Tuesday, May 18, 2010


While all the pundits seem interested in what's happening in the various primary races around the country today the reality is we still need to deal with the issue of America's banksters getting too big to fail (TBTF), and the fact that they're making bets like they're in Vegas with no adult supervision. Here's what's happening.

From TBTF to an Oligarchy of Interests
Back in September 2009 Thomas M. Hoenig, the 63-year-old president of the Kansas City, Federal Reserve Bank spoke about the need to rein in our increasingly TBTF banks. Because of the bailouts and the fact that the Federal Reserve has encouraged merging failing institutions with healthy ones Hoenig noted that "the top 20 banks own 70% of the [banking system's] assets." In many ways it's much worse. The top four banks in America (BofA, JPMorgan-Chase, Citigroup, and Wells Fargo) now control $7.5 trillion in assets, which accounts for more than half (52%) of our nation's total economic output for the year.

According to Hoenig, by dumping billions in taxpayer bailouts and guarantees on the banks - with virtually no questions asked, and no new restrictions - the federal government has effectively removed the threat of receivership, bankruptcy and disgrace from their horizons. This, not surprisingly, has had the effect of conferring special status on America's biggest banks.

So instead of finding themselves in receivership, and seeing their top executives fired for incompetence, our TBTF banks have become the new aristocracy of corporate America, perpetuating "an oligarchy of interest" ... that only benefits themselves.

Wait, It Gets Worse
Apart from removing the threat of bankruptcy from our nation's biggest institutions financial horizons, we have another, bigger, problem to deal with. Banks are making bets on derivative contracts at record levels, with money they didn't earn and, worse, with less than stringent capital requirements. First, the record levels ...

Immediately after the market collapsed in September 2008 the notional value of derivative trading (the stuff that got the banks in trouble) dropped by almost $7 trillion dollars, to $149 trillion, according to the FDIC. The reason was simple. In a few words, the banksters got spooked.

But once the banksters got Congress the American Taxpayer to bailout their stupid bets at 100 cents on the dollar things began to look up. The banksters went wild. Just one year after the September 2008 market collapse the notional value of derivatives traded by the banksters surged $31 Trillion, and reached $191.2 Trillion by September 2009 (that's more than 13 times our nation's GDP for the year). 

Guess who's making the most derivative bets trades according to the FDIC? Yup, it's the biggest TBTF banksters who own most of our nation's financial assets.

Better yet, take a guess what our biggest banks are betting trading on? Small business loans? Home loans? Corporate loans? Neighborhood development contracts? Not even close. They're betting on interest rates (90%) and foreign exchange contracts (8%). That's right, according to the FDIC, 98% of what they're betting trading on is the price of money in the future ... money that you and I provide them with our tax payer dollars.

Wait, it Gets "Worser"
Until 2004 the financial industry's "net capital rule" restrained brokerage firms to debt to equity ratios of 12 to 1. But then the Securities and Exchange Commission (SEC), as per their regulations, met to consider a request by Merrill Lynch, Goldman Sachs, Lehman Brothers, Bear Stearns, and Morgan Stanley. The request was very simple. Led by then CEO of Goldman Sachs, and future Treasury Secretary, Hank Paulson, the firms wanted the SEC to allow them - and just them - to lift their debt to equity ratios so they could borrow and trade more (on derivatives).

In a few words, for every dollar these firms had and traded they wanted to bet & carry more debt on the books. The SEC granted them their request and, as you can imagine, the brokerage firms went nuts on derivatives (almost doubling the amount of derivatives traded by the time the market collapsed in 2008).

Bear Stearns and Merrill Lynch, in particular saw their debt to equity ratios jump beyond 30 and 40 to 1 respectively. For those of you doing the math at home, this would be akin to someone making $50,000 per year and the banks allowing them to borrow and carry $1.5 to $2 million in debt ... which they then used to gamble in Vegas!

Since the market meltdown you'll be happy to know that little to nothing has been done to alter our Vegas economy environment. Leverage (debt) and "net capital" (asset) requirements remain virtually unchanged. My friends, Elvis has not left the building ... the party continues.

- Mark

Addendum: As long as I'm bringing up Elvis (and since he's still cool), I might as well include this song, because it reminds me where our banksters should be.

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