When we asked Dane Holmes, the head of investor relations at Goldman Sachs, why so few people trust big banks, he told us, “People don’t understand the banks,” because “there is a lack of transparency.” (Holmes later clarified that he was talking about average people, not the sophisticated investors with whom he interacts on an almost hourly basis.) He is certainly right that few students or plumbers or grandparents truly understand what big banks do anymore. Ordinary people have lost faith in financial institutions. That is a big enough problem on its own.
But an even bigger problem has developed—one that more fundamentally threatens the safety of the financial system—and it more squarely involves the sort of big investors with whom Holmes spends much of his time. More and more, the people in the know don’t trust big banks either.
Several financial executives told us that they see the large banks as “complete black boxes,” and have no interest in investing in their stocks.
A chief executive of one of the nation’s largest financial institutions told us that he regularly hears from investors that the banks are “uninvestable,” a Wall Street neologism for “untouchable.”
And why is that?
Do you really need an article for this?
Let's just apply basic logic:
Why would you ever be less than transparent about your balance sheet and operations?
Still having trouble figuring it out? Ok, I'll put it this way:
Nobody ever hides, obfuscates or says nothing when there is good news; they announce it loudly at every opportunity, whether it be in public filings, press releases, interviews or commercials run in the media.
It's not that tough.
HSBC Holdings Plc (HSBA)’s Mexican branches had become so well-known to drug traffickers as the place to launder proceeds from illicit sales that cartels began using special boxes to speed transactions, U.S. prosecutors said.
From 2006 to 2010, the Sinaloa cartel in Mexico and the Norte del Valle Cartel in Columbia moved more than $881 million in proceeds through HSBC’s U.S. unit, said Lanny Breuer, assistant attorney general for the U.S. Justice Department’s criminal division. Breuer, along with U.S. Attorney Lorretta Lynch in Brooklyn, New York, announced yesterday the bank had agreed to pay at least $1.9 billion to settle money laundering probes.
Number of banksters in prison? Zero.
Who will "pay" this fine? HSBC's customers and shareholders, neither of whom did anything wrong.
“We accept responsibility for our past mistakes,”Gulliver said in a statement. “We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organization from the one that made those mistakes.”
I'm sure they are profoundly sorry -- that they got caught.
Treasury called this "(an) egregious breakdown in anti-money laundering compliance."
I'd say so, when the dopers are sizing the packages they deposit so as to insure they fit through the deposit windows.
That's not suspicious, is it?
The bank engaged in payment practices that violated U.S. law and interfered with economic sanctions, such as forwarding messages to U.S. banks that said that an HSBC affiliate was the ordering institution and not individuals or entities subject to U.S. sanctions, Cohen said.
At least once, HSBC told a bank in Iran how to format payment messages so the U.S. wouldn’t block or reject the transactions, Breuer said.
Oh, it's better. The government alleges that the bank intentionally circumvented the law. Not that it looked the other way, but that it actively participated in the formatting of messages so as to evade surveilance.
The decision not to prosecute HSBC was a decision of the Justice Department and was influenced by factors including the impact of the probe on the company’s employees and the potential economic effect, Breuer said.
In other words if you get big enough and can threaten the government, you can do whatever the hell you want and at worst, if you get caught, you might pay a fine.
That's a nice business arrangement if you can manage to be one of the few able to abuse it.
We will have exactly no progress on repairing what's wrong with our financial system until this sort of behavior leads to handcuffs and revoked charters.
Three former Deutsche Bank AG (DBK)employees told U.S. regulators that the German lender covered up paper losses during the financial crisis, the Financial Times reported. The company disputed the allegation.
The employees -- a trader and two risk managers -- told the Securities and Exchange Commission that the Frankfurt-based bank inflated the value of credit derivatives to avoid recognizing as much as $12 billion in losses, the newspaper reported, citing people it didn’t identify. The portfolio had a notional value of $130 billion, the FT said.
Let's drill into this at the most-fundamental level -- the reason we have reports like this that surface is that we do not require that all of these instruments trade on an exchange, and thus we continue to have people make claims of asset valuations that are not supported by an actual trade at an actual price.
This sort of intentional distortion became effective law in the United States in 2009 following the Kanjorski hearing when FASB was effectively extorted by Congress.
That was the proximate event that halted the stock market slide in early 2009.
This sort of game, incidentally, has precedent. During the Latin-American Debt Crisis Volcker is known to have intentionally allowed banks to lie about their asset valuations and exposure on Latin American debt. Several large banks were factually insolvent and under the law should have been immediately closed.
There are many who argue that we "orderly markets" require that we allow these games to be played from time to time as these are "temporary insolvencies" and "cure themselves" if we allow large firms to "earn their way out of the hole."
The truth is more sinister -- firms get into the hole in the first place because they believe they will be permitted to play this game and instead of being held to account they will be given a pass.
That in turn leads to both outrageous subsidy costs being passed to the taxpayer and general citizen (e.g. ridiculous overdraft fees and other games) through the back door instead of good corporate governance and risk controls being imposed by boards up front.
This is exactly like a gambler in Vegas who has no fear of losing because when he loses he can force someone else to cover his marker, but when he wins he gets to keep the money.
When financial institutions gain the ability to use the guns possessed by government to force others to cover their expenses and commit frauds that you or I would go to prison for, arguing that "the economy requires that we prevent the bad outcomes from happening", we continually slip further and further toward losing our nation.
This game must stop, not because of an alleged $12 billion concealment but because no institution should be able to counterfeit the currency of any nation in which it operates, and any financial institution that issues unbacked credit whether above-board or under the table is doing exactly that.
You know, if you've been following my writing for any length of time, that I've been advocating a "One Dollar of Capital" standard for banking.
I have also asserted that unbacked credit emission is, economically and mathematically, identical to counterfeiting of the currency.
That's a strong allegation, and one that goes against what you've been told throughout your life -- that banks take in deposits (your earned money) and then they loan that out. That this powers economic growth. And that we need the banks' involvement in this process in order to have economic prosperity.
But these assertions that you have had your head filled with are identical to those that a drug pusher who tells you that he can make you feel good -- just take one toke right here sir!
What he neglected to tell you was that the drug you are about to ingest is highly addictive, expensive, and will rot the teeth right out of your head while turning you into a mental zombie!
So imagine my surprise when the banksters to top all banksters, the IMF itself, issued a research paper that took a look at an old plan floated during The Depression that came to be known as "The Chicago Plan." It was touted at the time as ending the risk of bank runs, dramatically reducing public debt (a huge problem now), dramatically reducing private debt (also a huge problem), curtailing the boom-and-bust cycle and allowing steady-state inflation to be zero without impairing monetary policy. The IMF, of course, says this is a scholarly work and does not (necessarily) represent their views. Ok, but their folks are studying it -- and they conclude that it's worthy of support!
That, my friends, is One Dollar of Capital plus a few more features. And academically, they validated its assertions.
But that's not the bombshell. That is found here:
In a financial system with little or no reserve backing for deposits, and with government-issued cash having a very small role relative to bank deposits, the creation of a nation’s broad monetary aggregates depends almost entirely on banks’ willingness to supply deposits. Because additional bank deposits can only be created through additional bank loans, sudden changes in the willingness of banks to extend credit must therefore not only lead to credit booms or busts, but also to an instant excess or shortage of money, and therefore of nominal aggregate demand. By contrast, under the Chicago Plan the quantity of money and the quantity of credit would become completely independent of each other. This would enable policy to control these two aggregates independently and therefore more effectively. Money growth could be controlled directly via a money growth rule. The control of credit growth would become much more straightforward because banks would no longer be able, as they are today, to generate their own funding, deposits, in the act of lending, an extraordinary privilege that is not enjoyed by any other type of business. Rather, banks would become what many erroneously believe them to be today, pure intermediaries that depend on obtaining outside funding before being able to lend. Having to obtain outside funding rather than being able to create it themselves would much reduce the ability of banks to cause business cycles due to potentially capricious changes in their attitude towards credit risk.
Read that however many times you need to until it sinks in folks, because this is what I and a few others have been saying now for a long time -- and our ideas are not only not really new, they're also factually correct.
The "extraordinarily privilege" referenced above, were you or I to engage in it, would be called what it is -- counterfeiting. "Generating their own funding, deposits", is exactly that -- creating money out of "thin air" though the unbacked emissions of credit. It is exactly identical in form and effect to you running off $100 bills on your office copier. And for every other entity other than a bank, it is a felony.
But it is Congress that has this power according to our Constitution. A commercial institution that operates for profit should never have the right to literally steal from you at its whim, but that is exactly what unbacked credit creation empowers a bank with -- the ability to take everything you have by debasing your purchasing power to the point that you are forced to hock, or even sell and abandon, any asset you possess.
This is what has happened to your standard of living. It is the strangulation of our economy, on purpose and for profit, that these institutions have imposed on us. Our political class has been bought by these jackals and turned into their minions, instead of the other way around where we empower politicians and they derive their power from the freely-given consent of the governed.
It is time to change this ladies and gentlemen.
You may have doubted that my analysis was correct when it comes to how the monetary and banking system works today, and whether One Dollar of Capital was workable and would address these issues along with being beneficial to the economy as a whole.
