Stupidity and Greed on steroids … Consider the dot com boom, where companies that had never earned a profit and whose running costs (burn rate) were hundreds of thousands of dollars per month were still valued in the hundreds of millions of dollars because they had an “e” before their name.
Idiots who thought that that their “e-pet-food” ventures could ever be profitable when the shipping costs of a fifty-pound bag of discounted dog food erased the margin and turned the transaction into a loss. Not to worry these idiots said – we have thousands of people looking at our web site daily and we can make up the loss by selling other “high margin” merchandise. Unfortunately, all of the other e-tailers were crawling all over themselves to discount that other “high margin” product line.
Enter Wall Street with their IPOs (Initial Public Offerings) which earned them handsome fees, outrageous executive bonuses and made e-company founders into multi-millionaires. Life was good as stocks traded higher and higher and executive bonuses reached record levels.
Until the day of reckoning, when someone said “the emperor has no clothes” or in the vernacular “are you crazy, this company has no profits and the losses will continue forever.” So the banks were left with so much dodgy paper on their books that they were technically insolvent.
Enter Alan Greenspan who concocted the 1% solution. Let’s simply keep the federal funds rate artificially low at 1% and have the Federal Reserve loan the banks good money in loans collateralized by dodgy paper – that way they can earn a guaranteed profit, recapitalize and all will be well throughout finance land.
Well this did not sit well with those managing investment funds and the international pool of capital because they could no longer invest in safe United States Treasuries and get a decent yield.
Star fund managers could not command a bonus for investments with abysmal yields, so they turned to another “historically safe” investment, mortgage-backed securities.
Unfortunately, again, the tidal wave of available capital overwhelmed the existence of decent mortgages and the Wall Street Wizards ran out of product to sell investors. So they called their buddies, the corrupt politicians, relaxed prudent lending standards and made more product. With standards becoming ever lower and borrowers becoming ever more dodgy.
Until the day of reckoning, when someone said “the emperor has no clothes” or in the vernacular “are you crazy, these mortgage pools are eating themselves out of house and home as foreclosures mount and the losses will continue as the mortgage market declines.”
Enter Ben Bernanke, the hand-picked protégé of Alan Greenspan (of the 1% solution). Not to be outdone, Ben faced a worse crisis. This time, even more banks were technically insolvent, but the worst case had been realized – it was the huge interconnected signature banks that controlled the entire United States economy.
Ben’s solution was ZIRP! Yes, let’s recapitalize the financial institutions by changing the Federal Funds rate to ZERO as in Zero Interest Rate Policy. ZIRP! We will loan the financial institutions good money at zero to one-quarter of one-percent so they can make a guaranteed profit and all will be well in finance land. Again, taking dodgy paper as collateral for good money.
Enter the corrupt politicians, Representative Barney Frank (D-MA) and Christopher Dodd (D-CT) who were responding to the outcry of depositors and investors who were earning less than the rate of inflation on their investments. Seniors on fixed incomes who were rapidly joining the homeless and dog-food eating set. Both of these asswipes put forth Dodd-Frank legislation, more formally known as the dishonestly named Wall Street Reform and Consumer Protection Act. There will be no more “too big to fail banks” because we will let them fail and their business activities will be “wound down” in a controlled orderly manner much as when the FDIC (Federal Deposit Insurance Corporation) takes over an insolvent depository bank and makes people whole (up to $250,000 – terms and conditions apply) and sells off the assets.
Which brings us to today …
One, the “too big to fail” banks have gotten larger and are imposing more of a systemic risk to our economy than ever before.
Two, those special regulations are still being written and have never been tested with a bank such as Citibank.
And three, the international financial community – including members in the United States – have figured out how to go beyond ZIRP (Zero Interest Rate Policy) to bail out a technically insolvent bank. “THE BAIL-IN!”
The “bail-in” is a simple concept. Instead of having the government bail our financial institutions with taxpayer’s money, it appears more efficient simply to steal the money directly – allowing the financial institution to be the agent of the government.
And, if you think Cyprus is a long way off, you may wish to look closer to home: the Canadian Version of Dodd-Frank …
From Page 144 -- Establishing a Risk Management Framework for Domestic Systemically Important Banks
Economic Action Plan 2013 will implement a comprehensive risk management framework for Canada’s systemically important banks. Canada’s large banks are a source of strength for the Canadian economy. Our large banks have become increasingly successful in international markets, creating jobs at home.
