There was little or no doubt during the 2008 mortgage meltdown and the broader financial crisis that followed that many of the nation’s largest and systemically important financial institutions were technically insolvent. That the institution’s obligations exceeded their assets and ability to use their existing liquidity to service their short-term debts coming due. The solution was TARP or the Troubled Assets Relief Program. A program where the financial firms used their illiquid and dodgy investment paper that nobody wanted to buy as collateral for good federal funds. The word collateral, in this instance, being a fictional device used by the politicians and financial community to allay the fears of a nervous public.
The poohbahs at the Treasury and Federal Reserve claimed that they recovered $441.7 billion of the $426.4 billion disbursed; declaring a “profit” of $15.3 billion. However if one were to recast the funds in constant dollars and include the operational expenses, one might find that the profit evaporated into a loss estimated at $24 billion.
The Dodd-Frank Dodge …
The poohbahs are claiming they are just ensuring that the financial system, the same systemically important financial institutions, have enough liquidity to stave off another financial crisis. Interesting because Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. A skeleton Act named after two of the most corrupt individuals in Congress, Representative Barney Frank (D-MA) who chaired the House Financial Services Committee and Christopher Dodd (D-CT) who chaired the Senate Banking Committee. These are the people who treated the two mortgage giants, Fannie Mae and Freddie Mac, as the Democrat’s slush fund and an employer for their corrupt friends who earned multi-million dollar salaries. A key provision of the Act was to explicitly state that there would be no further government bailouts of "too big to fail" financial institutions and that each of the systemically important financial institutions must develop a “living will” providing for their “resolution” or dissolution as dictated by circumstances.
Another perverse provision of the ACT allows financial institutions to simply borrow their depositor’s funds to effect their own “bail-in.” Where fiduciary duty is nothing but a dirty little lie.
Difference Between Bank Bail-In and Bank Bailout
A bail-in and a bailout are both designed to prevent the complete collapse of a failing bank. The difference lies primarily in who bears the financial burden of rescuing the bank. With a bailout, the government injects capital into the banks to enable them to continue to operate.
The government doesn't have its own money, so it must use taxpayer funds in such cases. According to the U.S. Treasury Department, the banks have since repaid all of the money.
With a bank bail-in, the bank uses the money of its unsecured creditors, including depositors and bondholders, to restructure their capital so it can stay afloat. In effect, the bank is allowed to convert its debt into equity for the purpose of increasing its capital requirements.
A bank can undergo a bail-in quickly through a resolution proceeding, which provides immediate relief to the bank.
The obvious risk to bank depositors is the possibility of losing a portion of their deposits. However, depositors have the protection of the Federal Deposit Insurance Corporation (FDIC), insuring each bank account for up to $250,000. Banks are required to use only those deposits in excess of the $250,000 protection. <Source>
[OCS: There is no guarantee that the FDIC will be able to provide enough funding from its own capitalization without resorting to bail-out funds from the government (taxpayer) or any fixed time-schedule for the return of withheld funds.]
What is going on?
According to published reports, the Federal Reserve just added another $72.8 billion, of what it calls “temporary liquidity” to its balance sheet which itself now totals $4.07 trillion. As far as I can tell, the Fed has provided $208 billion in short-term “repo” interventions plus other Fed manipulations of Treasury Bill pricing.
Of course, both the Federal Reserve and the financial institutions have a narrative to justify the Fed intervention of September 17, 2019. And, of course, it was all a fluke …
September 16th was the day the quarterly tax payments were due – draining cash that would have been invested in repo funds.
September 16th was also the day that $78 billion in Treasury debt was scheduled for settlement – draining even more cash from the financial institutions as they needed to pay for their previous purchase of government instruments.
And, all compounded by the LCR (Liquidity Coverage Ratio --12 CFR Part 329.10) which mandates an FDIC-regulated financial institution “must calculate and maintain a liquidity coverage ratio that is equal to or greater than 1.0 on each business day.” This is the reserve amount kept at the Fed and which is theoretically needed to ensure solvency and guarantee sufficient liquidity in the system. More cash leaving the financial institution’s coffers.
Fed Chairman Jerome Powell was allegedly petitioned by the financial community to lower the LCR requirements to free-up additional funds, but the Fed apparently decided that instead of lowering the LCR, they would inject the necessary liquidity into the system. In October, the Fed announced it would be buying $60 billion of debt each month into June of 2020. What happens after that is anyone’s guess.
Since many financial institutions use repo funds to fund their daily operations and trading activities (much like a check-kiting scheme), any major interruption of these funds represents a problematical liquidity event. Hence, the need for the Fed’s intervention. But, don’t call it a bail-out because these are short-term funds.
In any event, the questions not being asked are why the bank’s risk management systems seemed blind to these dates and/or could not correctly predict the outcome in time to stave off a liquidity event? Or was this an excuse to petition for a lower LCR.
Let us not forget that the Federal Reserve is not a government institution, it is a private corporation, ostensibly owned by its member banks, and operates in secrecy for the benefit of its owners. The Fed has never revealed who actually owns how much of the Fed. And a comprehensive audit has never been performed as if that were even possible. The audit of Fannie Mae took several years and cost over $1 billion and was obsolete the day after the audit commenced.
Just what are the major financial institutions doing that is putting pressure on the system – and why are their executives still earning outrageous salaries? Why aren’t the risk management systems predicting adverse events and taking preemptive corrective action? Or, are the financial institutions playing the system for financial and political gain?
I cannot help but think that the same “deep state” which corrupted the nation’s intelligence and law enforcement may be at work to provide a financial “October Surprise” should the election be extremely close in 2020. A conspiracy theory? Perhaps? But, as we have seen, a number of events, pooh-poohed as right-wing conspiracy theories, were in fact conspiracies between like-minded individuals seeking to derail the candidacy of Donald J. Trump, and continue to operate to this day to impeach the President and, if possible, remove him from office – which is unlikely. In essence, throw enough dirt against the wall and disrupt the 2020 election in favor of the progressive socialist democrats.
We are so screwed.
“Nullius in verba.”-- take nobody's word for it!
“Beware of false knowledge; it is more dangerous than ignorance.”-- George Bernard Shaw
“Progressive, liberal, Socialist, Marxist, Democratic Socialist -- they are all COMMUNISTS.”
“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS "The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius “A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell
“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS
"The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius
“A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell