26/01/2014 by Don Quijones
Today, one-thousand six-hundred and three days on from Lehman Brothers’ catalytic implosion, the global banking system is more fragile than ever. All this despite the fact that heretofore unimaginable, indeed incalculable, sums of money have been thrown at the sector in one shape or form – money that has disappeared forever and a day into bonuses, dark pools and tax havens.
Such fragility and instability is hardly surprising given that the banking system has embraced moral hazard as its defining business model. It has also doubled down on many of the dysfunctions that caused the crisis in the first place – over-leverage, derivatives trading, asset bubbles, concentration of risk, banking consolidation, excessive complexity – in a desperate bid to hide its deeply imbedded flaws and re-conjure some of the magic of the pre-crisis bubble years.
The results have been, to put it mildly, disastrous, especially for the real economy and the billions of people around the globe that depend on it. But none of this could have happened without the tacit approval and enabling practices of national and supranational legal, regulatory and governing authorities. As the London banker explains in his blog, those charged with protecting the integrity of markets from the abuses of financial institutions have instead been going out of their way to facilitate those same abuses:
It used to be that the role of the state in financial market regulation was to ensure efficient market operations, promote transparency of prices and liquidity, protect consumers from abusive practices, and to resolve failed companies according to principles of equitable distribution of assets among like classes of creditors. If the role of the state now is to shield HFT, dark pool and OTC markets from transparency, provide liquidity where the market fails, oversee the orderly fleecing of consumers, and to ensure that some creditors of failing firms always win while others always lose, then we no longer have a market economy. And as virtually all these regulatory policies have evolved in the absence of public debate and legislative scrutiny, we also no longer have democratic governance of markets.
The inevitable result is what we have now: a broken banking system with zero accountability or transparency, risible cash reserve ratios and a woeful incapacity to execute even its most basic market functions. And despite the best-laid plans of the global network of central banks to keep the show on the road, the strains are now beginning to show.
Rumours of a New Crisis
If recent reports out of Hong Kong are to be believed, HSBC, the world’s third largest bank by capital and the preferred bank of choice of drug traffickers, arms dealers and terrorist groups worldwide, has been hiding a capital shortfall on (or most likely off) its books of roughly 80 billion pounds (roughly 120 billion dollars). Even in these days of central bank megalomania and inflated currencies, 120 billion dollars is a sizable fortune – and one that even the Fed, Bank of England and Bank of International Settlements might struggle to magic out of thin air without someone noticing. To put it in perspective, the total bill for the Troika’s bailout of the Spanish financial sector ran just over 40 billion euros – less than half the amount that would be needed to plug the alleged holes in HSBC’s tattered books.
With reports slowly emerging of the bank’s fragile state of health, the bank seemingly began limiting the amount of cash customers can withdraw from their own accounts (though it has in recent days rescinded the limit). To wit, from the BBC:
“Some HSBC customers have been prevented from withdrawing large amounts of cash because they could not provide evidence of why they wanted it… Listeners have told Radio 4’s Money Box they were stopped from withdrawing amounts ranging from £5,000 to £10,000.”
Mr Cotton, a HSBC customer told the BBC’s Money Box programme:
“I’ve been banking in that bank for 28 years. They all know me in there. You shouldn’t have to explain to your bank why you want that money. It’s not theirs, it’s yours.”
While Mr Cotton is, if you’ll excuse the pun, on the money on the first point – no one should have to explain to their bank why they want to take money out from an account in their own name – he is unfortunately very wrong about who actually owns the money in his account. You see, unbeknownst to Mr. Cotton and the vast majority of bank depositors, the last few years have seen sweeping regulatory changes that have transformed the nature of bank account ownership across the Western world.
Change of Ownership
Ellen Brown, the author of Web of Debt and president of the Public Banking Institute, warned in the Huffington Post last year that plans to confiscate customer deposits (as happened in Cyprus) have been long in the making:
They originated with the G20 Financial Stability Board in Basel, Switzerland (discussed earlier here). The result will be to deliver clear title to the banks of depositor funds… Few depositors realize that legally, the bank owns the depositor’s funds as soon as they are put in the bank. Our money becomes the bank’s, and we become unsecured creditors holding IOUs. (See here and here.) But until now, the bank has been obligated to pay the money back as cash on demand. Under the FDIC-BOE plan, our IOUs will be converted into ‘bank equity’.
In the event of a future Lehman-like event, the bank seizes the money (no doubt to pay off more important creditors, i.e. big banks and hedge funds) while customers get close to worthless stock in a semi-failed bank – as happened to many holders of Bankia preferente bonds here in Spain. In the EU, similar provisions have been made to ensure that taxpayer money will not be the only source of funds used to keep the old — and increasingly senile — continent’s zombie banks from perishing.
As British blogger John Ward reported late last summer, the German site Deutsche Wirtschafts Nachrichten (German Economic News) featured a piece explaining that all bets are off as far as the ‘guarantee of all funds under €100,000′ pledge is concerned. Under the then Lithuanian Presidency of Dalia Grybauskaite, the proposal as drafted – and almost entirely ignored by the Western media – states as follows (comments in brackets provide by John Ward):
* Treatment will not be the same regardless of size of deposit, BUT small account holders will have to wait up to four weeks to get their money…. ‘depending on how serious the insolvency is’. During that time, there will be a maximum withdrawal of €100-200 per day – again, perhaps less depending on the seriousness of the failure. (Based on the Cyprus experience, the haircut in the end will be at least 60%).
* The EU Parliament – allegedly – is demanding that deposits of €100,000+ euros should be confiscated within five days. (So much for MEPs offering us some kind of protection from the Sprouts).
* In the event of a banking collapse, all previous government commitments are null and void. The force majeur of “exceptional circumstances” can lead to ways round such pledges. Part of the new plan suggests savers could also be subject to a ‘penalty tax’ if they have less than € 100,000 in the bank. (So much for Merkel’s promise to the German people).”
Despite the repeated warnings, including the heavily publicised bail-in of Cypriot banks, nobody seems to notice, nobody seems to care. he vast majority of the world’s bank account holders remain blissfully oblivious to the fact that their money effectively no longer belongs to them.
Little by little, the web is tightening, the fix is in. One day the next domino will fall – the façade of solvency grows thinner by the day, as does public trust in banking institutions, the last remaining glue keeping the system intact. And when that happens, the next round of creative wealth destruction will begin.