Not only are your savings and checking accounts at risk in any of the big banks, they are also at risk in smaller banks foolish enough to invest in derivatives, because the big banks will loot them on the day of the dollar crash (probably within a year from now).

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The Armageddon Looting Machine: The Looming Mass Destruction from Derivatives

Posted on September 17, 2013 by Ellen Brown

Increased regulation and low interest rates are driving lending from the regulated commercial banking system into the unregulated shadow banking system. The shadow banks, although free of government regulation, are propped up by a hidden government guarantee in the form of safe harbor status under the 2005 Bankruptcy Reform Act pushed through by Wall Street. The result is to create perverse incentives for the financial system to self-destruct.

Five years after the financial collapse precipitated by the Lehman Brothers bankruptcy on September 15, 2008, the risk of another full-blown financial panic is still looming large, despite the Dodd Frank legislation designed to contain it. As noted in a recent Reuters article, the risk has just moved into the shadows:

[B]anks are pulling back their balance sheets from the fringes of the credit markets, with more and more risk being driven to unregulated lenders that comprise the $60 trillion “shadow-banking” sector.

Increased regulation and low interest rates have made lending to homeowners and small businesses less attractive than before 2008. The easy subprime scams of yesteryear are no more. The void is being filled by the shadow banking system. Shadow banking comes in many forms, but the big money today is in repos and derivatives. The notional (or hypothetical) value of the derivatives market has been estimated to be as high as $1.2 quadrillion, or twenty times the GDP of all the countries of the world combined.

According to Hervé Hannoun, Deputy General Manager of the Bank for International Settlements, investment banks as well as commercial banks may conduct much of their business in the shadow banking system (SBS), although most are not generally classed as SBS institutions themselves. At least one financial regulatory expert has said that regulated banking organizations are the largest shadow banks.

The Hidden Government Guarantee that Props Up the Shadow Banking System

According to Dutch economist Enrico Perotti, banks are able to fund their loans much more cheaply than any other industry because they offer “liquidity on demand.” The promise that the depositor can get his money out at any time is made credible by government-backed deposit insurance and access to central bank funding.  But what guarantee underwrites the shadow banks? Why would financial institutions feel confident lending cheaply in the shadow market, when it is not protected by deposit insurance or government bailouts?

Perotti says that liquidity-on-demand is guaranteed in the SBS through another, lesser-known form of government guarantee: “safe harbor” status in bankruptcy. Repos and derivatives, the stock in trade of shadow banks, have “superpriority” over all other claims. Perotti writes:

Security pledging grants access to cheap funding thanks to the steady expansion in the EU and US of “safe harbor status”. Also called bankruptcy privileges, this ensures lenders secured on financial collateral immediate access to their pledged securities. . .

Safe harbor status grants the privilege of being excluded from mandatory stay, and basically all other restrictions. Safe harbor lenders, which at present include repos and derivative margins, can immediately repossess and resell pledged collateral.

This gives repos and derivatives extraordinary super-priority over all other claims, including tax and wage claims, deposits, real secured credit and insurance claims. Critically, it ensures immediacy (liquidity) for their holders. Unfortunately, it does so by undermining orderly liquidation.

When orderly liquidation is undermined, there is a rush to get the collateral, which can actually propel the debtor into bankruptcy.

The amendment to the Bankruptcy Reform Act of 2005 that created this favored status for repos and derivatives was pushed through by the banking lobby with few questions asked. In a December 2011 article titled “Plan B – How to Loot Nations and Their Banks Legally,” documentary film-maker David Malone wrote:

This amendment which was touted as necessary to reduce systemic risk in financial bankruptcies . . . allowed a whole range of far riskier assets to be used . . . . The size of the repo market hugely increased and riskier assets were gladly accepted as collateral because traders saw that if the person they had lent to went down they could get [their] money back before anyone else and no one could stop them.