The Government also recognizes the need to manage the risks associated with systemically important banks—those banks whose distress or failure could cause a disruption to the financial system and, in turn, negative impacts on the economy.
This requires strong prudential oversight and a robust set of options for resolving these institutions without the use of taxpayer funds, in the unlikely event that one becomes non-viable.
The Government proposes to implement a -- bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.
This risk management framework will limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other market participants that these institutions are ―too big to fail.
Source: Canada’s Economic Action Plan for 2013 – “Jobs Growth and Long-Term Prosperity”
The language of this Canadian document parallels U.S. documents in both intent and language …
House Resolution H.R. 4173, know by its short title as the “Dodd-Frank Wall Street Reform and Consumer Protection Act” is an act “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘‘too big to fail’’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.
SYSTEMICALLY IMPORTANT AND SYSTEMIC IMPORTANCE.— The terms ‘‘systemically important’’ and ‘‘systemic importance’’ mean a situation where the failure of or a disruption to the functioning of a financial market utility or the conduct of a payment, clearing, or settlement activity could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the financial system of the United States.
Source: Dodd-Frank Wall Street Reform and Consumer Protection Act
The danger is in the disclosure …
In almost all countries, politicians and financial operatives believe that disclosure is equated with legality. That is, if an onerous practice is disclosed in the fine print, the acceptance of the disclosed terms and conditions by you, the counterparty, is acceptable. Of course, you might not see those terms and conditions as they are buried in other terms and conditions. Or, while they are written using the English language, the construction of the wording renders the text either meaningless to the ordinary person or susceptible to adverse interpretations by the legal profession. And, if that were not bad enough, most transactions represent a “Hobson’s Choice” – essentially a “take it or leave it” proposition. Especially egregious after your hard work in jumping through the hoops as you qualified for credit.
So, let me translate Canadian financial speak and provide my humble non-legal opinion.
One, there are certain systemically important banks that are “too big to fail.”
Two, rather than claiming the taxpayer will “bail-out” these systemically important banks, the government and its regulatory agencies will still allow them to survive by recapitalizing themselves by the very rapid conversion of certain bank liabilities (your deposits) into regulatory capital (money to keep them afloat). The very essence of a “bail-in.”
And three, you are screwed because you have no control over the situation and the politicians and regulatory agencies in thrall to the financial special interests.
Here in the United States, I cannot find a smoking gun that would permit “bail-ins,” but so much of Dodd-Frank has yet to be codified – so there is a potential for corrupt politicians to assist their special interests in the financial sector with an inserted clause in some bill that allows for the practice.
Let me also remind you that we are not just speaking about regulated depository institutions (banks, credit unions, thrifts, etc.), but all large financial institutions (including unaffiliated corporations with large financing operations such as GE Capital, etc.) which may present a systemic risk.
In the case of the United States, as it appears to be happening in Greece, the FDIC (Federal Deposit Insurance Corporation). NCUA (National Credit Union Administration), SIPC (Securities Investor Protection Corporation) insurance limits may be the truest test of what you can expect to recover over some time period should an institution become insolvent and the government regulatory agencies be unable to “resolve” the situation.
Bottom line …
Perhaps it is prudent to transfer all of your funds to regional or middle-tier financial institutions that can prove their solvency in the absence of large positions in mortgages, car loans, credit card debt and derrivatives relating to those underlying collateralized obligations. It is unknown at this time whether or not a large technically insolvent financial institution would be allowed to purchase any other financial institution for the sole purpose of providing access to good funds.
And, more importantly, to elect honest brokers to represent “We the People.”
But, in the final analysis, all I can say is watch your assets.
Reference Links …
Here are a few of my financial blog posts that you might want to review …
Banking: The emperor's new clothes ...
Barney Frank & Company: Lying about "too big to fail"
THE MOTHER OF ALL CONSPIRACY THEORIES MAY BE TRUE!
ON THIS LIST AT RISK FOR ARE THE TOP THREE BANKS MERGER/ACQUISITION TO PREVENT THEIR COLLAPSE? (Updated)