Showing posts with label Banking Crisis. Show all posts
Showing posts with label Banking Crisis. Show all posts

Friday, July 13, 2012

A Simple Explanation of Securitization





This was originally written in terms of South African Rand, I've changed Rand into Dollars, and various British spellings for sake of clarity to American readers. I apologize for the lack of attribution, I do not know who the original author is. -AK

A Simple Explanation of Securitization

It is the simple basic task of taking a whole pile of simple single things, joining them all together and calling the collective of them all a new thing, and then selling that thing.

In the banking sector its the taking of a bunch of loans, bundling them together, calling a group of 10 loans a 'structured investment vehicle', and then selling the 'structured investment vehicle' to someone else.

In the Stock Exchange it just taking a group of separate stocks, bundling them together, calling them a unit trust, and selling a unit trust.

In the insurance industry its just taking a bunch of insurance policies, grouping them all together, calling them a re-insurance group, and selling the re-insurance group.

The underlying common principle behind every one of these acts is that the new thing that is formed is not an actual physical thing, and therefore somebody is not paying for an actual physical thing and that is where the whole monetary system collapses.

Its the whole 'widgets in your hand' story.

If you have a factory making widgets and it makes 10 widgets and sells them for $1 each, then the factory has received $10 rand and somebody else has 10 widgets. If that someone else then bunches them together into a 'box of widgets' and sells "A box of widgets" to someone else for $15, then someone else has paid $15 for 10 widgets THAT ARE ONLY WORTH $10.

If that someone else ever tries to sell one of those widgets he has to ask $1.50 for it just to break even, but no-one will ever pay him $1.50 for it because they can buy it from the widget factory for $1.00 already, so at some stage someone will always end up sitting with something that he has paid too much money for that he cannot sell to anyone. And if that someone is a bank, who said to 10 customers give me $1.50 each so that we can buy this 'box of 10 widgets' for$R15, and therefore the bank didn't use their own money, then the bank just turns round to those 10 guys and just says "sorry I've lost your money its not my problem its you who lose out, I'm alright jack because I just get paid a salary for going shopping for "boxes of widgets."  And those 10 customers who gave the bank their money are left sitting with a widget each that they have paid $1.50 for that anyone else can buy at the widget factory for only $1.00.

Monday, July 9, 2012

Modern Banking's Fatal Flaw




This is from South Africa's Mail and Guardian Newspaper.  Thanks again to "African Kabuki" for bringing this to my attention!

http://mg.co.za/article/2012-07-06-modern-bankings-fatal-flaw

Modern banking's fatal flaw
Mail and Guardian
06 JUL 2012 12:00 - RUSSEL LAMBERTI

Economic events around the globe over the past five years have revealed one important fact: the modern banking system is fundamentally dysfunctional.

Does this surprise you? It should not. It has been this way since 1844.

In that fateful year, the British Parliament passed the Bank Charter Act, an attempt to bar commercial banks from engaging in fractional reserve lending.

Back then, people would deposit gold (the money of the day) for safekeeping in bank vaults. The banks would issue depositors with a signed contract stipulating that the bank was obliged to hand over, on demand at any time in the future, a specified weight of gold to the bearer of the contract. These contracts became known as “banknotes”. Because banknotes were a legal claim to ownership of real money in bank vaults, the banknotes of the most trusted and respected banks came to circulate as money substitutes and were hardly ever redeemed for actual gold.

These banks soon realised they could create banknotes that looked just like the original banknotes, with the same contractual stipulations (that is, a claim on gold) and lend them out to merchants at interest. Because hardly anyone actually redeemed their gold, no one realised initially that the banks had created more contractual notes (banknotes) than there was actual gold in the vaults. There was now a pile of new banknotes circulating in the economy, mimicking real banknotes backed by gold.

This was fractional reserve lending.

Creating economic havoc

The injection of excessive monetary liquidity into the economy fuelled euphoric speculative bubbles in asset markets. When these unsustainable bubbles inevitably burst, confidence rapidly deteriorated and people rationally rushed to hold real gold instead of paper claims on gold. Of course, as people flooded the banks with contractual claims on gold, it was quickly discovered that most banks did not have enough gold in their vaults to meet all the claims. This caused even more panic and the resultant run on the banks forced many to declare bankruptcy.

