by Bill Sardi
Recently by Bill Sardi: The Hunt for a Known Cure
Oh bankers crystal ball, who is the fairest bank of all? Answer: Take your money out of the bank and buy some gold.
Financial oversight agencies now have software to pre-inform them of the predicted day of their demise. This software goes beyond predicting the death of any single bank to calculate the inter-connectedness of the entire banking system and show when one banks falls if the rest will fall with it.
They call it DebtRank. You can call it Bankers Doomsday Software, an algorithmic oracle that tells when a financial crisis is nearing that would crumble the entire global financial system. What its initial test run is telling us is that the world banking system is so intertwined with credit default swaps and derivatives that a relatively small banking institution can bring down the entire system of world banking. Using DebtRank software, prognosticators were retrospectively able to determine that the financial crisis of 2008, started by the collapse of a relatively small firm, Lehman Brothers, could have wiped out more than 70% of the wealth of the world's financial network if bailout funds had not been provided in a timely manner.
The DebtRank development team says a problem uncovered by its analytic software is that its ability to avert a future worldwide financial meltdown is hampered by the fact most global transactions are confidential and regulation occurs only at the national level. Therefore, there is no authority keeping track at the international level to monitor the global finance system as a whole.
The deputy governor of the Bank of England didn't have DebtRank at hand last October (2011), but he issued a warning to chief executives of Britain's largest banks that there was a serious chance none of their institutions would survive to the end of the year. His precise wording, posted online by the UKs Telegraph, said: "Gentlemen, you could all be out of business by Christmas."
American banks, having lost about 70% of their revenue sources with the collapse of the residential real estate market and the legislative reduction of billions of dollars of fees to process debit card transactions seems to have prompted bankers to make up for their desperate situation by ignoring the rules. Regulators seem be looking the other way as an array of infractions have been revealed in recent news media reports.
Just take a gander at what the largest American banks have been up to lately: money laundering, interest rate rigging, defrauding hospitals, schools and state governments of investment income from municipal bond sales, misleading investors over the quality of home mortgages, omission of documents relating to the sale of debt instruments, fake research on the sale of stocks and bonds, etc.
Listen to how Neil Barofsky, former TARP bailout watchdog, describes it: "it's all part of a pattern of activity, this sort of scandal after scandal…. not only do we have to rescue them (the financial institutions) but they get to operate above the law. Because they know and we know, that if we took dramatic action against them we could bring them down and then bring down the entire economy."
What has become apparent is that "too big to fail banks" are essentially working the system to gain a competitive upper hand. They are using public backing (bailout money) to reduce their borrowing costs. Bailouts have become subsidies. Banks that play by the rules and take no bailout money receive no such advantages. It is financial cannibalism at its finest.
Because there is predictive software doesn't make things any better. Corrective action could possibly be taken but most of this amounts to creating more electronic money from the U.S. Federal Reserve while fundamental banking malpractice remains in place.
Actually, the world financial system is more precarious in some respects, if for nothing more than all the counterfeit money that was created to make it appear banks are solvent. If bankers today had to play by truthful accounting rules and appraise their real estate assets at their actual market value and declare all their non-performing home loans as foreclosures, the entire banking system would collapse.
The bankers' crystal ball may declare an immediate crisis lies ahead, but then again, what if the crisis is imminent and daily? Now it becomes business as usual. Just change the rules and then go back to the DebtRank crystal ball and ask again if the financial system is about to implode. The DebtRank crystal ball will give a different answer this time. So it can be manipulated. Some large banks have learned how to borrow money just prior to their required quarterly financial reports to make their financial status appear rosier. See if DebtRank can calculate that.
Doomsday software only tells you whether the first domino has begun to fall, it does nothing to prevent a crisis and only begs for more money printing and bailouts that foment irresponsible banking practices.
The same fundamental flaws of fiat money, fractional banking and debt-based money prevail. Anything that would reign in these dangerous practices and restore sanity to banking, such as gold-backed money that puts limits on inflation and how leveraged banks can be, and full-100% reserves rather than 8-10% reserves on loans (which banks ignore anyway), are shunned or ignored.
With knowledge that a relatively small bank could bring down the world financial system, even small bankers can extort the Central Bank. Maybe the smaller banking and financial institutions can't be cannibalized directly. Regulators now step in and do the cannibalizing for the mega-banks by forcing a weaker institution to merge with a stronger one.
The Volcker rule, which requires banks to restrict their investments in hedge funds and private equity funds, is being put in force, but banks have delayed implementation till 2014 and who knows when that date is reached whether bankers will obtain even further delays. We all hear the rules, but exactly what are the penalties if the rules are violated beyond a slap on the hands with fines and penalties that amount to far less than what is gained by breaking the rules. So bankers ignore the rules and pay the fines. Disregard for law is everyday business practice. It's like an auto driver who keeps getting speeding tickets and just paying the fines with no regard for the law.
The Basel III agreement, which is to be phased in from 2013 through 2019, will require banks to maintain "top-quality capital" equivalent to 7 percent of their risk-bearing assets (loans), which is about three times what they are required to hold under existing rules. But who enforces this rule and when will the banks ever stop delaying its implementation? Will any violators ever go to jail?
An online presentation by a 12-year old girl in Canada reveals the banking system there has loaned out $1.5 trillion with only $4 billion on reserve. That is less than 1% on reserve. The banking system is a total farce.
Banking organizations may be able to get banks to agree, but they may not be able get them to comply. The Basel I agreement, which required banks to hold 8% in reserve, was agreed upon 24 years ago. The world's banks have yet to uniformly comply.
In 1999, when the price of gold was $260/oz. (less than the cost of getting it out of the ground and refining it), Reginald H. Howe said an "online poll of U. S. college students showed that twice as many expected in their lifetime to see aliens land on Earth than to experience another Great Depression."
How times have changed. Gold is ~$1640/oz. as I write today and the banking and finance industry papers over what amounts to an economic calamity that dwarfs the Great Depression and obfuscates any real reforms. This means even more difficult times ahead.
To update Reginald H. Howe's monitoring of online public opinion polls, in an unexpected reversal, an interplanetary poll reveals Martians are now fearful earth will expel its bankers to their planet. I've overheard earth's bankers say they are looking forward to a Martian landing as that planet that has no gold, no banking rules and no reserve requirements. However, a Mars early landing rover which was sent to scout the opportunity to start a central bank there was stunned to discover a preserved copy of Ludwig von Mises book The Theory Of Money And Credit on the red planet. It was like Dracula finding a ring of garlic.