It’s easy to be negative about the U.S. economy these days. Find a glint of silver, and folks come running to point out all of the dark clouds looming about. This, of course, is what we got last week when the monthly jobs report was released from the U.S. Department of Labor (DOL). Folks pooh-poohed the number of jobs and whining that they’re not enough or that it’s less than a bunch of economists thought that it might be. But you know what? Stuff ’em.
Given how poorly states like California and Illinois have funded the pension funds for their own employees, one would think that this would stop dead in its tracks any plan to have the government assist in managing private sector funds too. The spate of recent activity, however, suggests otherwise.
The financial world is plodding along like a drunken sailor avoiding debt collectors by keeping no cash in his wallet. It’s not the kind of calm that’s going to last or end well. But the storm will have to wait until after the Olympics.What a game! We’ve never watched ice hockey closely before. But watching […]
“When they come for my gun, they will have to pry it out of my cold, dead hands,” is a common refrain I often hear from the Neo-Cons when there is a threat, credible or otherwise, that the U.S. government is going to take their firearms.And, when I hear this crazy talk, I agree with […]
Last year was quite the year for Bitcoin. We’ve seen exponential growth in Bitcoin’s exchange rate and extensive coverage in the media. Another phenomenon we have witnessed is the proliferation of alternative cryptocurrencies, five of which we’ve provided below.What all of these cryptocurrencies have in common is that they rely on a decentralized network to […]
The nonpartisan Congressional Budget Office is acting in a bipartisan way to cover up the biggest single threat to the bipartisan political alliance that is stripping America of its wealth: the United States Congress.There is no question that the following policy is bipartisan. Democrats and Republicans in Congress are completely agreed that the following information […]
Amidst all the revelations about how the American people, many of whom are absolutely convinced they live in a free society, have their telephone calls, emails, website visits, and who knows what else under surveillance by their own government, let’s not forget the massive infringements on financial privacy that have gone on for decades.Consider, for […]
Image: ShutterstockBitInstant CEO Charlie Shrem, along with alleged co-conspirator Robert Faiella, was arrested by federal authorities last week for allegedly laundering more than $1 million worth of Bitcoins. This is a tiny amount compared to the largest drug-and-terrorism money laundering case ever. Yet when British bank HSBC was found guilty in 2012 of laundering billions, […]
The exercise had an awesome name, inspired by the movies: “Quantum Dawn 2.”On July 18, scads of U.S. banks, stock exchanges and government agencies took part in a digital fire drill — a practice run in the event all of Wall Street came under massive cyberattack.This isn’t the first time banks have come under an […]
The faces of the Detroit bankruptcy are the thousands of pensioners whose promised benefits are suddenly part of the restructure negotiation. When Motown filed for Chapter 9 last July, the city had $11.5 billion in unsecured liabilities. The vast majority of this was pension and health care benefits owed to retired city employees.The images of […]
So you’ve maneuvered the Obamacare website, plugged in your top-secret information and found out how much you are forced to pay to avoid a fine.And for some of you, it turns out you qualify for a government subsidy — making the premium sound like a bargain. But signing on that line to accept the government’s […]
The Largest Company in History:“The United States Corporation of Government (USCOG)”I follow global social and commercial networks, looking for entrepreneurial opportunities.Innovation surges when industry and government models change. Buggy whips. Landline phones. Railroads. The Soviet Union. Apartheid South Africa. All marked social and commercial innovation, both bad and good.We are witnessing a new form of […]
We’d like to give the banks in Australia some credit. They’ve finally gone and done it. They have caught up with 1960s technology. They’ve figured out how to use PIN numbers.How to only use PIN numbers, that is. They’re considering scrapping signatures on credit cards to cut down on fraud. Apparently, having to verify your […]
We put in a good-citizen call to the SEC the other day.“There’s a massive scheme to manipulate stock prices,” we told the friendly agent.“I have to tell you that your call is being monitored so that we can better serve the public,” he replied.“Oh, don’t worry about that. The NSA is tapping our call anyway.”“Are […]
Bitcoins are largely considered digital currency (or “crypto currency”) so you’d expect it to be treated like currency on a retail web site. But the Internal Revenue Service might not think so.
