Financial Crisis

[fletchsmile]

Here's a question I've never seen addressed. I guess we know that the major holders of bad debt in Europe are "German, French and UK banks" We know they leveraged it to the hilt. What I'd like to know is who's money is it really?

The trite answer is the money belongs to the banks and the debts belong to us.

I have been trying to find the answer to this question for some while. So far I cannot find a definitive answer.

I believe the following is along the correct lines.

The banks are required to keep reserves at the central banks in relation to the debt they have created. This is defined by the capital adequacy ratio. Any reserves over and above this amount the banks can either lend to other financial institutions (because they are a bit short of the capital adequacy requirements) at the overnight rate, or purchase other stuff such as government bonds.

If these bonds took a haircut, then it would eat into the banks' own capital, which could collapse the system.

To fix this we have another chunk of change being thrust up into the system

http://www.bloomberg...-estimated.html

Against collateral the banks can take on a loan from the ECB at 1% (pity this privilege is not extended to industry, where it might really do something for the economy) and this cash can then also be used to buy government bonds, effectively supporting the bond market and driving the yield curve down. This injection of EUR serves. IMO, two main purposes

1. Drive down the cost of borrowing for the PIGIES

2. Enable cash-strapped banks to temporarily exchange long term asset holdings to meet short term cash requirements, further supporting the asset prices by preventing forced sales.

Now to the funny money bit.; we all know that banks create most of the money in the world through issuing debt by simply crediting an account with a couple of keystrokes. The question is, can a bank credit an internal account the same way, which could then be used to buy government bonds? Somehow I doubt that this is legal. But could say the investment arm of a bank ask for a loan at favourable terms and then buy government bonds? Is this then possible? Just how many shenanigans are there?

I don't know.

But disregarding that last speculative bit, I think the banks have invested their own surplus reserves in the higher yielding bonds of the PIGIES and might go insolvent if the PIGIES don't cough up in full. This in turn will hit all the other institutions, including the pension schemes, who have money in the stock markets.

Doubtless they also have money in the bond market, but that is not the question you asked.

With all due respect there's quite a few inaccuracies in your notes above in terms of how capital adequacy works. The 300+ page doc at the link below helps show how the principles work generally for many of the most developed countries globally, and a skim read would help give a flavour as well as highlighting some of the complexities, bearing in mind countries can add their own discretional rules

http://www.bis.org/publ/bcbs128.pdf

Basel II is by no means a perfect capital adequacy, but it provides some improvements over previous frameworks. Worth also bearing in mind that the US hadn't yet implemented Basel II in Lehman's time. It does however, help explain how capital adequacy is usually viewed by banks and regulators.

Now a couple of the fundamental shortcomings in the capital adequacy framework are:

1) It picks up the capital adequacy of individual entities. It doesn't pick up systemic risk and the interactions. Very important in the context of Greek and possible domino effects

2) It doesn't really pick up liquidity risk well, and that capital is often not an effective mitigant for liquidity risk. Hence you had institutions like Northern Rock which looked perhaps OK for CAR but not for liquidity as they were too reliant on interbank funding, and when uncertainty hits banks don't want to lend to each other, so liquidity dries up. Similar to many non-bank companies fail due to cashflow inadequacies rather than being unprofitable

3) It doesn't pick up well sovereign risk and how this interacts with the banking system. For the Euro for example there's a mismatch in political and economic alignment as well

There are quite a few other inadequacies as well, such as use of models and assumptions for calcuclating risk weighted assets, countercyclicality, and the effectiveness of different types of capital. Role of supervisors and central banks that may set monetary policy as well as regulate. In the case of the Eurozone this is a particular mess.

A great example of the problems with cycles and capital was where the US manipulated the housing market and with political agendas encouraged loans in good times that should never have happened, causing bubbles.

