When a bank is
simply too big, its lending choices fade and with the ability of borrow massive
amounts of money in the short end of the market, it is always tempting buy high
yielding assets in the long term market such as capital stock and even land. The only problem with that is that a rise in
rates can crush such a balance sheet.
But no matter, we will get the fed to print more money.
As usual we
continue to see idiocy hard at work and we call it the hidden hand of the
market. Except it is not hidden and it
is not a market. It is an invitation to
freely enrich yourself and stiff the shareholders and the Fed. Recall that small banks have serious trouble
doing this. Banks restricted by
geography and business cannot do this.
The truly great
opportunity for wealth creation in the USA today will come from actively
recapitalizing the lower two thirds of the population in a productive and
communal manner similar to microfinance.
200,000,000 people producing a plus $30,000 lifeway, creates at least $10,000
financial spending power or supports say $50,000 borrowing capacity for a total
of ten trillion in financial assets easily supported by a rising wave of
capital equal to that or much more.
As usual no one
can figure this out because they are all running around trying to steal from
each other instead.
The
Leveraged Buyout of America
Global Research, August 26, 2013
Giant
bank holding companies now own airports, toll roads, and ports; control power
plants; and store and hoard vast quantities of commodities of all sorts. They
are systematically buying up or gaining control of the essential lifelines of
the economy. How have they pulled this off, and where have they gotten the
money?
In a letter to Federal Reserve Chairman Ben Bernanke dated June
27, 2013, US Representative Alan Grayson and three co-signers expressed concern
about the expansion of large banks into what have traditionally been
non-financial commercial spheres. Specifically:
[W]e are
concerned about how large banks have recently expanded their businesses into
such fields as electric power production, oil refining and distribution, owning
and operating of public assets such as ports and airports, and even uranium
mining.
After listing
some disturbing examples, they observed:
According to legal scholar Saule Omarova, over the past
five years, there has been a “quiet transformation of U.S. financial holding
companies.” These financial services companies have become global merchants
that seek to extract rent from any commercial or financial business activity
within their reach. They have used legal authority in Graham-Leach-Bliley
to subvert the “foundational principle of separation of banking from commerce”. . . .
It seems
like there is a significant macro-economic risk in having a massive entity
like, say JP Morgan, both issuing credit cards and mortgages, managing
municipal bond offerings, selling gasoline and electric power, running large
oil tankers, trading derivatives, and owning and operating airports, in
multiple countries.
A “macro” risk
indeed – not just to our economy but to our democracy and our individual and
national sovereignty. Giant banks are buying up our country’s infrastructure –
the power and supply chains that are vital to the economy. Aren’t there rules
against that? And where are the banks getting the money?
How Banks Launder Money Through the Repo
Market
In an illuminating series of articles on Seeking Alpha titled “Repoed!”,
Colin Lokey argues that the investment arms of large Wall Street banks
are using their “excess” deposits – the excess of deposits over loans – as
collateral for borrowing in the repo market. Repos, or “repurchase agreements,”
are used to raise short-term capital. Securities are sold to investors
overnight and repurchased the next day, usually day after day.
The
deposit-to-loan gap for all US banks is now about $2 trillion, and nearly half
of this gap is in Bank of America, JP Morgan Chase, and Wells Fargo alone. It
seems that the largest banks are using the majority of their deposits (along
with the Federal Reserve’s quantitative easing dollars) not to back loans to
individuals and businesses but to borrow for their own trading. Buying assets
with borrowed money is called a “leveraged buyout.” The banks are leveraging
our money to buy up ports, airports, toll roads, power, and massive stores of
commodities.
Using these excess deposits directly for their own
speculative trading would be blatantly illegal, but the banks have been able to
avoid the appearance of impropriety by borrowing from the repo market. (See my
earlier article here.) The banks’
excess deposits are first used to purchase Treasury bonds, agency securities,
and other highly liquid, “safe” securities. These liquid assets are then
pledged as collateral in repo transactions, allowing the banks to get “clean”
cash to invest as they please. They can channel this laundered money into risky
assets such as derivatives, corporate bonds, and equities (stock).
That means they
can buy up companies. Lokey writes, “It is common knowledge that prop
[proprietary] trading desks at banks can and do invest in a variety of assets,
including stocks.” Prop trading desks invest for the banks’ own accounts. This
was something that depository banks were forbidden to do by the New Deal-era
Glass-Steagall Act but that was allowed in 1999 by the Gramm-Leach-Bliley Act,
which repealed those portions of Glass-Steagall.
The result has been a massively risky $700-plus trillion
speculative derivatives bubble. Lokey quotes from an article by Bill Frezza in
the January 2013 Huffington Post titled “Too-Big-To-Fail Banks Gamble With Bernanke Bucks“:
If you think
[the cash cushion from excess deposits] makes the banks less vulnerable to
shock, think again. Much of this balance sheet cash has been hypothecated in
the repo market, laundered through the off-the-books shadow banking system.