The unredeemable banknotes immediately lost all their value. Huge piles of banknotes stopped circulating, causing monetary liquidity to dry up, leading to further declines in previously overinflated assets and a painful deflationary economic depression – a hangover from the preceding euphoric paper-note inflation and asset bubble.

British legislators rightly wanted to avoid these unnecessarily destructive cycles. The banks’ ability to create banknotes out of thin air and lend them out to merchants was the chief cause of the resulting and destructive boom-bust, inflation-deflation cycle. The Bank Charter Act of 1844 correctly declared this type of lending illegal and barred banks from defrauding the public by issuing banknotes posing illegitimately as gold substitutes.

A loophole

However, despite the noble intentions of the Bank Charter Act of 1844, it contained a fatal flaw, a flaw that still torments the financial system in 2012. For although the Act forbade the creation and lending of counterfeit banknotes, it failed to prohibit another form of unbacked lending that in effect allowed the banks to continue doing what they had been doing before.

Banks carried on lending out more than the actual value of gold in their vaults, but now, instead of issuing physical banknotes, they simply loaned “money” by entering values into borrowers’ personal account records on which cheques could be written for payment. The banks had found a loophole.

These new loans, which reflected as mere entries in cheque accounts, falsely posed as gold substitutes in the same way, though more difficult to detect, as banknotes once had. Destabilising paper-banknote inflation had been stopped, but it had merely been replaced by destabilising check-account inflation.

Put simply, banks continued to lend more money than actual gold on deposit, rendering the financial system as unstable as before.

This practice of inflating cheque or deposit account entries out of thin air remains the modus operandi of all commercial banks to this day. In addition, the very purpose of the central bank – and the monopoly currency production privilege it enjoys through legal tender laws – is to absolve commercial banks from the responsibility of holding real gold money in their vaults and to print paper money when commercial banks are threatened with bank runs and solvency crises.

Unfortunate mistake
The Bank Charter Act of 1844, therefore, was almost the greatest legal advance in the history of modern banking, but it failed to deal with the fundamental problem: fractional reserve lending.

The result of this unfortunate legal mistake in the United Kingdom well over 150 years ago is that today’s banking system remains fundamentally dysfunctional. The best we can expect is incessant financial volatility and uncertainty, if indeed we manage to avoid outright financial and fiscal calamity.

The nub of the problem stems from the symbiosis between politics and banking. Politicians seek access to easy channels of finance; bankers seek favourable regulatory regimes and protections to continue the lucrative yet inherently unstable practice of fractional lending. The central bank, a unique quasi-private/quasi-public institution contrived by politicians and bankers, is the bridge between the two, legislatively authorised to print paper money out of thin air in order to bail out irresponsible banks and governments.

However, as our current global financial crisis demonstrates, central-bank oversight of the fractional banking system does not prevent crises it guarantees them. The central bank’s role as liquidity provider of last resort encourages commercial banks to engage in even riskier fractional lending, inevitably leading to greater illusory euphoria and subsequent solvency crises.

The two greatest economic crises in American history – the Great Depression of the 1930s and the current Great Recession starting in 2008 – have occurred since the creation of the United States Federal Reserve Bank in 1913. The crises that occurred before 1913 were usually the result of legal privileges granted by government to one or more fractional-reserve banks that led to unsustainable lending booms and busts. Moreover, economic crises and painful recessions have occurred in every decade since 1913 and have been particularly severe since 1971 when the US government severed all official links between the US dollar and gold.

No accident
The current financial crisis is no accident. It is the predictable and logical result of fractional reserve banking and the political-legal privileges that make this system possible.

Only a return to legally sound banking principles, the kind the 1844 Bank Charter Act was after, can remedy this unfortunate situation. This requires the abolition of legal tender laws, a return to sound commodity money, monetary deposits to be respected as safekeeping contracts and for banks to loan only those funds previously loaned to them by yield-seeking investors prepared to forgo fully the use of their funds for the term of the loan.

Russell Lamberti is head strategist at ETM Analytics, in charge of global and South African macroeconomic, financial market and policy strategy within the ETM group.