In terms of whose money is it, again at the risk of oversimplifying:

Capital is largely from the shareholders' equity capital and reserves/retained earnings + long term qualifying debt issued by the company (not to be confused with short term debt for general business purposes)

However, liquidity, partly comes from the initial capital put in, but the lion's share comes from funding and deposits. It's mainly the retail deposits from me and you, plus the insitutional deposits which is the main liquidity and cashflow of the bank

In theory if there was no capital adequacy requirement, a bank could lend out all its capital and all its deposits. This would of course be a problem if only a single depositor wanted his money back as there's no money left. The CAR framework therefore attaches risk weightings to the money that goes out and gives a minimum percentage of the risk weighted assets that must be kept back. This is where the 8% number comes in (again an oversimplifaction). If the bank has risk weighted assets out of 100 it retains 8 as a safety measure for capital in case depositors want their money back, on the basis that not every depositor wants his money back at the same time. (And usually true until a run on the bank because of liquidity or other problems)

This is what many people refer to as fractional banking. Basically if you expect credit then it's difficult to escape this leveraging. If banks could only lend out their capital put in, as some people naively suggest, this isn't enough for demands. Additionally why would they want your money and pay interest to you for deposits which they can't pass on, and do something. To make deposit taking worthwhile under this scenario they'd have to charge you a fee, so apart from security why put your money with banks.

One of the problems as mentioned tho' is leverage accentuates cycles and bubbles.

Another way of looking at it is that great comedian Hancock, with his Hancock's half hour. He had one episode called the blood bank where he donated blood and wanted his own kept just for him. Hilarious but not practical. Society would have to fundamentally and dramatically change if you want your dollar kept waiting for you. Think zero credit. Think of all the bills you pay on credit: electricity, water, internet, without even the wider economy. Things would grind to a halt

BTW On proprietary trading desks mentioned by Lanna, this is the bank's own trading account for its own views. Again it will generate assets which are given a % risk weighting of which 8% capital must be retained, as well as liabilities to fund it. This should be very different from "client money" placed with them by trusts, rich people etc, which should be kept separately and segregated from the bank's own assets and liabilities and is not on the banks balance sheet. Unfortunately a few unscrupulous companies dip into client funds for their own purposes, which is totally wrong a la MF Global. These should not be mixed.

Basically a massively complex area, which is difficult even with the best of intentions. Of course by nature humans make mistakes, and some people don't have the best of intentions. Not forgetting the politicians who stick their oar in for their own interests and manipulate people and policies out of self interest

Edited March 7, 2012 by fletchsmile

[fletchsmile]

Worth adding that the politicians have realised having enough capital isn't always enough to save the world. Capital isn't always an effective mitigant for liquidity risk. So even for solvent institutions, liquidity risk comes along strongly when there's no confidence and is compounded by leveraging on capital adequacy issues. So banks and institutions may have enough money to pay debts if given enough time, but if not readily available as needed things go pear shaped and dominoes can fall. With all the uncertainty and lack of understanding and transparency no-one is also sure exactly where the systemic risk lies or who is the second third, 4th domino in the line or who stacks up next to who.

Unfortunately politicians have realised that conversely they can delay capital and solvency problems and kick the can down the road by chucking money at insolvent institutions by giving them loads of money at cheap rates via QE, LTRO etc. What these guys didn't pick up tho' was that goverments can chuck money at poor financial institutions to kick the can down the road, unfortunately this then means the countries and sovereigns take on more debt. For poorly managed countries like Greece this compounds their inadequacies. For the US it's just a larger scale of inadequate politicians and leaders in a loss making country.

I guess the conclusions is the Thai Buddhist knew all along, that everything is much more connected than people realise

Edited March 7, 2012 by fletchsmile

[fletchsmile]

Don't forget the media either. They love selling bad news. The more uncertainty and bad news the more they love it. Unfortunately in a global world technology moves bad news quickly. They love these crises and have a not insignificant part in spreading fear, uncertainty and bad news. Things could be quite different without their sh*t stirring

[churchill]

The Fed copying the ECB .. QE or not .. That is the question ..

Goldman on sterilised QE

http://ftalphaville.ft.com/blog/2012/03/08/913481/goldman-on-sterilised-qe/?utm_source=dlvr.it&utm_medium=twitter

[churchill]

This is going to become an increasing problem .......

I have been told that to draw funds from my pension , i can only take out , in effect , an annual amount linked to interest rates !!! How big a pension does one need with interest rates at 1-2% ...

QE blamed for surge in pensions shortfall

http://www.ft.com/intl/cms/s/0/9becfa48-6884-11e1-a6cc-00144feabdc0.html?ftcamp=published_links/rss/companies/feed//product#axzz1oW9ECH5Y

[midas]

Geithner arrested?

