TAL Money Memo 4-22-09: Banks and the Banksters Who Run Them

–Tragedy and Hope by Carroll Quigley, 1966

(I'm not saying the bank stocks were inflated back in 2007, but wow!)

But blowing past the balloon-popped bank stocks,  I'm somewhat stumped.  How can two otherwise intelligent and erudite writer types be taking SDRs seriously?  I mean, despite old age, nobody's ever seen an actual SDR.  Nobody understands how SDRs are created, or where or whether they would be negotiable.  And how would we nickname them?  Could you call them Special Bucks?  Drawing Dollars?  Secret Sauce?  Too phonetically inelegant.  The Japanese probably couldn't even pronounce them.  They'll never fly.

The BIS was created in 1930 to try and collect the World War I loser penalty debts of the Germans.  Somehow in doing that, the BIS became Swiss Nazis - according to Charles Higham in his book Trading with the Enemy. The BIS National Socialist sympathies were bad enough that the American government offered a resolution at the Bretton-Woods Conference n 1944 calling for the liquidation of the BIS.  But there were bigger issues on the table - like the establishment of U.S. Dollar hegemony for the planet - and our little anti-Nazi resolution disappeared.

Anyway, it turns out Ellen had some Basel points that might shed some insight upon our currently lousy economic situation.  In Ellen's words:

"The power of the BIS to make or break economies was demonstrated in 1988, when it issued a Basel Accord - raising bank capital requirements from 6% to 8%. By then, Japan had emerged as the world's largest creditor; but Japan's banks were less well capitalized than other major international banks. Raising the capital requirement forced them to cut back on lending, creating a recession in Japan like that suffered in the U.S. today.  A downward spiral followed, ending with the total bankruptcy of the banks.  The banks had to be nationalized, although that word was not used.

Similar complaints about Basel I have come from Korea.  An article in the December 12, 2008 Korea Times titled "BIS Calls Trigger Vicious Cycle" described how even Korean entrepreneurs with good collateral cannot get operational loans from Korean banks, because the banks need to keep the BIS ratio high enough to survive.

And, in a May 2002 article in The Asia Times titled "Global Economy: The BIS vs. National Banks," economist Henry C. K. Liu observed that the Basel Accords have forced national banking systems "to march to the same tune, designed to serve the needs of highly sophisticated global financial markets, regardless of the developmental needs of their national economies."

Now, I respect Henry C. K. Liu.  He's a smart guy who's written a lot of stuff I've saved and have been trying to understand…but then it hit me.  Wait a minute.  Basel I is talking about 8% reserves here…up a couple of measly percentage points from 6% when compared to a bank's outstanding loans.  Yes, the BIS is making banks everywhere hold more money in their vaults after the fact of their lending, but there was lead time in which to restrict lending or to raise more capital.  The real problem wasn't the raising of the bar to 8%.  The real problem was that bankers everywhere had been gambling recklessly with the public's money.

In the time of the middle ages and the Medicis, banks had to keep 10% of their deposits available to handle the distress of their customers.  The only reason banks have gotten in such trouble over the past 30 or 40 years is because they've stopped being responsible savings institutions, and have become casinos.  Where is it written that they're allowed to get away with this crap?  Didn't anybody see It's a Wonderful Life?  Bank runs happen.  Be prepared.  (Revisit that wonderful scene where Donna Reed acts as the Central Bank and bails out Bailey Savings & Loan: http://tinyurl.com/dxc77s ).  (And remember, in the movie, Potter, the despicable bankster, got away with keeping Uncle Billy's missing $8000 bucks.  No wonder the banks hate that flick.)

But enough of my ethical whining.  Ellen's final point is to take on Basel Accord II, which she says was aimed directly at the U.S.  (Wasn't the U.S. in the room in the person of Greenspan or Bernanke at the Tower of Basel when these rules were written?)  Ellen writes:

Basel II requires banks to adjust the value of their marketable securities to the "market price" of the security, a rule called "mark to market."  Lenders that had been considered sufficiently well capitalized to make new loans suddenly found they were insolvent.  At least, they would have been insolvent if they had tried to sell their assets, an assumption required by the new rule.

