Honesty Sorely Lacking Between Banks and Stakeholders

I think the focus of people should continue to be on the financial health (ie, the lack thereof) of the major financial services companies.

I believe that a crisis is occurring at HB&B ("Humongous Bank & Broker"), masked by central bank action that is pushing down interest rates and the $USD, which is a policy commonly referred to as reflation. The last time we saw such a large scale problem in the banking system was in the Savings & Loan Bank Crisis.

What was not learned by bankers in the 1980s and early 1990s is precisely the same thing that has happened today, and is threatening a global financial system crisis that HB&B wants you to ignore: imprudent real estate lending:

(From wikipedia) In an effort to take advantage of the real estate boom (outstanding US mortgage loans: 1976 $700bn; 1980 $1.2tn)[citation needed] and high interest rates of the late 1970s and early 1980s, many S&Ls lent far more money than was prudent, and to risky ventures which many S&Ls were not qualified to assess. L. William Seidman, former chairman of both the FDIC and the Resolution Trust Corporation, stated, "The banking problems of the '80s and '90s came primarily, but not exclusively, from unsound real estate lending." [6]

Basically, for reasons of greed I believe, the new banker has allowed himself to be tricked the same way as the old banker. Last time, it was the pooling or packaging of junk bonds in order to deceive the buyer into a belief that capital risk was lower in a fund. This time, it was pooling of junk mortgages. Ignored was the investment principle of “Junk in; junk out”.

Michael Milken of Drexel, Burnham and Lambert packaged brokered funds for several S&Ls on the condition that the institutions would invest in the junk bonds of his clients.

HB&B got away with the problem that the asset backing was dubious at best for a time, because some of those mortgages were maintained in good standing, and because the bankers were saying to their clients, “Trust us; we’re your banker”.

But they knew, or ought to have known because it was their professional responsibility to do so, that the collateral was deficient. It was only because they said their products held a certain value that the buyer accepted the price. The buyers were deceived, and now the world is about to see at least a trillion dollars of class-action law-suits against HB&B.

Legal action takes time to pursue and the result is often unknown. But in this case, the defense is virtually non-existent. The result is almost a foregone conclusion. What that means is that the capital that props up HB&B today will be removed tomorrow.

It's one person’s opinion but I think these banks are done like dinner. Kaput.

Tuesday, Goldman Sachs (GS), which claims to be free and clear of the credit market crisis, dropped -2 pct in a heartbeat about 3:00pm, hitting a 171 handle. Two weeks ago, GS was trading in the low to mid 190s. Three weeks ago, GS traded over 208. The image that comes to mind is rats jumping a sinking ship.

You will not hear this from Financial Entertainment TV.

That’s why I say, we trade prices. By doing so, we have been forced to live in the real world.

Tuesday night, I pointed you to Glenn Beck’s concern over FDIC because you ought to be listening. There is no industry insurance in the US that is capable of saving the banking system. In recent months, the world saw there was no industry insurance in the UK that could save banks as the government, meaning the People, had to guarantee the debt of Northern Rock bank (NHRKF.PK), which is one of many in trouble, which means that the People now have to save all the banks.

The amount of the People’s guarantee of the debts of Northern Rock – a single bank in England that I’d say 99 pct of Americans had never heard of before – was many times larger than the total value of the FDIC industry insurance for all the banks in the United States. So, what does that say about the crisis in America?

Bankers rely on what I have referred to as the credit ring. If enough assets go bad, meaning that the bank cannot collect on their holdings, the bank fails, which was the case at Northern Rock. But one bank is also the customer of another bank, which means that when Bank #1 fails, Bank #2 is in trouble, and so on down the line.

The notion of “systemic failure” at HB&B is like a nuclear reaction in silence. By that I mean, HB&B will not – can not – tell you they are insolvent. Bank #2 will report to its regulator that the loans of Bank #1 are good, and they will do that until Bank #1 closes its doors, which will not happen as long as FDIC has some money in the cash register or the Treasury Secretary (the former head of Goldman Sachs, who I’m guessing is leaking word to his friends that the good ship America hit an iceberg) is able to run the 1-800-HELP flag up the pole for bankers under the pretense of doing the same for so-called lowly sub-prime “liar loan” offenders.

HB&B controls Other People’s Money in the trillions. In less than the blink of an eye, a cornered rat will use that money to push up stock prices (and US Treasury prices since the “government will always pay”).

So, while Mom & Pop are watching serious problems hit the economic and corporate world, they cannot understand why prices of stocks are so high. I said it before: prices are where they are because HB&B has put them there. But if you look at the 12-month performance table in my Daily Report, look at where (XLF) (Financial sector dominated by HB&B) stands in relation to the other sectors. It’s a disaster for shareholders.

But think for a moment which shareholders. Do you really think these HB&B executives don’t know what’s going down, and, while keeping mum, have not been selling their own stakes in their banks?

Remember the word credulity syndrome: don’t get afflicted. Not to pick on one banker and one bank, do yourself the favor of checking the personal trading record of one of Financial Entertainment TV’s favorite bankers and Talking Heads, Dr. Sherry Cooper.

Ask yourself why she disposed of so much Bank of Montreal (BMO) stock at the top of the stock cycle for BMO, which co-incidentally was when all the credit market kafuffle hit the news.

Dr. Cooper may be a fine person – I wouldn’t know – but I surmise she is much like any banker – any human being – who is risk averse when facing reality. The issue isn’t about individual bankers, including Talking Head bankers, it’s about the honesty of the relationship between the bank and its stakeholders – depositors, shareholders, bond holders, employees and vendors.

My point to all this is that I don’t think there is near enough honesty at HB&B today, and their insurance is not capable of holding the industry together. When the People realize who ultimately will be holding the bag, they too will do what Dr. Sherry Cooper did, and sell their stocks. There is a big liquidity crisis on the horizon. I cannot say more other than I believe it will become apparent as soon as the current commodity bubble pops.

Remember, gold is the last dancer off the floor, and then the music stops…

Comments

[ITVGuy2000]

Outstanding article. Well written and to the point. I hope somebody goes to jail. The fed seems complicit. I guess he doesn't have much of a choice now.