getting to at least that number — and preferably more — before it’s too late, by doing what needs to be done to: equity, additional Tier-1 securities (contingent convertible bonds or hybrids), subordinated debt, and senior debt available for bail-in.
Component 2: The ‘Re-Structuring’
Per the proposal set forth by Richard W Fisher, former head of the Dallas Fed, in remarks before the “Committee for the Republic” on January 16 2013 — with the major recommended modification by Main Street Gov to that proposal being that the breakpoint for every megabank’s ‘re-structure’ be $50 billion in balance sheet LIABILITIES instead of $250 billion in balance sheet ASSETS as Mr. Fisher has proposed — this Bill-Request asks that the following be implemented: Ending Too Big to Fail, A Proposal for Reform Before It’s Too Late.
You’ve just read the Reasoning & Rationale for this Bill-Request. If that’s enough for you to vote in support of it, then go ahead and vote your support now — but if however you’d like to see more, you’ll find it HERE.