The paper cited here is 71 pages and will take you a bit of time to read and noodle over. But if you do, if you become awake and aware of exactly what has been taken from you, by whom, and why, perhaps you will rise and demand that it stop, backing that demand with your political power, your vote, your protest and your actions in the economy.
We do not have to put up with this outrageous activity by private firms; we have the right, and the power, to put a stop to it under the United States Constitution, and stop it we must if our economy is to clear and improve.
Many of you have read my various tickers over the years on One Dollar of Capital, including this one from 2009. This also features prominently in my book Leverage; indeed, quite a bit of ink was spent on this very topic.
I am continually asked by various policy-makers to define exactly what I mean by this standard, as it appears that the various previous Tickers are not sufficient for clarity. Thus, the definition set forward here.
One Dollar of Capital is simply the principle that nobody be permitted to "create credit out of thin air", thus artificially expanding the spendable supply of "money" in the system. This, and only this, is the reason for all of the bubbles and financial collapses throughout history. This sleight-of-hand is why Tulip Mania happened, it's why we had a crash in 1873, it's why we had a crash in 1929, it is why the tech market blew up in 2000 and it's why we had a crash in 2008 in housing. It is why we're threatened with collapse in Europe now. It is a scam as old as the money changers during the time of Hammurabi, and until we stop it there will never be stability in the banking and financial system. This sleight-of-hand is in fact exactly identical in mathematical and economic impact to counterfeiting of the nation's currency, a crime which we all should recognize, condemn, and when it occurs the punishment should include both imprisonment and forfeiture of every dollar of ill-gotten gain.
Putting a stop to unbridled credit creation also removes the threat of "inflation" because it makes inflation by sleight-of-hand flatly impossible. It returns the ability to cause inflation to the one place where it should rest -- the entity that is supposed to be in control of the money supply, the federal government (specifically, Congress.) We have in fact had monstrous inflation over the last 30 years; one need only look at the increase in the price of stocks, of college educations and medical services to see it. The bankers and their cronies have tried to hide its impact on the common man through offshoring of labor so as to hold down "prices" in the CPI, but that's a lie too as a man who loses his high-paying job to some slave in China has his spendable income destroyed at the same time as he gets "lower prices" at WalMart.
Simply put, for every dollar of alleged GDP there must be one of dollar of credit or currency with which to buy the goods and services produced. If you increase the denominator, that is, the number of units of either credit or currency in the system then each unit must inevitably be worth less than it was before. Only when those units are exactly in balance with economic output is there zero inflation and protection of the currency's purchasing power.
That is the definition of Sound Money.
So mechanically, how do we get to One Dollar of Capital?
We impose the following standards on all institutions:
Imposition of this model inherently requires resolving The Federal Reserve's manipulation of the currency and interest-rate markets. We have seen that The Fed has intentionally refused to put a stop to manipulation by banks, including the recent LIBOR scandal; indeed The Fed argued that LIBOR was "the best" standard for money rates even while fully aware it was being gamed. The Federal Reserve Act allegedly requires that it both lend only against collateral at real values, but we do a terrible job of actually enforcing full transparency in this regard and an even worse job of stopping The Fed from circumventing the law (e.g. Maiden Lane.)
Note that a move to One Dollar of Capital immediately resolves all derivative concerns, since every underwater position must be netted every night against actual capital. If you cannot post actual capital on an underwater position you must liquidate the position. This instantly de-fangs the derivative monster.
Since no institution can "create credit" there is never systemic risk. Deposit insurance would be unnecessary except that we have a 30 year history of the government refusing to do its job and even participating in book-cooking schemes; during the crisis IndyMac allegedly back-dated deposits with the OTS, its government regulator, aware of the practice and in fact the same individual allegedly responsible this time did the same thing during the S&L crisis. Because we cannot trust the government nor can we seem to prosecute government agencies and individuals successfully when their malfeasance results in the loss of customer funds, FDIC insurance must be maintained.
With One Dollar of Capital Lehman could have gone broke and it would not have mattered, beyond Lehman. The bondholders and stockholders would have lost some or all of their investment, but since Lehman would have been prohibited from lending or guaranteeing the loan of any money that exceeded shareholder and bondholder equity the damage would have stopped there. Companies go bankrupt all the time; systemic risk only arises when you permit firms to commit acts that on any rational analysis amount to fraudulent emission of "money" such that they can imperil everyone else if their deception is forcibly recognized by the market.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.
NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.
The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.
Looking for "The Best of Market Ticker"? Check out Ticker Classics.
Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.
Market Ticker content may be reproduced or excerpted online provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media.
Submissions may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.
Leads on stories of current economic and political interest are always welcome. Our fax tip line is 850-897-9364; please include contact information with your transmission.