Politicians — elected officials — are street smart rather than book smart.If you care about influencing government policy it helps to know how they think.Forbes contributor Nathan Lewis argues that:“Too much is done today on the oral tradition. That is, literally, what it is. In this post-Gutenberg age, we have some better alternatives.“Thus, we need […]
Bitcoin has been making headlines for months now. Extreme price fluctuations have sparked a vigorous debate: Is it a currency or a scam? Is Bitcoin viable in the long-term, or are we witnessing a bubble waiting to burst?The answers to these questions are simple: Yes, Bitcoin is a currency, but we cannot know if it […]
The Silk Road was an undercover website where you could buy or sell illegal goods — drugs mainly. I believe passports were changing hands for about $6,000, and I understand weapons were also sold, but that was ceased in response to the spate of shootings in the U.S. over the summer. The essence of the […]
The market has selected different things as money throughout history. Some of these items have served as money in isolated places for specific periods of time — for instance, cigarettes in prisoner-of-war camps. Cigarettes continue to be a currency in prisons if allowed, but if not, according to Wikipedia, “postage stamps have become a more […]
[Ed. Note: This article originally published on Jan. 24, 2013]Stocks up. Gold down. Bitcoin… waaay up.The S&P 500 busted through the 1,500 mark this morning. Stocks haven’t been this expensive since 2007… right before they got a whole lot cheaper… for a whole lot longer. Gold, meanwhile, dipped a tad. This, despite central bankers of […]
Now, this is sheer entertainment. The Chicago branch of the Federal Reserve has addressed the great monetary question of our day. A researcher has taken a detailed look at the prospects for market-based crypto-currency, with a special focus on Bitcoin. It concludes that Bitcoin is not a viable replacement for the dollar. The report includes […]
The standard version of how money came to be goes like this: First, there was barter. (A handful of nails for a pint of ale!) Then, along came various forms of money. An evolutionary derby eventually crowned gold and silver as the supreme money. And finally, credit (or debt) was born. This is the apex […]
2013 represents another turning point in the demise of the American Empire. If you view it in economic (rather than ethical or moral) terms, the high water mark of Empire was probably in the late 1990s.But the Internet bubble and bust marked an important turning point. It coincided with the birth of the euro, a […]
It was a wild ride last week in the world of the Deep Web, that section of the Internet that requires special tools to access. The feds took down the site called Silk Road and claim to have arrested its founder and administrator. The news streams were filled with lurid tales of derring-do in this […]
My community in the Deep South prides itself on friendship, community feeling, and an overall happy spirit. So it was a bit strange for all of this to be utterly smashed and obliterated in the course of a few calamitous weeks in which friend turned against friend, colleagues became antagonists and enemies, and families were […]
A new assessment of state pension obligations suggests the problem is even worse than it already appears.How much worse?EMPTY COOKIE JAR: Pension liabilities are worse than many states’ official figures indicate.Using a more conservative method of accounting for financial gains in the marketplace, there is a $4.1 trillion gap between assets and liabilities — known […]
I dreamed I saw Bernard von NotHaus, alive as you or me.Said I, “But Bernard, you’ve been jailed two years.”“I never was,” said he.Bernard has been the called the Rosa Parks of the alternative money movement. More than 10 years ago, he had this idea that he would make his own money — not the […]
There’s no way it could happen in the United States. That’s the conventional wisdom on this side of the pond about the ECB’s bailout of the banks in Cyprus. That caper looks as if it may take a chunk out of the hides of at least some bank depositors on the tiny Mediterranean island.
So far, the Cyprus parliament can’t pull the trigger on a plan to tax insured and uninsured bank deposits to pay a share of the bailout. However, a bank holiday has been declared and Cypriot depositors are nervous, taking all they can from ATMs. The Cypriot banks, loaded with Greek debt, are on the verge of collapse.
William Isaac, a former chairman of the FDIC, calls the idea of taxing insured deposits in the U.S. “unthinkable.” He went on to tell American Banker, “I can’t believe the Europeans were that insensitive to the psychology of depositors throughout the world. They have a government pledge to cover these people, and they’ve reneged on it.”
At the same time, Isaac says governments have a right to give a “haircut” to (aka steal from) uninsured depositors. He adds, “But I would question in light of the worldwide financial instability over the past five years whether this is the right time to make that move, particularly without any notice.”
In the good old US of A, the Federal Deposit Insurance Corporation (FDIC) has an unbroken track record of repaying insured deposits, as the American Banking Association is quick to remind us. “While the crisis in Cyprus is a real concern for depositors in Cypriot banks, it has no implication for depositors in U.S. institutions.”