Burning Down the Barn to Get the Insurance

Safe harbor status creates the sort of perverse incentives that make derivatives “financial weapons of mass destruction,” as Warren Buffett famously branded them. It is the equivalent of burning down the barn to collect the insurance. Says Malone:

All other creditors – bond holders – risk losing some of their money in a bankruptcy. So they have a reason to want to avoid bankruptcy of a trading partner. Not so the repo and derivatives partners. They would now be best served by looting the company – perfectly legally – as soon as trouble seemed likely. In fact the repo and derivatives traders could push a bank that owed them money over into bankruptcy when it most suited them as creditors. When, for example, they might be in need of a bit of cash themselves to meet a few pressing creditors of their own.

The collapse of . . . Bear Stearns, Lehman Brothers and AIG were all directly because repo and derivatives partners of those institutions suddenly stopped trading and ‘looted’ them instead.

The global credit collapse was triggered, it seems, not by wild subprime lending but by the rush to grab collateral by players with congressionally-approved safe harbor status for their repos and derivatives.

Bear Stearns and Lehman Brothers were strictly investment banks, but now we have giant depository banks gambling in derivatives as well; and with the repeal of the Glass-Steagall Act that separated depository and investment banking, they are allowed to commingle their deposits and investments. The risk to the depositors was made glaringly obvious when MF Global went bankrupt in October 2011. Malone wrote:

When MF Global went down it did so because its repo, derivative and hypothecation partners essentially foreclosed on it. And when they did so they then ‘looted’ the company. And because of the co-mingling of clients money in the hypothecation deals the ‘looters’ also seized clients money as well. . . JPMorgan allegedly has MF Global money while other people’s lawyers can only argue about it.

MF Global was followed by the Cyprus “bail-in” – the confiscation of depositor funds to recapitalize the country’s failed banks. This was followed by the coordinated appearance of bail-in templates worldwide, mandated by the Financial Stability Board, the global banking regulator in Switzerland.

The Auto-Destruct Trip Wire on the Banking System

Bail-in policies are being necessitated by the fact that governments are balking at further bank bailouts. In the US, the Dodd-Frank Act (Section 716) now bans taxpayer bailouts of most speculative derivative activities. That means the next time we have a Lehman-style event, the banking system could simply collapse into a black hole of derivative looting. Malone writes:

. . . The bankruptcy laws allow a mechanism for banks to disembowel each other. The strongest lend to the weaker and loot them when the moment of crisis approaches. The plan allows the biggest banks, those who happen to be burdened with massive holdings of dodgy euro area bonds, to leap out of the bond crisis and instead profit from a bankruptcy which might otherwise have killed them. All that is required is to know the import of the bankruptcy law and do as much repo, hypothecation and derivative trading with the weaker banks as you can.

. . . I think this means that some of the biggest banks, themselves, have already constructed and greatly enlarged a now truly massive trip wired auto-destruct on the banking system.

The weaker banks may be the victims, but it is we the people who will wind up holding the bag. Malone observes:

For the last four years who has been putting money in to the banks? And who has become a massive bond holder in all the banks? We have. First via our national banks and now via the Fed, ECB and various tax payer funded bail out funds. We are the bond holders who would be shafted by the Plan B looting. We would be the people waiting in line for the money the banks would have already made off with. . . .

. . . [T]he banks have created a financial Armageddon looting machine. Their Plan B is a mechanism to loot not just the more vulnerable banks in weaker nations, but those nations themselves. And the looting will not take months, not even days. It could happen in hours if not minutes.

Crisis and Opportunity: Building a Better Mousetrap

There is no way to regulate away this sort of risk. If both the conventional banking system and the shadow banking system are being maintained by government guarantees, then we the people are bearing the risk. We should be directing where the credit goes and collecting the interest. Banking and the creation of money-as-credit need to be made public utilities, owned by the public and having a mandate to serve the public. Public banks do not engage in derivatives.

Today, virtually the entire circulating money supply (M1, M2 and M3) consists of privately-created “bank credit” – money created on the books of banks in the form of loans. If this private credit system implodes, we will be without a money supply. One option would be to return to the system of government-issued money that was devised by the American colonists, revived by Abraham Lincoln during the Civil War, and used by other countries at various times and places around the world. Another option would be a system of publicly-owned state banks on the model of the Bank of North Dakota, leveraging the capital of the state backed by the revenues of the state into public bank credit for the use of the local economy.

