That was the title of a book written about the savings and loans crisis by a regulator who understands a little bit about banking frauds. This clip shows Iain Black explaining how the banking frauds being perpetrated around the world are far bigger than people yet realise, and explains the systems that have been used to, for example, push Ireland into sovereign debt to bail out her defrauded banks.
Sent in by Derek in the comments to the last post. Thanks, Derek. Good stuff, again. NINJA Loans – no income, no job or assets! Liars Loans. The rules were created so swindlers could exploit them. As Colin Story says, the bust banks were defrauded……by their own CEOs who have become vastly rich.
Funnily enough another financial piece along similar lines was also sent in by Colin today. Thanks, Colin. See below. With Wikileaks news also pointing towards further financial revelations, some say, about The Bank Of America, all roads are leading to Rome.
In the clip, I paraphrase –
Huge frauds committed in the Bush era, unchecked, which nearly crashed the system in 2008, could be about to crash the system once again. The frauds are still out there with 60% to 80% loan losses racking up at most banks. The financial system had become a vast Ponzi scheme, which has yet to be exposed. In addition to the bad loans, the banks are now starting to face litigation for the lost billions that were defrauded.
FACT – The AIG made bad loans. They lost more than all the money lost in the Savings & Loans Crisis. The losses have been covered up.
Basically the tactic of Wall Street and the government has been to continue lying in order to build ‘confidence’. Yet while the lies get bigger,the problems are getting bigger. The Government will be forced into increasingly large giveaways of Treasury money, or allow banks to go into receivership. Each time they bail out the banks, they leave the same fraudulent CEOs in place, as they don’t want the facts to come out. They ensure their own fortunes are safe, while setting up others to carry the losses.
This is not just a financial crisis. It is a moral crisis. ‘Most elite institutions in America are engaged in fraud’. The solution is to get rid of the people who have caused the problems. They are all still in place. The losses are still being hidden, and need exposing.
Colin’s send in –
Quantitative Easing: The Real Reason the Fed May Go For QE3
[Editor’s Note: Retired hedge-fund manager Shah Gilani is one of the industry’s foremost experts on the global financial crisis – and all the worldwide ripple effects that this financial scandal has caused.]
By Shah Gilani, Contributing Editor, Money Morning
Ben Bernanke has a secret.
And it’s a secret that very likely terrifies him and his policymaking brethren at the U.S. Federal Reserve.
That secret has to do with his latest round of “quantitative easing,” a liquidity-push known as “QE2.”
What Bernanke & Co. don’t want Americans to know is that painfully slow growth – or even a double-dip recession – isn’t their greatest fear. Bernanke’s greatest fear is that without this liquidity, one or more of the massive, already-bailed-out U.S. banks could stumble and once again undermine the global financial system.
And this time around, the outcome would be much, much uglier….
Most of these big banks were in the “too-big-to-fail” category. That’s why back in 2008-09 they got all that bailout money: Given their size and influence, the worry was that should one or more of these fail, the whole financial system could come crashing down.
But here’s the problem. Since that time, many of those big banks have gotten bigger. And their risks have been steadily increasing: Many of them now face litigation, as well as the balance-sheet, credit and liquidity risks that could cause any one of them to fail – which could take the financial system down with them.
What the Fed is hiding under its cloak is the inside knowledge of:
- What the banks still have on their balance sheets in the way of so-called “toxic assets” – for starters, $2.4 trillion in mortgages and more than $1 trillion in mortgage-backed-securities.
- How the banks have been able to juggle accounting rules to make their books look better.
- How they’ve made their recent profitability look robust by moving loan-loss reserves back over into the revenue columns of their income statements – booking that as top-line growth.
- And the onslaught of litigation banks now face that could force them to mark down their assets at the same time that they will have to buy back tens of billions of dollars of non-performing mortgages they originated and securitized.
Banks are subject to “put-backs” or “buybacks” of the mortgages they place into securities if it can be proven that the quality of the mortgages weren’t what they were represented to be when the securities contracts were originated. That’s not hard to prove.
Regulators are very worried about the size of the put-back problem. In an attempt to assess the put-back risk faced by individual banks, the Fed has embarked on internal investigations.
When asked in recent testimony about the depth of the problem, Fed Governor Dan Tarullo, while not willing to quantify banks’ put-back risk, termed it “substantial.”
Put-back risk is one key reason the Fed will be conducting another round of stress tests on the country’s 19 biggest banks. Only this time they’re keeping the results to themselves.
But, that’s only the beginning.
The U.S. Securities and Exchange Commission (SEC) is investigating the banks for their part in falsely – if not fraudulently – spreading their toxic financial Kool-Aid around to other institutions.
