FedUpUSA

Archive for May 17th, 2012

Christopher Whalen is a Senior Managing Director of Tangent Capital Partners in New York City. Christopher is co-founder and vice chairman of the board of directors of Lord, Whalen LLC, parent of Institutional Risk Analytics, the Los Angeles based provider of bank and company ratings, custom analytics and consulting services.

The bank runs that we are watching right now in Greece are shocking, but they are only just the beginning.  Since May 6th, nearly one billion dollars has been withdrawn from Greek banks.  For a small nation like Greece, that is an absolutely catastrophic number.  At this point, the entire Greek banking system is in danger of collapsing.  If you had money in a Greek bank, why wouldn’t you pull it out?  If Greeceleaves the euro, all euros in Greek banks will likely be converted to drachmas, and the value of those drachmas will almost certainly decline dramatically.  In fact, it has been estimated that Greek citizens could see the value of their bank accounts decline by up to 50 percent if Greece leaves the euro.  So if you had money in a Greek bank, it would only make sense to withdraw it and move it to another country as quickly as possible.  And as the eurozone begins to unravel, this is a scenario that we are going to see play out in country after country.  As member nations leave the eurozone, you would be a fool to have your euros in Italian banks or Spanish banks when you could have them in German banks instead.  So the bank runs that are happening in Greece right now are only a preview of things to come.  Before this crisis is over we are going to see bank runs happening all over Europe.

If Greece leaves the euro, the consequences are likely to be quite messy.  Those that are promoting the idea that a “Grexit” can be done in an orderly fashion are not being particularly honest.  The following is from a recent article in the Independent….

“Whoever tells you a Greek exit would be no big deal is an idiot, lying or disingenuous,” said Sony Kapoor of the European think-tank Re-Define. Economists fear that a disorderly exit would prompt a huge run by investors on Spanish and Italian debt, forcing those countries to seek support from an EU bailout fund, which, with a capacity of just €500bn, is widely regarded as too small to cope with those pressures.

A Greek exit from the euro would not only result in a run on Spanish and Italian bonds, but it would also likely result in a run on Spanish and Italian banks.

If Greece is allowed to leave the euro, that will be a signal that other countries will eventually be allowed to leave as well.  Nobody in their right mind would want their euros stuck in Spanish or Italian banks if those countries end up converting back to national currencies.

Fear is a powerful motivator.  If Greece converts their euros back to drachmas, that will be a clear signal that all euros are not created equally.  The race to move money into German banks will accelerate dramatically.

And a Greek exit from the euro is looking more likely with each passing day.  Even the IMF is now admitting that it is a very real possibility….

Christine Lagarde, head of the IMF, warned she was “technically prepared for anything” and said the utmost effort must be made to ensure any Greek exit was orderly. The effect was likely to be “quite messy” with risks to growth, trade and financial markets. “It is something that would be extremely expensive and would pose great risks but it is part of options that we must technically consider,” she said.

Meanwhile, banks in other troubled European nations are already on shaky ground.  The Spanish banking system is an absolute disaster zone at this point and on Monday night Moody’s downgraded the credit ratings of 26 Italian banks.

The situation in Italy is especially worth keeping a close eye on.  As Ambrose Evans-Pritchard recently noted, things are not looking good for Italy at all….

Italy’s former premier Romano Prodi said the EU risks instant contagion to Spain, Italy, and France if Greece leaves. “The whole house of cards will come down”, he said

Angelo Drusiani from Banca Albertini said the only way to avert catstrophe is to convert the European Central Bank into a lender of last resort. Otherwise Italy faces “massive devaluation, three to five years of hyperinflation, and unbearable unemployment.”

So what can be done about any of this?

Well, there is actually a lot that could be done if politicians in Europe were willing to think outside of the established global financial paradigm.

The truth is that Greece could solve their current financial problems in four easy steps.  They would have to be willing to stick it to the rest of Europe and to risk being blackballed by the international community, but it could be done.

The following is my prescription for Greece….

1) Default on all debts.

2) Leave the euro.

3) Issue drachmas that are debt-free and that do not come from a central bank.  Instead, have the Greek government create them and spend them directly into circulation.

4) Enjoy a return to prosperity.

In such a scenario, the Greek national debt would no longer be a problem, the Greek government would never have to borrow any more money and austerity would no longer be needed.

Yes, inflation would be an issue with the new currency, but a bit of inflation would be a walk in the park compared to the horrible economic depression that Greece is experiencing right now.

And once the Greek economy was growing again, it would certainly be possible for them to make the transition to “hard money” if they wanted to.

It is imperative that we all understand that just because the global financial system works a certain way today does not mean that it must always work that way.

The Economic Collapse

Once again, the practices of the “Too Big to Fail” banksters bring the financial money machine to the brink. The J.P. Morgan derivative losses and trading gambles by their “London Whale” demonstrates business as usual in the murky world of risk distortion. Even the vexing progressive Robert Reich makes an accurate assessment for breaking up the big banks and the resurrecting of Glass-Steagall.