Change happens historically in times of crisis, and we may be there again today.
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Ellen Brown is an attorney, president of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her websites are http://WebofDebt.com, http://PublicBankSolution.com, and http://PublicBankingInstitute.org.

If your (BIG) bank fails, the U.S., Canada, England, and European governments are prepared take part of your deposits ...and any help from the FDIC will be miniscule. This is called a bail-IN (as opposed to a bail-out). The large global and Wall Street banks are at the greatest risk because they have been gambling depositor money in risky derivatives and other speculative devices. Derivatives enjoy special status in bankruptsy, effectively making drivative counterparties senior to almost all other claimants, especially bank depositors. What a pity that only 842 people are following this blog, when due to their ignorance millions of people will surely lose much of their bank deposits in this way. The big banks are now gobbling up much of the wealth on earth before their bubbles burst, at which point they will steal even more. Do your friends a favor by telling them to follow Ellen Brown.

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PublicBankingTV : Your Money Is Not Safe in the Big Banks

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Posted on August 25, 2013 by Ellen Brown

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The Leveraged Buyout of America

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Posted on August 26, 2013 by Ellen Brown

Giant bank holding companies now own airports, toll roads, and ports; control power plants; and store and hoard vast quantities of commodities of all sorts. They are systematically buying up or gaining control of the essential lifelines of the economy. How have they pulled this off, and where have they gotten the money?

In a letter to Federal Reserve Chairman Ben Bernanke dated June 27, 2013, US Representative Alan Grayson and three co-signers expressed concern about the expansion of large banks into what have traditionally been non-financial commercial spheres. Specifically:

[W]e are concerned about how large banks have recently expanded their businesses into such fields as electric power production, oil refining and distribution, owning and operating of public assets such as ports and airports, and even uranium mining.

After listing some disturbing examples, they observed:

According to legal scholar Saule Omarova, over the past five years, there has been a “quiet transformation of U.S. financial holding companies.” These financial services companies have become global merchants that seek to extract rent from any commercial or financial business activity within their reach.  They have used legal authority in Graham-Leach-Bliley to subvert the “foundational principle of separation of banking from commerce”. . . .

It seems like there is a significant macro-economic risk in having a massive entity like, say JP Morgan, both issuing credit cards and mortgages, managing municipal bond offerings, selling gasoline and electric power, running large oil tankers, trading derivatives, and owning and operating airports, in multiple countries.

A “macro” risk indeed – not just to our economy but to our democracy and our individual and national sovereignty. Giant banks are buying up our country’s infrastructure – the power and supply chains that are vital to the economy. Aren’t there rules against that? And where are the banks getting the money?

How Banks Launder Money Through the Repo Market

In an illuminating series of articles on Seeking Alpha titled “Repoed!”, Colin Lokey argues that  the investment arms of large Wall Street banks are using their “excess” deposits – the excess of deposits over loans – as collateral for borrowing in the repo market. Repos, or “repurchase agreements,” are used to raise short-term capital. Securities are sold to investors overnight and repurchased the next day, usually day after day.

The deposit-to-loan gap for all US banks is now about $2 trillion, and nearly half of this gap is in Bank of America, JP Morgan Chase, and Wells Fargo alone. It seems that the largest banks are using the majority of their deposits (along with the Federal Reserve’s quantitative easing dollars) not to back loans to individuals and businesses but to borrow for their own trading. Acquiring a company or a portion of a company mostly with borrowed money is called a “leveraged buyout.” The banks are leveraging our money to buy up ports, airports, toll roads, power, and massive stores of commodities.

Using these excess deposits directly for their own speculative trading would be blatantly illegal, but the banks have been able to avoid the appearance of impropriety by borrowing from the repo market. (See my earlier article here.) The banks’ excess deposits are first used to purchase Treasury bonds, agency securities, and other highly liquid, “safe” securities. These liquid assets are then pledged as collateral in repo transactions, allowing the banks to get “clean” cash to invest as they please. They can channel this laundered money into risky assets such as derivatives, corporate bonds, and equities (stock).