Hints that a settlement was in the works last week quickly got squashed. Besides costing the banks penalties in settling charges, by settling and admitting any kind of guilt, they would be subject to lawsuits for decades to come. And since the litigation costs and the damages themselves could reach into the hundreds of billions of dollars, banks would have to set aside capital and reserves against future liabilities.
Now that this cat is out of the bag, it’s doubtful that the SEC can let the banks off that easily.
- The bottom line here is that banks are facing years of possible litigation and massive potential losses – just as their revenue will be squeezed by the many reforms laid out in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Additionally, new Basel III international capital standards are being imposed on banks, which will mean changes in how they classify the risk profile of various assets over time and how much capital will have to be held in reserve. (A recent report in The Financial Times suggested that U.S. banks – related to Basel III alone – face a $100 billion shortfall.)
And while all this is happening, the U.S. Treasury Department sold its Citigroup Inc. (NYSE: C) stake for a tidy little profit (thanks to the Fed’s easy money-inflating equity prices) and banks are saying they’re planning on raising dividend payouts in 2011.
The Ultimate Objective
It’s a high-stakes poker game. The Fed is bluffing and the banks are playing their hands – and will be big beneficiaries if the central bank pulls this off.
Just this Tuesday, at the Goldman Sachs Group Inc. (NYSE: GS) financial services conference in New York, Bank of America Corp. (NYSE: BAC) Chief Executive Officer Brian Moynihan said the big bank has fixed its balance sheet and is planning to raise its dividend next year.
And, Wells Fargo’s CEO John Stumpf projected confidence about growing market share in 2011 and said the bank “was optimistic it can steal loan customers from community banks that are retrenching after overextending themselves before the downturn,” according to an American Banker story on the meeting.
That brings us to the trick behind the trick. What QE2 and any subsequent quantitative easing actions (as well as the original quantitative easing move that was worth $1.7 trillion) really does is create a direct liquidity lifeline into the big banks.
The big banks got to stuff themselves with liquidity to enhance their capital ratios and balance sheets. And when that money had no place to go (it wasn’t being lent out), it found its way into the stock and bond markets, giving them a very nice run.
But small U.S. community banks got nothing.
In fact, they got less than nothing.
Community banks got overly cautious regulators from the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC). Those OCC and FDIC visits sucked the life out of the community banks because, after missing all the banking problems that led to the credit crisis in the first place, bank examiners are now erring on the other side of caution.
There’s no question that things are bad at community banks. But while big banks reap the benefits of the Fed’s direct triage efforts, community banks are being left for dead. That works out fine for the big U.S. banks. They want to grab market share, and can do so in a big way when these community workhorses are put out to pasture.
The difference between big banks and community banks comes down to economies of scale and size. Big banks want to serve big clients with big loans and capital markets services. They don’t want little-guy loans, they’re too small to be profitable relative to the allocation of resources.
Now, more than ever, that’s especially true. With all the problems inherent in the securitization market, big banks aren’t interested in small loans because they can’t package them into big loans and offload them to investors.
It’s going to be a long time before securitization of small loans from disparate originations makes sense again to investors.
Community banks could be facing planned extermination. Of course, the big banks will say that community banks did it to themselves. Without the necessary support to backstop their shaky balance sheets and with capital so difficult to raise because of their weak future prospects, community banks are in great jeopardy.
Since all real estate is “local” and job growth comes from small businesses, who better than community banks to take back the high ground of personal-relationship banking to serve local banking needs that can be better assessed by local bankers?
If we want to empower small businesses to take chances, they need a more-direct access to capital. Since that capital isn’t coming from the big banks, we better take another look at whom quantitative easing is benefiting and whom it is hurting.
If the Fed really wanted to shore up community banks, it could backstop most of the “local” commercial real estate and local commercial and industrial loans at community banks with less than $100 billion in assets.
That would give the community banks room to breathe and money to lend to local small business start-ups. Some of the 18 million unemployed folks in America could sure use that kind of backstopping.
If you couldn’t initially see the ultimate objective in the QE2 trick, you could be forgiven. But now you know. The fact is that banks are being made to look healthy by means of massive liquidity thrown at them. To foster that “illusion,” the U.S. Treasury is cutting them free, and the banks themselves are talking about a future bright with dividends and buyouts.
But they’re doing this without really knowing what their liabilities, capital requirements and future revenue will actually be.
And that says it all.
From Odin’s Raven in Comments. Thanks Raven.
This is also very informative.
The piece explains how Germans were restricted in their ability to engage in high risk transactions in Germany by good regulations, and so they used to slip over to Dublin. Using what is known as regulatory arbitrage, they did their high risk business there, in a low regulation and low tax environment. The writer of the blog, who has interviewed very nervous Irish bank executives anonymously who explained the system to him, thinks the blame for Ireland’s current mess should be shared between Germany and Ireland, and not be Ireland’s responsibility alone.