Judge Napolitano testifies of Treasury Secretary and Federal Reserve-insider Timothy Geither’s arrest in this 4-minute corporate news show.

http://www.washingto...ce-is-this.html

There was no such arrest- that's total BS. No news or secrets here. Just Fox "news"/propaganda Republican political wet dreams. Real disclosures were in the news back then and later... http://www.bloomberg...id=a__.69Q8BR04 I didn't like it then or now but it was a US gov. deal with the knowledge and consent of FED chairman Bernanke per this article and my recollection from reading articles at the time was that then Republican Secretary of Treasury Paulson, President Bush, etc.were totally aware and approved of this too. No way Mr. Geithner did this on his own. Fox propaganda can't rewrite history, its already documented.

" There was no such arrest- that's total BS " is that only your opinion or is there a source ?

It is hard to know who to believe about anything these days. The only politician i have any

faith in is Ron Paul and his website says the following :-

[uPDATE 2-27-12 2345 HST: check this link, Was Treasury Secretary Arrested, Questioned & Released?. I tried to web search this, but was unsuccessful. NOTE: the title says "arrested", but what Ben writes is: "Treasury Secretary Timothy Geithner was detained for questioning by New York police on February 24th and was released..." So there may not even be an arrest record for this. Also note what Leowanta said in the next post: "Geithner no doubt is being watched protected in exchange for his knowledge... that’s the way it works... now, we wait for the Bushes to try and take out Geithner... and bingo, their had [bad]… Karl Rove has a huge problem, the White Dragon Society!”]

http://www.dailypaul.com/217315/nwo-collapsing-is-this-why-so-many-bankers-are-resigning

[flying]

It is hard to know who to believe about anything these days. The only politician i have any

faith in is Ron Paul and his website says the following :-

http://www.dailypaul...s-are-resigning

As you know Midas I am 100% a supporter of Ron Paul & agree he is the only one asking questions & the only one

who shows any real knowledge in the Financial workings of our government. Also he has a great understanding of our Constitution.

But I do not want you to mistake that site as his site as it is not. It is a interesting site but should not be confused as his site

The Daily Paul is a community driven website with no affiliation to Ron Paul, Rand Paul or any of their affiliated organizations.

Ron Paul's site is here..... http://www.ronpaul.com/welcome.php

[fletchsmile]

The best thing about the Financial crisis is it cuts down the air time available for discussing the US election

[midas]

It is hard to know who to believe about anything these days. The only politician i have any

faith in is Ron Paul and his website says the following :-

http://www.dailypaul...s-are-resigning

As you know Midas I am 100% a supporter of Ron Paul & agree he is the only one asking questions & the only one

who shows any real knowledge in the Financial workings of our government. Also he has a great understanding of our Constitution.

But I do not want you to mistake that site as his site as it is not. It is a interesting site but should not be confused as his site

The Daily Paul is a community driven website with no affiliation to Ron Paul, Rand Paul or any of their affiliated organizations.

Ron Paul's site is here..... http://www.ronpaul.com/welcome.php

Thanks flying yes I did make a mistake.

But it's pretty disappointing that of all people Judge Andrew Napolitano seems to have made

a wild exaggeration on air.

even people who despise Fox television still believe

Judge Napolitano .

[Naam]

even people who despise Fox television still believe Judge Napolitano

i never did. heard over the years quite some BS from him too. having said so i would like to mention that Napolitano has (or had during "my time") much more class, knowledge and integrity than any of the bunch of goddàmn FAUX liars lead by Bill O'Reilly and Sean Hannity.

[Naam]

The best thing about the Financial crisis is it cuts down the air time available for discussing the US election

but isn't it extremely interesting to discuss whether Romney wears Mormon underwear or not?

[midas]

rewarded for stunningly bad behaviour

this would be quite hilarious if it wasn't so outrageous

MF Global Holdings Executives to Get Bonuses If Court Approves

http://www.bloomberg.com/news/2012-03-09/mf-global-executives-who-oversaw-company-may-get-bonuses-if-court-approves.html

[flying]

rewarded for stunningly bad behavior

this would be quite hilarious if it wasn't so outrageous

The people who lost need to exercise their right to bear arms

[midas]

rewarded for stunningly bad behavior

this would be quite hilarious if it wasn't so outrageous

The people who lost need to exercise their right to bear arms

how about bonuses for all the people that lost their money like getting some of their money back?