That means they can buy up companies. Lokey writes, “It is common knowledge that prop [proprietary] trading desks at banks can and do invest in a variety of assets, including stocks.” Prop trading desks invest for the banks’ own accounts. This was something that depository banks were forbidden to do by the New Deal-era Glass-Steagall Act but that was allowed in 1999 by the Gramm-Leach-Bliley Act, which repealed those portions of Glass-Steagall.

The result has been a massively risky $700-plus trillion speculative derivatives bubble. Lokey quotes from an article by Bill Frezza in the January 2013 Huffington Post titled “Too-Big-To-Fail Banks Gamble With Bernanke Bucks“:

If you think [the cash cushion from excess deposits] makes the banks less vulnerable to shock, think again. Much of this balance sheet cash has been hypothecated in the repo market, laundered through the off-the-books shadow banking system. This allows the proprietary trading desks at these “banks” to use that cash as collateral to take out loans to gamble with. In a process called hyper-hypothecation this pledged collateral gets pyramided, creating a ticking time bomb ready to go kablooey when the next panic comes around.

That Explains the Mountain of Excess Reserves

Historically, banks have attempted to maintain a loan-to-deposit ratio of close to 100%, meaning they were “fully loaned up” and making money on their deposits. Today, however, that ratio is only 72% on average; and for the big derivative banks, it is lower yet. The unlent portion represents the “excess deposits” available to be tapped as collateral for the repo market.

The Fed’s quantitative easing contributes to this collateral pool by converting less-liquid mortgage-backed securities into cash in the banks’ reserve accounts. This cash is not something the banks can spend for their own proprietary trading, but they can invest it in “safe” securities – Treasuries and similar securities that are also the sort of collateral acceptable in the repo market. Using this repo collateral, the banks can then acquire the laundered cash with which they can invest or speculate for their own accounts.

Lokey notes that US Treasuries are now being bought by banks in record quantities. These bonds stay on the banks’ books for Fed supervision purposes, even as they are being pledged to other parties to get cash via repo. The fact that such pledging is going on can be determined from the banks’ balance sheets, but it takes some detective work. Explaining the intricacies of this process, the evidence that it is being done, and how it is hidden in plain sight takes Lokey three articles, to which the reader is referred. Suffice it to say here that he makes a compelling case.

Can They Do That?

Countering the argument that “banks can’t really do anything with their excess reserves” and that “there is no evidence that they are being rehypothecated,” Lokey points to data coming to light in conjunction with JPMorgan’s $6 billion “London Whale” fiasco. He calls it “clear-cut proof that banks trade stocks (and virtually everything else) with excess deposits.” JPM’s London-based Chief Investment Office [CIO] reported:

JPMorgan’s businesses take in more in deposits that they make in loans and, as a result, the Firm has excess cash that must be invested to meet future liquidity needs and provide a reasonable return. The primary reponsibility of CIO, working with JPMorgan’s Treasury, is to manage this excess cash. CIO invests the bulk of JPMorgan’s excess cash in high credit quality, fixed income securities, such as municipal bonds, whole loans, and asset-backed securities, mortgage backed securities, corporate securities, sovereign securities, and collateralized loan obligations.

Lokey comments:

That passage is unequivocal — it is as unambiguous as it could possibly be. JPMorgan invests excess deposits in a variety of assets for its own account and as the above clearly indicates, there isn’t much they won’t invest those deposits in. Sure, the first things mentioned are “high quality fixed income securities,” but by the end of the list, deposits are being invested in corporate securities [stock] and CLOs [collateralized loan obligations]. . . . [T]he idea that deposits are invested only in Treasury bonds, agencies, or derivatives related to such “risk free” securities is patently false.

He adds:

[I]t is no coincidence that stocks have rallied as the Fed has pumped money into the coffers of the primary dealers while ICI data shows retail investors have pulled nearly a half trillion from U.S. equity funds over the same period. It is the banks that are propping stocks.