“Word on the Street is that J.P. Morgan’s exposure is so large that it can’t dump these bad bets without affecting the market and losing even more money. And given its mammoth size and interlinked connections with every other financial institution, anything that shakes J.P. Morgan is likely to rock the rest of the Street.”

Since then, J.P. Morgan’s lobbyists and lawyers have done everything in their power to eviscerate the Volcker rule — creating exceptions, exemptions, and loopholes that effectively allow any big bank to go on doing most of the derivative trading it was doing before the near-meltdown.”

The prospects for constructive oversight and judicious safeguards on the money center banks; while, desperately needed, are highly unlikely for enactment. The existing administrative regulation is more about process than accountability.

The notice - S.E.C. Opens Investigation Into JPMorgan’s $2 Billion Loss, admits to a limited scope – “Regulators are investigating potential civil violations”.

“An important avenue for the S.E.C. investigation, the people said, is the firm’s accounting methods relating to the trades. Investigators could take a close look at a measure known as value-at-risk. The company disclosed earlier this year that it changed the way it calculates the metric, which may have masked some of the risk surrounding this trade. On a conference call Thursday, Mr. Dimon said the firm had reverted to the old way of measuring value-at-risk.”

The sociable regulatory atmosphere that turns the revolving door relationship of Wall Street and government regulation is so chummy that only insignificant fines are levied, when the major money center banks gets caught with their hands in the cookie jar. Earnest and comprehensive restructuring of the financial system is impossible as long as the banksters dictate economic policy to their favorite legislative protégés.

Fox News identifies the inadequate measures of legislation heralded as a response to prevent future bank bailouts.

“Enhanced oversight of derivatives was a pillar of the 2010 financial overhaul law, known as Dodd-Frank, but the implementation has been delayed repeatedly and will not take effect until the end of this year at the earliest.”

Both Senator Dodd and Congressman Frank took their retirement after the passage of this banker friendly diversion from reinstating a total separation of commercial banking from speculative investment banking swap instruments.

J.P. Morgan Chase, the dominating financial house behind the Federal Reserve, prescribes a coordinated government policy in every political administration. Goldman Sachs best known for supplying senior treasury officials, as Morgan keeps herd on the Fed’s Open Market Committee.

The Washington Times publishes an article, Avast, Wall Street: At J. P. Morgan, there be whales!, and describes practices in the pirate culture that ignores any reform or institutional restraint.

“From 2008 onward, taxpayers have been bailing out Jamie Dimon’s J.P. Morgan, along with Citibank, Bank of America, etc., etc., because they’re “too big to fail.” And here goes JPM four years later indulging in the same activities with the same abandon that caused at least two of their major peers to fail in 2008.

“The London whale” and his ilk have a distinctly buccaneering attitude out there that should have been tempered by the events of 2008 and the following years. But they haven’t learned a thing, apparently.”

Even a casual observer of the unstable international banking environment, knows that the banks game the system at every opportunity. The certified cynic does not need additional proof that the central banks are more important in shaping an unending economic crisis that, favor the “Too Big to Fail” money banks, than governments. If the federal government can enact the Foreign Account Tax Compliance Act to close the door on offshore banking accounts, in theory meaningful revamping of commercial and investment banking should be possible.

Notwithstanding, in practice the banks refuse to allow legislation that strips away the risky trading wagers that contribute to obscene short term paper gains, while sticking the taxpayer and government bail outs when losses accrue.

Mr. Reich continues with a valuable insight on just how the fiasco operates.

“And now — only a few years after the banking crisis that forced American taxpayers to bail out the Street, caused home values to plunge by more than 30 percent and pushed millions of homeowners underwater, threatened or diminished the savings of millions more, and sent the entire American economy hurtling into the worst downturn since the Great Depression — J.P. Morgan Chase recapitulates the whole debacle with the same kind of errors, sloppiness, bad judgment, excessively risky trades poorly-executed and poorly-monitored, that caused the crisis in the first place.”

Is it possible to save the international financial system from its own greed and high risk betting patterns? From all empirical evidence and from the best business advice available, chasing the debt bubble in an attempt to make computer-generated returns is a fool’s mission. Presently, profits clear depositing banks because governments devalue their currencies and pump fresh liquidity that add to the balance sheets of money-centered banks, to keep them solvent by increasing accumulative debt.

Breaking up the oversized behemoths because whales are feeding on a red tide of poison is the rational response to continued excess. Simply put, governments are forfeiting their sovereignty to banking ministers who are beholden to the fractional reserve central banking model.

Since it is a matter of time before a financial crisis becomes uncontainable, the judicious alternative is to abandon the entire premise that banking is a debt created scheme. Any discussion that rejects this axiom is doomed to failure. Coherent oversight means designing a financial system that restricts speculation, leverage and mad risk by requirements of elevated secured capitalization.

James Hall – BATR