Tuesday, February 25, 2014


After 1933 this is how our banking system was designed to work ... 

In our post-1929 world we learned that one of the reasons that the stock market collapsed was because commercial banks tried to do what investment banks did. The problem was that America's commercial banks were bundling up the deposits of their regular customers to make big market bets (which I wrote about here). 

As long as the market kept rising through the 1920s the commercial bankers saw handsome returns, which they famously did not share with the customers whose accounts they used to backstop their market bets.

Then the market crashed in 1929. Panic hit and almost 5,000 banks would be forced to shut their doors. 

To deal with this problem the U.S. government decided to forbid commercial banks from doing what investment banks do. The federal government also provided federal deposit insurance (FDIC) for commercial banks.The laws were pretty clear, and commercial banking became boring across America.  

Specifically, investment banks could only seek out and take money from well-heeled investors. Their job was to match this money with high risk but potentially high-yield investment opportunities. If the investment banks didn't do their homework their investors would lose their money and the investment bank would not be in business long if they continued giving out bad investment advice (or at least that's how the market is supposed to work). 

For their part commercial banks were supposed to take deposits from regular people like you and me. They, in turn, were supposed to lend this money to locals who wanted to, say, build a home, start a tow truck business or open a restaurant. If banks were run incompetently, or got reckless, the federal government would step in to reimburse the money of small depositors. 

As a reminder, we created this banking model for a reason. If given an opportunity people will do greedy and stupid things. We learned this in 1929. So we regulated and made banking boring after FDR became president in 1933.

But there was an upside to boring. For the better part of 50 years America's banking system was stable. Words like "depression" and "meltdown" were effectively eliminated from our economic language.

Then the spirit of deregulation hit in the late 1970s and really hit its stride in the 1980s. It was then that America's banking system would stagger from one financial crisis to another. Bailouts became the norm in the American economy. The Savings & Loan debacle in the 1980s was particularly brutal. Then, in 2008, the Mother of All Banking Meltdowns happened. 

You would have thought that we would have learned a lesson after 2008 (and 1929). Not so fast. 

Apart from watering down proposed legislation after 2008 the U.S. Congress decided to leave some pretty big loopholes in America's post-2008 banking code. Specifically, as Matt Taibbi points out, there is a "bank holding" loophole that's turned America's financial institutions into multi-headed financial vampires. This enabled our Too Big To Fail (TBTF) financial institutions to gobble up some of the American economy's most important commodities and industries. 

How does this loophole-filled banking code work, you ask? In layman terms America's TBTF commercial banking institutions are treated like commercial banks but they get to act like investment banks.

America's post-2008 banking environment - as Matt Taibbi points out - allows our TBTF financial institutions to:
(1) Access cheap Federal Reserve funds (the banking side).
(2) Hoard and trade commodities through complex commodity schemes which allow them to "make [set] prices(the investment side)
(3) Create complex derivative products that allow them to bet on the entire process (the futures side).
The entire process is akin to giving a recovering alcoholic a drink and then pretending that things are going to be OK because they promise to go to their AA meetings ... you know, right after they hit the bars first.

Today firms like Goldman Sachs - who were granted commercial banking status in 2008 so they could be eligible for bail out funds, and other government programs - are in the position to deliberately create warehouse delays (on their investment side). They can do this by shipping products - like aluminum - from warehouse to warehouse, which they happen to own. This allows Goldman Sachs to charge a "premium" for getting their goods out of their artificially created shipping "merry-go-round" and into the market.

In layman's terms, Goldman Sachs is effectively "jacking up" the shipping and handling price of the goods they control.

Similar market cornering developments are occurring in nickel, zinc, and copper markets. This helps explain why market prices in these raw materials are so high in spite of the fact that several of these markets are over supplied

Simply put, our markets are being manipulated.

Then we have the "front running" schemes being used by our TBTF institutions. Then there are the "repo" borrowing scams that allow financial institutions to use your accounts to make money. And let's not forget the toothless "lemon laws" that allow Wall Street to manipulate and defraud clients, and then laugh all the way to the bank after they get their wrists slapped with weak settlements and fines. 

So, yeah, our bailed out banks are controlling and manipulating market outcomes, again. It's almost as if 2008 never happened. Sigh ...

- Mark 

UPDATE (2-28-14): Here's the story of Goldman Sachs' involvement in another commodity, the raw uranium market, also called yellowcake. Recently Goldman Sachs decided they want out of the uranium market. Their decision, however, has nothing to do with doing the right thing. Nor are they concerned that yellowcake is a potentially lethal substance that was used as an excuse (i.e. a bogus excuse) to go to war in Iraq. Nor are they concerned about the potentially bad PR (Goldman+yellowcake=great story for conspiracy theorists). Goldman got cold feet because demand for yellowcake collapsed after the Fukushima disaster in Japan. And the beat goes on. 

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