Another Argument for Public Banking

All this helps explain why the largest Wall Street banks have radically scaled back their lending to the local economy. It appears that their  loan-to-deposit ratios are low not because they cannot find creditworthy borrowers but because they can profit more from buying airports and commodities through their prop trading desks than from making loans to small local businesses.

Small and medium-sized businesses are responsible for creating most of the jobs in the economy, and they are struggling today to get the credit they need to operate. That is one of many reasons that we the people need to own some banks ourselves.  Publicly-owned banks can direct credit where it is needed in the local economy; can protect public funds from confiscation through “bail-ins” resulting from bad gambling in by big derivative banks; and can augment public coffers with banking revenues, allowing local governments to cut taxes, add services, and salvage public assets from fire-sale privatization. Publicly-owned banks have a long and successful history, and recent studies have found them to be the safest in the world.

As Representative Grayson and co-signers observed in their letter to Chairman Bernanke, the banking system is now dominated by “global merchants that seek to extract rent from any commercial or financial business activity within their reach.” They represent a return to a feudal landlord economy of unearned profits from rent-seeking. We need a banking system that focuses not on casino profiteering or feudal rent-seeking but on promoting economic and social well-being; and that is the mandate of the public banking sector globally.

For a PublicBankingTV video on the bail-in threat, see here.

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Ellen Brown is an attorney, president of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her websites are http://WebofDebt.com, http://PublicBankSolution.com, and http://PublicBankingInstitute.org.

This Is What Resistance Looks Like

Posted on Apr 3, 2011

By Chris Hedges

The phrase consent of the governed has been turned into a cruel joke. There is no way to vote against the interests of Goldman Sachs. Civil disobedience is the only tool we have left.

We will not halt the laying off of teachers and other public employees, the slashing of unemployment benefits, the closing of public libraries, the reduction of student loans, the foreclosures, the gutting of public education and early childhood programs or the dismantling of basic social services such as heating assistance for the elderly until we start to carry out sustained acts of civil disobedience against the financial institutions responsible for our debacle. The banks and Wall Street, which have erected the corporate state to serve their interests at our expense, caused the financial crisis. The bankers and their lobbyists crafted tax havens that account for up to $1 trillion in tax revenue lost every decade. They rewrote tax laws so the nation’s most profitable corporations, including Bank of America, could avoid paying any federal taxes. They engaged in massive fraud and deception that wiped out an estimated $40 trillion in global wealth. The banks are the ones that should be made to pay for the financial collapse. Not us. And for this reason at 11 a.m. April 15 I will join protesters in Union Square in New York City in front of the Bank of America.

“The political process no longer works,” Kevin Zeese, the director of Prosperity Agenda and one of the organizers of the April 15 event, told me. “The economy is controlled by a handful of economic elites. The necessities of most Americans are no longer being met. The only way to change this is to shift the power to a culture of resistance. This will be the first in a series of events we will organize to help give people control of their economic and political life.”

If you are among the one in six workers in this country who does not have a job, if you are among the some 6 million people who have lost their homes to repossessions, if you are among the many hundreds of thousands of people who went bankrupt last year because they could not pay their medical bills or if you have simply had enough of the current kleptocracy, join us in Union Square Park for the “Sounds of Resistance Concert,” which will feature political hip-hop/rock powerhouse Junkyard Empire with Broadcast Live and Sketch the Cataclysm. The organizers have set up a website, and there’s more information on their Facebook page.

We will picket the Union Square branch of Bank of America, one of the major financial institutions responsible for the theft of roughly $17 trillion in wages, savings and retirement benefits taken from ordinary citizens. We will build a miniature cardboard community that will include what we should have—good public libraries, free health clinics, banks that have been converted into credit unions, free and well-funded public schools and public universities, and shuttered recruiting centers (young men and women should not have to go to Iraq and Afghanistan as soldiers or Marines to find a job with health care). We will call for an end to all foreclosures and bank repossessions, a breaking up of the huge banking monopolies, a fair system of taxation and a government that is accountable to the people.

