Recently by Simon Black: A Very Subtle Form of Theft
Lets speak plainly. If you are in the United States or Western Europe, chances are incredibly high that your bank is simply not safe. In other words, your money is at risk. Big time. Lets review some of the chief concerns:
1) A black box of assets
Banking is a complicated industry and especially when larger banks are concerned, nobody really knows whats under the hood. Can we say with any accuracy whats on Bank of America, Deutsche Bank, or Citis balance sheets?
No way. Theres $8.5 trillion worth of mortgage-backed securities floating around the system. Not to mention, tens of trillions of dollars worth of derivatives contracts tied to mortgage-backed securities on top of that.
These assets are all highly susceptible to downturns in housing, a rise in interest rates, and a host of other systemic risks. Yet we have no earthly idea who owns what, or who the counterparties are. Its all a black box of assets.
In a world where the most basic foundations of the financial system can no longer be accepted as truth, we cannot assume away that bank balance sheets are healthy without more careful investigation and transparent information.
2) The assets that we do know about arent winning any beauty prizes
When governments auction-off tens of billions of dollars worth of bonds, its often the banks that buy. Large banks wielding hundreds of billions, trillions of dollars have few options where they park capital. They require enormous liquidity, and its ironic that the most liquid bond markets are the most dangerously indebted nations.
When $13 billion worth of 30-year bonds were sold last week at record low yields as low as 2.815%, your bank may very well have been one of the buyers.
In the all-too-likely event that price inflation surpasses 2.815% thanks to all the easing, twisting, and printing going on, your bank will essentially be sitting on even more worthless paper. And this doesnt take into account the possibility of an all-out default.
3) Core banking business has all but shuttered
Do you remember the good old days when banks used to be responsible stewards of capital, paying depositors a fair rate (which exceeded inflation) and making sensible loans to creditworthy businesses and individuals?
I dont either. But Im told thats how banking used to be. These days, banks hardly loan to anything that doesnt come with a government guarantee.
This is not a well-functioning system. Safe banks are profitable and in order to be profitable in the long-term, banks must engage in sound deposit and lending practices. This is no longer part of the banking landscape.
4) Lies, regulatory loopholes, and accounting tricks