I know Gerald Celente was one of the people who lost money.

I bet there would be some very colourful Bronx style language from him about this matter

Edited March 10, 2012 by midas

[midas]

rewarded for stunningly bad behavior

this would be quite hilarious if it wasn't so outrageous

The people who lost need to exercise their right to bear arms

how about bonuses for all the people that lost their money like getting some of their money back?

I know Gerald Celente was one of the people who lost money.

I bet there would be some very colourful Bronx style language from him about this matter

As the search for the "missing" $1.2 billion in client funds rolls on, Gerald Celente has a message for all Americans: "If you don't have your money under your pillow or mattress, you don't have it all. It's not safe."

BECAUSE......

"The only thing I can tell you is that MF Global transferred customer money to its broker dealer, and that Mr. Corzine was aware of the loans being made from segregated accounts," Duffy said under oath.

http://finance.yahoo...-144949248.html

Edited March 10, 2012 by midas

[Naam]

a consolation might be that Mr Celente's money is neither missing nor gone. it still exists... in the pockets of other people.

p.s. what's the big hoo-hah anyway? after all it's only worthless fiat money.

Edited March 10, 2012 by Naam

[midas]

a consolation might be that Mr Celente's money is neither missing nor gone. it still exists... in the pockets of other people.

p.s. what's the big hoo-hah anyway? after all it's only worthless fiat money.

" Now, let me make this very clear. I buy for possession and I buy, you know, through – I buy coins through dealers and I buy bullion on contracts, so I buy a futures contract. And so, when I build up enough money, I take delivery on that contract. And I had a contract coming up due in December and I got a call that I needed more money to back my margin on my contracts, and I had plenty of money in there because I was going to take delivery. So, my account was – well, my account was whole to take delivery on what I was going to be buying. And I said, “You have to be kidding me.” He said, “No.” He said, “The trustees decided to take the money out of the accounts and put it in the hands of a trustee.” I mean, who are you kidding? What, am I six years old? So, they took my money. They – my money’s supposed to be in a segregated account. It’s like going into any bank and taking your money out of your savings or checking account and that’s what they did and I can’t get it back and they closed out my positions – a couple of my positions because I refused to send them more money. They stole my money and they won’t give it back! "

http://news.goldseek.com/GoldSeek/1321563900.php

[flying]

They stole my money and they won’t give it back! "

If the people don't TAKE it back in one form or another, these folks will not learn.

The government is obviously bought & paid for/compromised.

These folks will hear only one thing & it is all that will stop them & it is all that is left.

How can folks obey the law in a lawless country? If only those that obey lose & those that do not obey win +have the audacity to ask to be rewarded for their treachery/thievery?

How will that work? Will it not eventually boil over & there be major Mayhem/Revolution?

Better the people start to clean Their homes NOW while the roaches are in reality the minority.

Future roach wannabe's seeing roaches getting crushed will think for once.....Instead we have wannabes seeing roaches

being rewarded...Guess what direction they will choose?

Will they rather become part of the rewarded problem or the poor solution?

Edited March 10, 2012 by flying

[Naam]

a consolation might be that Mr Celente's money is neither missing nor gone. it still exists... in the pockets of other people.

p.s. what's the big hoo-hah anyway? after all it's only worthless fiat money.

" Now, let me make this very clear. I buy for possession and I buy, you know, through – I buy coins through dealers and I buy bullion on contracts, so I buy a futures contract. And so, when I build up enough money, I take delivery on that contract. And I had a contract coming up due in December and I got a call that I needed more money to back my margin on my contracts, and I had plenty of money in there because I was going to take delivery. So, my account was – well, my account was whole to take delivery on what I was going to be buying. And I said, “You have to be kidding me.” He said, “No.” He said, “The trustees decided to take the money out of the accounts and put it in the hands of a trustee.” I mean, who are you kidding? What, am I six years old? So, they took my money. They – my money’s supposed to be in a segregated account. It’s like going into any bank and taking your money out of your savings or checking account and that’s what they did and I can’t get it back and they closed out my positions – a couple of my positions because I refused to send them more money. They stole my money and they won’t give it back! "

http://news.goldseek.../1321563900.php

tough luck to invest in a jurisdiction which does not protect the rights of an individual.