Thursday, May 17, 2012

Spanish Withdraw 1 Billion Euros!
French Govt Slashes Pay By 30%



Reposted from http://the2012scenario.com
2012 MAY 17
Posted by Stephen Cook

Spanish Withdraw 1 Billion Euros! French Govt Slashes Pay By 30%

Stephen: It’s all happening in Europe today. I mean, we have long been told things would happen in the blink of a eye…

Following the Greeks withdrawing over 800 million Euro from their banks yesterday, the Spanish have grabbed their withdrawal slips, headed for their banks and started removing their money, too. Over 1 Billion Euro out already today.

Personally, I think they could be on to something. If everyone in the world withdrew all their money from the banks on one day, we would soon see some very big changes – and quickly. After all, the cabal-owned banks and moneymen caused this whole money schemozzle in the first place.

Meanwhile, proving that they have indeed voted in a more egalitarian regime, the new French President, Francois Hollande has slashed his government’s pay packets by 30 percent.

Thursday, March 8, 2012

Financier Allen Stanford Convicted for US Investment Fraud

Verdict against Allen Stanford, former Texas financier and Caribbean playboy, caps a riches-to-rags trajectory.

Jurors found Allen Stanford guilty of fraud, conspiracy, money laundering and obstruction of justice.

A jury has convicted financier Allen Stanford on all but one of the charges he faced for allegedly bilking investors out of more than $7bn in one of the largest pyramid schemes in US history.

The Texan had pleaded not guilty to bilking 30,000 investors from more than 100 countries through bogus investments with Stanford International Bank.

Jurors on Tuesday found him guilty of 13 of 14 counts of fraud, conspiracy, moneylaundering and obstruction of justice which each carry maximum sentences of five to 20 years in jail.
Stanford, 61, has spent the past three years in jail after being deemed a flight risk shortly after his February 2009 arrest.

He remained stoic as the guilty verdicts were read, but his elderly mother, two adult daughters and a family friend dropped their heads into their hands in dismay. He will be sentenced at a later date.
His lawyers told reporters the verdict was a "disappointment" and vowed to appeal. Prosecution attorneys left the courtroom quickly, and were unavailable for comment.

Cassie Wilkinson, one of Stanford's victims, said Tuesday was a day she has long awaited.
'Unfit for trial'

"We were taken advantage of not just by Allen, but by a whole band of crooks," she said. "It's great to know there were 12 jurors who felt the same way."

The only non-guilty verdict was returned on Count 2, in which Stanford was charged with wire fraud for allegedly purchasing $9,000 Super Bowl tickets for Antiguan bank regulator, Leroy King.

The charge apparently presented some difficulties for the jury as they sent two questions to the judge on Monday in an attempt to clarify language in the testimony regarding that count and the law governing such gifts.

Badly beaten in a jailhouse brawl, Stanford was temporarily declared unfit for trial after he became addicted to painkillers while also on antidepressants.

He tried to have his case completely dismissed after claiming that the beating and drugs destroyed his memory, but a judge refused to believe him.

Defence attorneys at the trial tried to shift the blame to former chief financial officer James Davis, who he said perpetrated the entire fraud while Stanford naively placed his trust in his former college roommate.
They also insisted the bulk of investor money was lost due to mismanagement by court-appointed receivers after the US government seized the bank.

Prosecutors scoffed at the notion, and said Stanford funded his lavish lifestyle by siphoning off $2bn in investor deposits while pushing "bogus" certificates of deposits which promised artificially high returns based on "safe" investments.

Investigators could not find 92 per cent of the $8bn the bank said it had in assets and cash reserves.
As a dual citizen of the United States and the Caribbean country of Antigua and Barbuda, Stanford was known for his largesse, especially on the two paradise islands.

With a fortune of $2.2bn, Forbes Magazine ranked Stanford as the 605th richest person in the world in 2006.

http://refreshingnews9.blogspot.in/2012/03/banker-gets-65-to-260-years-in-prison.html

Tuesday, February 28, 2012

Rumor 2/28/12 Banking Cabal Arrests

Unconfirmed rumor: "...this AM saw Interpol arresting 'bout 1/2 dozen director level FED bankers across the pond [UK]....don't know the outcome, but the big complaint is that these fellows have some kind of diplomatic immunity. They are saying to watch, of all things, the Chicago Trib, for details..."