Imposing the mark-to-market rule on U.S. banks caused an instant credit freeze, which proceeded to take down the economies not only of the U.S. but of countries worldwide.  In early April 2009, the mark-to-market rule was finally softened by the U.S. Financial Accounting Standards Board (FASB); but critics said the modification did not go far enough, and it was done in response to pressure from politicians and bankers, not out of any fundamental change of heart or policies by the BIS."

The Basel Accord II could be the LAST smoking gun that shot the U.S. banks in the heart…and the gut…and the balls.  And our bankers helped pull the trigger.

2.  Onward….In early 2009, Weiss Research released its take on the bailout problems:  Dangerous Unintended Consequences, a scathing 94 page attack on the Federal boondoggles.  Weiss runs a good shop in Florida, and says the bailouts won't fix the bank disaster, and will only make it worse.  The Executive Summary of the report is less than 5 pages, and if you can't read 5 pages to learn why you ought to be storing guns and food…well, have another beer.
http://www.moneyandmarkets.com/files/documents/banking-white-paper.pdf

3.  Now for some good news!  I've found a wonderful mural, called Tracking the Credit Crisis from the Museum of American Finance, part of the Smithsonian:

http://tinyurl.com/dm582h http://tinyurl.com/dm582h Stay up to date with all the disasters as they happen.  Ok, enough respite, back to more bad news:

4.  This past Sunday, the Turner Radio Network leaked the bank Stress Tests. http://turnerradionetwork.blogspot.com/2009/04/leaked-bank-stress-test-reults.html

Here are the top five of the top six results of Geithner's so called "Stress Tests":

1) Of the top nineteen (19) banks in the nation, sixteen (16) are already technically insolvent. (This is based upon the "alternatively more adverse" scenario assumption which had a 3.3 percent contraction of the U.S. Economy in 2009, accompanied by 8.9 percent unemployment, followed by 0.5 percent growth of the U.S. Economy but a 10.3 percent jobless in 2010.) [Those economic scenarios don't seem very alternative to me.  Aren't we just about there now?  Mike]

2) Of the 16 banks that are already technically insolvent, not even one can withstand any disruption of cash flow at all, or any further deterioration in non-paying loans. (Without further government injections of cash).

3) If any two of the 16 insolvent banks go under, they will totally wipe out all remaining FDIC insurance funding.  [Hey, don't worry about this one, Geithner has already pledged the FDIC's money to the PPIC.  They'll be broke in a year.]

4) Of the top 19 banks in the nation, the top five (5) largest banks are under capitalized so dangerously, there is serious doubt about their ability to continue as ongoing businesses.

6) Bank of America's total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank's was 278 percent; JPMorgan Chase's, 382 percent; and HSBC America's, 550 percent.  It gets even worse: Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital!

Gee, the Turner Radio Network report was leaked Sunday night, and on Monday the media scrambled to ignore it.  Bloomberg did mention it, but the interviewee denied that the leaked results were accurate.  In fact, he said, that the stress tests don't have to be released until May 4, and therefore they're not completed yet.

Hmmm.  I'll bet the stress tests were in fact completed back after the end of 2008.  They knew then that the banks were broke; they're just stalling for time.

(Full Guilty Disclosure here:  Ok, possibly I'm Matt Drudge on this one.  There may in fact not be any results yet…but something smashed the Dow down 289 points on Monday, and the bank stocks got hit worst of all.  How can big media ignore this kind of stuff totally?) E.g., Maria Bartiromo of CNBC interviewed Ken Lewis, CEO of Bank of America and never mentioned or referred to the leaked numbers or report AT ALL.  Oh well, another important naked truth dropped into the black hole of non-existence by  "responsible news networks."

Thank goodness the Plunge Protectors are all over the market on Tuesday, feeding ESF Upsidaisies, little newsy positrons, and Repo-to-Chicago-to-NYSE money to bolster the market UP 126 Dow points.  Da Boyz have to keep the bank shares high enough to sell more worthless equity while they can.

Speaking of timing, would it be Ok to mention here that the best time to buy gold in an ongoing bull market is after it's been hammered by Da Boyz.  (We're below $900 again.)  Be sure and get in before the orchestrated GM bankruptcy this summer, while gold is still cheap.  You might want to hold off on the SDRs.