This allows the proprietary trading desks at these “banks” to use that cash as
collateral to take out loans to gamble with. In a process called
hyper-hypothecation this pledged collateral gets pyramided, creating a ticking
time bomb ready to go kablooey when the next panic comes around.
That Explains the Mountain of Excess Reserves
Historically, banks have attempted to maintain a
loan-to-deposit ratio of close to 100%, meaning they were “fully loaned up” and
making money on their deposits. Today, however, that ratio is only 72% on
average; and for the big derivative banks, it is much lower. For JPMorgan, it is only 31%. The unlent portion represents the
“excess deposits” available to be tapped as collateral for the repo market.
The Fed’s
quantitative easing contributes to this collateral pool by converting
less-liquid mortgage-backed securities into cash in the banks’ reserve
accounts. This cash is not something the banks can spend for their own
proprietary trading, but they can invest it in “safe” securities – Treasuries
and similar securities that are also the sort of collateral acceptable in the
repo market. Using this repo collateral, the banks can then acquire the
laundered cash with which they can invest or speculate for their own accounts.
Lokey notes that
US Treasuries are now being bought by banks in record quantities. These bonds
stay on the banks’ books for Fed supervision purposes, even as they are being
pledged to other parties to get cash via repo. The fact that such pledging is
going on can be determined from the banks’ balance sheets, but it takes some
detective work. Explaining the intricacies of this process, the evidence that it
is being done, and how it is hidden in plain sight takes Lokey three articles,
to which the reader is referred. Suffice it to say here that he makes a
compelling case.
Can They Do That?
Countering the argument that “banks can’t really do
anything with their excess reserves” and that “there is no evidence that they
are being rehypothecated,” Lokey points to data coming to light in conjunction
with JPMorgan’s $6 billion “London Whale” fiasco. He calls it “clear-cut proof
that banks trade stocks (and virtually everything else) with excess deposits.”
JPM’s London-based Chief Investment Office [CIO] reported:
JPMorgan’s
businesses take in more in deposits that they make in loans and, as a result,
the Firm has excess cash that must be invested to meet future liquidity needs
and provide a reasonable return. The primary reponsibility of CIO, working with
JPMorgan’s Treasury, is to manage this excess cash. CIO invests the bulk of
JPMorgan’s excess cash in high credit quality, fixed income securities, such as
municipal bonds, whole loans, and asset-backed securities, mortgage backed
securities, corporate securities, sovereign securities, and collateralized loan
obligations.
Lokey comments:
That passage is unequivocal — it is as unambiguous as it
could possibly be. JPMorgan
invests excess deposits in a variety of assets for its own account and as the
above clearly indicates, there isn’t much they won’t invest those deposits in.
Sure, the first things mentioned are “high quality fixed income securities,”
but by the end of the list, deposits are being invested in corporate securities
[stock] and CLOs [collateralized loan obligations]. . . . [T]he idea that
deposits are invested only in Treasury bonds, agencies, or derivatives related
to such “risk free” securities is patently false.
He adds:
[I]t is no
coincidence that stocks have rallied as the Fed has pumped money into the
coffers of the primary dealers while ICI data shows retail investors have
pulled nearly a half trillion from U.S. equity funds over the same period. It
is the banks that are propping stocks.
Another Argument for Public Banking
All this helps
explain why the largest Wall Street banks have radically scaled back their
lending to the local economy. It appears that JPMorgan’s loan-to-deposit ratio
is only 31% not because the bank could find no creditworthy borrowers for the
other 69% but because it can profit more from buying airports and commodities
through its prop trading desk than from making loans to small local businesses.
Small and medium-sized businesses are responsible for
creating most of the jobs in the economy, and they are struggling today to get
the credit they need to operate. That is one of many reasons that banking needs
to be a public utility. Publicly-owned banks can direct credit where it is
needed in the local economy; can protect public funds from confiscation through “bail-ins” resulting from bad gambling in by big
derivative banks; and can augment public coffers with banking revenues,
allowing local governments to cut taxes, add services, and salvage public
assets from fire-sale privatization. Publicly-owned banks have a long and successful history, and recent
studies have found them to be the safest in the world.
As
Representative Grayson and co-signers observed in their letter to Chairman
Bernanke, the banking system is now dominated by “global merchants that seek to
extract rent from any commercial or financial business activity within their
reach.” They represent a return to a feudal landlord economy of unearned
profits from rent-seeking. We need a banking system that focuses not on casino
profiteering or feudal rent-seeking but on promoting economic and social
well-being; and that is the mandate of the public banking sector globally.
Ellen
Brown is an
attorney, president of the Public Banking Institute, and author of twelve books
including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models
historically and globally. Her websites are
This is called: turning people into slaves. However, throughout history and in every country, slaves revolt and often violently. That's probably why local police forces are being turned into soldiers....
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