The 10 major banks, which control 60 percent of the economy, determine how our legislative bills are written, how our courts rule, how we frame our public debates on the airwaves, who is elected to office and how we are governed. The phrase consent of the governed has been turned by our two major political parties into a cruel joke. There is no way to vote against the interests of Goldman Sachs. And the faster these banks and huge corporations are broken up and regulated, the sooner we will become free.

Bank of America is one of the worst. It did not pay any federal taxes last year or the year before. It is currently one of the most aggressive banks in seizing homes, at times using private security teams that carry out brutal home invasions to toss families into the street. The bank refuses to lend small business people and consumers the billions in government money it was handed. It has returned with a vengeance to the flagrant criminal activity and speculation that created the meltdown, behavior made possible because the government refuses to institute effective sanctions or control from regulators, legislators or the courts. Bank of America, like most of the banks that peddled garbage to small shareholders, routinely hid its massive losses through a creative accounting device it called “repurchase agreements.” It used these “repos” during the financial collapse to temporarily erase losses from the books by transferring toxic debt to dummy firms before public filings had to be made. It is called fraud. And Bank of America is very good at it.

US Uncut, which will be involved in the April 15 demonstration in New York, carried out 50 protests outside Bank of America branches and offices on Feb. 26. UK Uncut, a British version of the group, produced this video guide to launching a “bail-in” in your neighborhood.



Civil disobedience, such as that described in the bail-in video or the upcoming protest in Union Square, is the only tool we have left. A fourth of the country’s largest corporations—including General Electric, ExxonMobil and Bank of America—paid no federal income taxes in 2010. But at the same time these corporations operate as if they have a divine right to hundreds of billions in taxpayer subsidies. Bank of America was handed $45 billion—that is billion with a B—in federal bailout funds. Bank of America takes this money—money you and I paid in taxes—and hides it along with its profits in some 115 offshore accounts to avoid paying taxes. One assumes the bank’s legions of accountants are busy making sure the corporation will not pay federal taxes again this year. Imagine if you or I tried that.

“If Bank of America paid their fair share of taxes, planned cuts of $1.7 billion in early childhood education, including Head Start & Title 1, would not be needed,” Zeese pointed out. “Bank of America avoids paying taxes by using subsidiaries in offshore tax havens. To eliminate their taxes, they reinvest proceeds overseas, instead of bringing the dollars home, thereby undermining the U.S. economy and avoiding federal taxes. Big Finance, like Bank of America, contributes to record deficits that are resulting in massive cuts to basic services in federal and state governments.”

The big banks and corporations are parasites. They greedily devour the entrails of the nation in a quest for profit, thrusting us all into serfdom and polluting and poisoning the ecosystem that sustains the human species. They have gobbled up more than a trillion dollars from the Department of Treasury and the Federal Reserve and created tiny enclaves of wealth and privilege where corporate managers replicate the decadence of the Forbidden City and Versailles. Those outside the gates, however, struggle to find work and watch helplessly as food and commodity prices rocket upward. The owners of one out of seven houses are now behind on their mortgage payments. In 2010 there were 3.8 million foreclosure filings and bank repossessions topped 2.8 million, a 2 percent increase over 2009 and a 23 percent increase over 2008. This record looks set to be broken in 2011. And no one in the Congress, the Obama White House, the courts or the press, all beholden to corporate money, will step in to stop or denounce the assault on families. Our ruling elite, including Barack Obama, are courtiers, shameless hedonists of power, who kneel before Wall Street and daily sell us out. The top corporate plutocrats are pulling down $900,000 an hour while one in four children depends on food stamps to eat.

We don’t need leaders. We don’t need directives from above. We don’t need formal organizations. We don’t need to waste our time appealing to the Democratic Party or writing letters to the editor. We don’t need more diatribes on the Internet. We need to physically get into the public square and create a mass movement. We need you and a few of your neighbors to begin it. We need you to walk down to your Bank of America branch and protest. We need you to come to Union Square. And once you do that you begin to create a force these elites always desperately try to snuff out—resistance.

Chris Hedges’ column appears every Monday at Truthdig. Hedges, a fellow at The Nation Institute and a Pulitzer Prize-winning journalist, is the author of “Death of the Liberal Class.”