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Its Dejo Vu all over again.

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August 15, 2009 – Comments (10)

So all of the big banks are insolvent and are only being proped up by the FASB rule change and the Fed. Govt.

Ever wonder why your Citi (used to be City but Walter Wriston decided it would be sexier to change the y to an i) credit card statement comes from South Dakota instead of New York? In the early 80's, most (if not all) of the big money center banks were technically insolvent. They caused it that time by making billions of dollars in bad loans to Latin American (and some other) countries. It was so bad, that they had to make new loans to them so they could pay the interest on the old ones (so they could continue to pretend that they were performing). As a former banker (from this same time period), I can tell you that when you have to put out new money to keep the customer alive, it is a lost cause.

Luckily for Citi, they had a hard charging Retail banker named John Reed ( who replaced Wriston), who had come up with a way to bail them out. Of course this also took cooperation from the Fed's (to look the other way and let time heal the wounds), as well as ship loads of middle east oil money; but it was the retail and credit card business that eventually allowed them to earn enough to finally face reality on the huge commercial loans that had buried them.

Some where about this time the Supreme Court had ruled that as long as the rate you were charging was leagal in the state of origination (read South Dakota), it was not subject to the usury laws of the states your borrowers lived in.

Reed convinced the Governor or South Dakota (whose state was badly in need of jobs) to push through the state legislature a bill raising the state usury rate to 28.99% (sound familiar). They then moved their operation to SD and began the flood of credit cards.

Thus were the big banks (sepecially citi) able to lend their way out of bankruptcy.

Their was another crisis in the 90"s involving Real Estate, but they were able to overcome that one too.

My point is, that as long as the Govt. follows the rule of "Too Big To Fail" and is willing to be patient, and let the banks charge outrageous rates on credit cards they will in time, work their way back out of it.

This is not intended to be an exhaustive history of the American Banking industry, and was done from my own living memory, so if there are some minor errors, pleas ignore, or if you must, correct them.

This is also why I am long on C, BAC, HBAN, RD, LYG and AIB.

JMO and worth exactly what I am charging for it.  

 

10 Comments – Post Your Own

#1) On August 15, 2009 at 6:58 PM, AdirondackFund (< 20) wrote:

I remember Wriston and Reed too.  I also remember the Brazilian Debt Crisis as well. 

There are salient differences, however.  That Crisis did not spread worldwide.  It did not cause a Worldwide Depression.  It did not cause a 60% decline in asset values...worldwide.  It was not the result of a 1 Quadrillion loss, as we are today experiencing.  It did not cause a 25% Unemployment Rate (I am using the Real Rate of Unemployment, not the 'make pretend' one bandied about by Government).  The Brazillian Debt Crisis also did not cause 47 of 50 States to lose a combined 168 Billion in the first 6 months of this current crisis. 

Lastly, there is no presumed 'greater fool' this time around, not even Government itself.  No one can cover a 1 Quadrillion loss by issuing millions of new Credit Cards, as Reed was able to do shortly before the '87 Crash.  Not in this economy.  So, today's solutions have raised the bar a tad bit this time around.  Perhaps the bar is now too high to clear.  It is like expecting a human being to High Jump 40 Stories.  Not going to happen.  If anything, it confirms the opposite.  

 

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#2) On August 15, 2009 at 7:01 PM, cthomas1017 (98.42) wrote:

One small flaw in the logic this time (unless we inflate our way out of it, of course).  The credit cards are the debts that are going insolvent this time.  Ditto... JMO!!! :)  Only mine's worth only hlf what you paid for it. ;)

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#3) On August 15, 2009 at 7:07 PM, bucheron (84.21) wrote:

Déjà vu

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#4) On August 15, 2009 at 7:09 PM, whereaminow (< 20) wrote:

This is interesting.  Let me see if I have this straight, and of course, feel free to correct me.

You are saying that most banks are insolvent, and therefore, horrible investments (and of course, since they are FRB's they are always near insolvency - which is why they need a vehicle for recapitalization, the Fed.)  However, you are confident that the government, the Fed, and the banks will strong arm the American taxpayer - your fellow citizens - into recapitalizing them, thus making your investment decisions turn out profitable.

Does that pretty much cover it?

I think we can agree on all of that with one caveat.  Clearly history is on your side.

The next question of course would be, what makes this anything other than fraud?

David in Qatar

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#5) On August 15, 2009 at 10:00 PM, alstry (36.32) wrote:

Let me expand this excellent discussion a bit further....

As a result of infecting our individuals, businesses, schools, hospitals, cities, states, etc....with so much debt over the past 30 years, and past 10 in particular, we super saturated the market with debt so we had to leverage something beyond debt to keep the game going.......

hence the invention of the credit default swap....or simply insure the debt for many more times than the amount of debt outstanding. 

At that point the real economy doesn't matter as the "real" money was made by insuring debt.

Why make billions in a manufacturing business when you can make trillions insuring debt?  Even if infecting the economy with so much debt eventually destroys the economy. 

