PublicBankingTV : Your Money Is Not Safe in the Big Banks
Posted on August 25, 2013 by Ellen Brown
The Leveraged Buyout of America
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.
____________________________
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.