[midas]

tough luck to invest in a jurisdiction which does not protect the rights of an individual .

....................unless you are a personal friend of POTUS

Edited March 11, 2012 by midas

[Naam]

tough luck to invest in a jurisdiction which does not protect the rights of an individual .

....................unless you are a personal friend of POTUS

i wonder whether this chapter is really closed Midas.

[churchill]

James Koutoulas has published an open letter to Jamie Dimon of JP Morgan

http://jessescrossroadscafe.blogspot.com/2012/03/james-koutoulas-open-letter-to-jamie.html

[midas]

tough luck to invest in a jurisdiction which does not protect the rights of an individual .

....................unless you are a personal friend of POTUS

i wonder whether this chapter is really closed Midas.

you have to be joking Naam ?I think they have only just opened the book,

I don't think we have seen anything yet and particularly if he gets a second term.

the next stage will be friendships and loyalties will determine whether or not you are sent to

a private corporate prison for breaking the " law ",,,,,,,,

Edited March 12, 2012 by midas

[midas]

auditors can get away with an awful lot .........because who audits the auditors?

but then one day the chickens come home to roost

Old Landsbanki to sue PriceWaterhouseCoopers for ‘deliberate’ auditing errors

Read more: http://www.icenews.i.../#ixzz1ou0dIBs6

Edited March 12, 2012 by midas

[Naam]

tough luck to invest in a jurisdiction which does not protect the rights of an individual .

....................unless you are a personal friend of POTUS

i wonder whether this chapter is really closed Midas.

you have to be joking Naam ?I think they have only just opened the book,

I don't think we have seen anything yet and particularly if he gets a second term.

the next stage will be friendships and loyalties will determine whether or not you are sent to

a private corporate prison for breaking the " law ",,,,,,,,

then you and me should vote for him and organise a few fund raisers in Pattaya.

[midas]

....................unless you are a personal friend of POTUS

i wonder whether this chapter is really closed Midas.

you have to be joking Naam ?I think they have only just opened the book,

I don't think we have seen anything yet and particularly if he gets a second term.

the next stage will be friendships and loyalties will determine whether or not you are sent to

a private corporate prison for breaking the " law ",,,,,,,,

then you and me should vote for him and organise a few fund raisers in Pattaya.

I live in a Buddhist country and I believe if I did anything like that I might come back as a rat

[churchill]

Determined but Delusional Eurocrats Carry On Up The Khyber

[midas]

Determined but Delusional Eurocrats Carry On Up The Khyber

Greece off course as troika paves way for bailout funds

Greece is already off course and is likely to miss the budget targets attached to the €130bn (£108bn) bailout programme, officials have warned.

http://www.telegraph.co.uk/finance/financialcrisis/9141852/Greece-off-course-as-troika-paves-way-for-bailout-funds.html

[midas]

surely the Greek people won't be willing to tolerate these conditions for very long?

Greece on the breadline: the children of Athens too hungry to do PE

""Many families, suddenly left without work, are in shock and there is nowhere to turn. Social services are collapsing. They are not professional beggars. They are ordinary people like you and me, suddenly left with nothing. I know one area, where schools have specialised in what they gather: 1st primary school gather rice and legumes, 2nd vegetables, 3rd meat and chicken etc."

http://www.guardian....gry-children-pe

Edited March 14, 2012 by midas

[midas]

....................unless you are a personal friend of POTUS

i wonder whether this chapter is really closed Midas.

you have to be joking Naam ?I think they have only just opened the book,

I don't think we have seen anything yet and particularly if he gets a second term.

the next stage will be friendships and loyalties will determine whether or not you are sent to

a private corporate prison for breaking the " law ",,,,,,,,

then you and me should vote for him and organise a few fund raisers in Pattaya.

here you go Naam.....this is why I emphasised private corporate prisons

where lawbreakers will simply be used as a means to make more money

China used prisoners in lucrative internet gaming work

"Prison bosses made more money forcing inmates to play games than they do forcing people to do manual labour," Liu told the Guardian. "There were 300 prisoners forced to play games. We worked 12-hour shifts in the camp. I heard them say they could earn 5,000-6,000rmb [£470-570] a day. We didn't see any of the money. The computers were never turned off."

http://www.guardian....net-gaming-scam

Edited March 14, 2012 by midas