The problem is you need an ever growing supply of debt to keep the game going.....until there is few left to lend to..............then the unprecedented overhang of debt suffocates the economy until there is practically no economy left.

Welcome to the path to practically no economy left part of the cycle....until we restructure the debt....we are now in the same position as Latin America in the early eighties.....except the private citizens had much less debt than we do today.

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#6) On August 16, 2009 at 12:19 PM, AdirondackFund (< 20) wrote:

That's exactly correct, Alstry.  We have moved past the 'point of no return' on this one.  Arguably this all occurred as early as 1999 and the Bush Adminstration did a brilliant job in masking the symptoms for 8 years, only to then give up on the constructive strategy once it was clear a Republican Victory could/would/ or should not be won this election cycle.  Why they ever paid the Banks, I will never know, but once they did, they sealed the fate on this transaction and Wall St. responded appropriately by panicking.  

Unless and until every penny is accounted for and returned to the U.S. Treasury, we will have the most massive Depression ever known as simple punishment for the depth and breadth of the Crimes committed...mostly and surely including those Crimes committed by Government itself against it's own People.  

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#7) On August 16, 2009 at 12:26 PM, whereaminow (< 20) wrote:

alstry,

What a great comment.  It reminded of your liquidity trap on a deserted island post.

We have a bunch of idiots running around tearing sheets of paper out their notebooks, when they should be out looking for coconuts.

Did anyone who received bailout money actually do something to improve the economy?

Hmm, I smell a blog post coming on....

David in Qatar

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#8) On August 16, 2009 at 3:31 PM, Teacherman1 (28.84) wrote:

Not defending what the banks did and are doing, just observing that we have had financial crisis before and it has been worked out. Not in a particularly honorable manner, nor other than a temporary solution, but the "big banks" did not fail, and I don't believe they will this time. There are many differences in the size and scope this time, but the financial institutions are also much bigger.

I forgot, there was also "disintermediation" taking place during this time. That is when the public stops putting money in the banks, and goes directly to the highest bidder. In that case, it was the investment banks, who not having the same regulations and capital restrictions that banks had, were paying more on money market accounts, than the banks could charge on loans. While I was not at a big money center bank, I do remember that we were upside down on all of our commercial loans. Shortly there after, we (like a lot of banks), went soley to floating rate, 90 day notes.

The last "debt swap" vehicle was the "Junk Bonds", which is what the investment banks peddled with all the extra money.

Understand, I am very concerned about the world economy, and feel greatly for those out of work, and under water on their homes. But if we take the position that the banks should be punished, and they are put out of business, it will be infinitely worse.

I don't know how it will all turn out, but I am fairly confident that the US and other Govts. will work their "wizardry", and we will get through it. Not judging the rightness or wrongness of it, but just offering my opinion of what the eventual out come will be.

Maybe I am too optomistic, but I can't live my life without hope and in the constantl belief that the "sky is falling".

Many great opinions expressed and all have valid points. Only time will tell which will prove to be correct.

JMO and worth exactly what I am charging for it.

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#9) On August 16, 2009 at 4:10 PM, AdirondackFund (< 20) wrote:

Great Old Wall St. saying, and the basis upon which all trade is made.  "Do what you want, but don't get caught."  This time you got caught.  RED HANDED.  The reason why you got caught is because you knew the jig was up and grabbed too quickly for the money, thus alerting eyes and ears to your ploy. 

By the time you are done diluting out 1 quadrillion, you will have effectively destroyed currency itself.  The last time that happened we lived without currency for many, many years.  The same will happen this time around.  It is part of nature.

The only viable alternative is for a mass deflation wave, which is coming, and without which there can be no bid and no auction for anything, simply because there is no money in circulation and the velocity of money has indeed stopped.  The hyperinflation argument simply won't work because whatever money is printed will never get to The People so that they can spend it.  That has to happen first before inflation can even ocurr.  

You will also find out soon that natural forces rule the Earth, not man made ones.  It is not an expression of superior will or intelligence to stand in front of a tsunami wave, it is an expression of daftness.  The Inflationists have been purposely positioned to be struck by this wave, just as they have been perfectly positioned within Government to take responsibility and blame for the failure which they themselves have caused.

They are the arsonist/firefighter come to save the day....not.  Instead, they have been caught RED HANDED, in plain sight, at the strike of noon.  

It is time to hang 'em high.  My ancestors did not work and sweat to build a Country just so these bozos and can blow into town and make money worthless.  I'd rather see them dead than allow that to happen. 

Dilute out your own savings, errrr, I suspect you have none.    

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#10) On August 16, 2009 at 4:27 PM, whatsupprahalad (< 20) wrote:

The reason the big banks will live to see another day is because the big banks own a majority stake in FED (Money masters : google)

The fall of the smaller local/regional banks is part of the spring cleaning giving the big banks a clean slate to start all over again.

Would like to get someone to comment on the SDR (Special Drawing Rights - funny money of the IMF) is being touted as the next global/reserve currency and looks like obama has already signed off!!.

is the wealth being transfered "Lock Stock & Barrel" out of US to a new location just like when the wealth transferred from UK to USA

=happy investing.

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