You gotta believe it because, see, the FDIC has $33 billion in reserves to handle such occasions. Banks pay into the fund each year to make sure there is money to repay depositors. The ABA states, “Simply put, U.S. insured depositors are safe and their deposits are protected by a strong FDIC fund, a financially secure banking system and the full faith and credit of the U.S.”
OK, but while $33 billion sounds like a lot of money, total domestic bank deposits in the U.S. stand at over $9.4 trillion. Of that, $7.4 trillion are insured. That means the FDIC’s reserve fund provides 45 basis points (a basis point is 1/100th of 1%) worth of coverage. Only a bank trade group would characterize that coverage as “strong.”
And just how financially secure is the banking system?
Over at The New York Times, Floyd Norris makes the point that if the big banks in the U.S. used the same accounting rules as Europe, U.S. banks would be much bigger. But more to the point, it would be apparent that JP Morgan (for instance) is an even bigger financial edifice teetering on the head of a pin.
JPM has $2.4 trillion in stated assets, but it also has derivatives with an additional market value of $1.5 trillion not listed on their balance sheet. So instead of being leveraged at 11.6-to-1 and being well capitalized, JPM is employing leverage at just short of 19-to-1 and is a dicier proposition.
Nothing can go wrong when leveraged at 19-to-1.
That’s OK. JPMorgan head man Jamie Dimon is supposed to be the smartest guy in the room. Not according to Jim Rickards, however, who told Maria Bartiromo and Bill Griffeth on CNBC that Dimon makes money only because of government subsidies and doesn’t understand the risks of derivatives.
The author of Currency Wars shocked the CNBC anchors saying, “Having Jamie Dimon as CEO is like having a welder in charge of a hospital. You don’t want someone working on your heart with a blowtorch.”
You might wonder why JP Morgan and their peers don’t have to count the derivatives. Well, as Norris explains:
“Under American accounting rules, banks that deal in derivatives can net out most of their exposure by offsetting the assets against the liabilities. They do this based not on the nature of the asset or liability, but on the identity of the institution on the other side of the trade — the counterparty, in market lingo.
“The logic of this has to do with what would happen in a bankruptcy. What are called ‘netting agreements’ allow only the net value to be claimed in case of a failure. So the bank shows the sum of those net positions with each party.”
Of course, no one knows for sure the strengths and weaknesses of their counterparties in a pinch. The three simple letters that remind us are A-I-G. The notional amount of derivatives in federally regulated institutions at the end of last year was $224 trillion, nearly 10 times greater than the derivatives exposure at banks in the dark ages of 1997, which was $25.4 trillion at year-end.
The accountants were going to blow up this whole netting exercise thing a few years ago. The bankers got them to back off. Most derivatives positions are disclosed in the financial footnotes, but repo and reverse repo positions are not. According to Norris:
“The sort-of invisible derivative assets and liabilities are only part of the reason that it is so hard to really get a handle on just how risky any given bank is. Regulators look at banks’ ‘Tier 1 capital ratios,’ in which they divide capital by ‘risk-weighted assets.’ They get high numbers.”
A 300-page report prepared for the Senate concerning JP Morgan’s $6.2 billion loss contends the bank hid the loss from regulators and investors. Of course, if you’re the smartest guy in the room like Mr. Dimon, you can make the numbers up as you go and tell investors it’s all a “tempest in a teapot.” Just what were those London Whale trades? The subcommittee report described the portfolio as a “make-believe voodoo magic composite hedge.”
Bank earnings in 2012 were the second highest ever. But the largest contribution to earnings came from reduced provisions for loan losses, plus increased trading revenue and asset sales. Another downturn and this all reverses itself in a hurry.
Finally, the last line of defense for U.S. depositors is the full faith and credit of the U.S. government. Uncle Sam is an entity with over $16 trillion in direct obligations and is currently running an annual deficit of somewhere around $1 trillion, give or take.
Social Security and other promises stretch the total obligations to numbers beyond comprehension.
On the plus side, for now, dollars can be created ad infinitum from nowhere.
That’s the real problem. The Cypriots can’t print their own money and are depending upon the kindness of strangers.
Americans should take a lesson from the Cypriots, just in case one of these days the product of Uncle Sam’s printing press is not so welcomed and the notion of “unthinkable” is tested.