Fix the Banks!

Bank of America BailoutBy Greg Hunter’s USAWatchdog.com  

If there is one central theme to the ongoing financial crisis we face, it is an insolvent banking system.  It is so bad that the accounting rules were changed (after the financial meltdown in 2008) to allow banks to value assets on their books at whatever they think they will fetch far into the future.  So, the billions of dollars of underwater mortgage-backed securities and real estate sitting on the balance sheet is held at imaginary values to make many banks look solvent when, in fact, they are not.   This is opposite of the way the IRS values assets.  The price of something is based on what the asset is worth today.  This is called mark to market accounting.

If any of the banks (especially the big banks) want to prove me wrong on this point, then they can simply value all their assets for what they can get for them today and the argument is over—fat chance!  I never see this subject ever brought up when the president of a big bank is interviewed.  I’ll bet you Jamie Dimon of JPMorgan would really squirm if he was asked what his bank would be worth if all the assets on the balance sheet were valued at today’s price.

In January of 2009, I wrote a piece called “Default Option.”  I had the crazy idea that the big banks should be taken into receivership.  Yes, shareholders and bond holders would have been wiped out.  Tough—that’s investing.  The only people you would have to protect are the depositors and, at the time, it would have cost $6 trillion.  I said, “Letting those banks take the hit for their ill-advised, reckless investments based on greed will do many things.  Here are just a few.  Letting the reckless banks fail will limit taxpayer exposure, preserve our capital and our credit rating as a country. Bank failure will wash bad debt out of the system once and for all and protect the dollar from free fall.  Finally, I think in the end it will be cheaper and more effective than what has and will be done in the future to “fix” the credit crisis.”    (Click here to read the original Default Option post.)  

Fast forward to today, and we see the dollar is falling, gold is spiking and the credit rating of the U.S. has been cut.  My plan was downright miserly when you consider that the Fed (according to a recent GAO report) spent $16 trillion bailing out the world, with $5 trillion going to foreign banks alone.  If you really want jobs in this country, you need capital formation not–debt formation.  Capital invests in productive assets, and productive assets create real jobs!  We still have a crippled banking system despite spending trillions of dollars, and there are still no jobs!

Money manager Barry Ritholtz of “The Big Picture” blog wrote last week, “The US banking sector is not healthy.  There is a fundamental misunderstanding about the Wall Street bailouts amongst the public, and quite a few policy makers at Treasury and the Federal Reserve: Somehow, they “fixed” the banking system. All it took was few trillion dollars in liquidity and a few $100 billion dollars in recapitalization, and all is now fine (I suspect some people at the Fed know the Truth).  In fact, they did nothing of the sort. The banking system was not saved; the massive injection of liquidity temporarily salvaged the day-to-day operations of banks, but they did not repair what ailed our financial institutions. Indeed, pouring billions into nearly identical management teams that mismanaged the risk, over-leveraged exposure, and drove banks off the cliff in the first place was an invitation for another crisis.  And that crisis now appears to be arriving. And, it’s our own fault.”  (Click here for the original top notch post from Ritholtz.) 

This next crisis will be even worse.  For one thing, institutions like Bank of America are being sued with allegations of “massive fraud” for selling toxic mortgage-backed securities. And it is not just B of A being sued.  Investorguide.com said earlier this month, “These lawsuits are sweeping through the industry at an alarming rate, with no less than 90 active lawsuits over mortgage bond losses asking for approximately $197 billion – which could cripple some major financial players quickly and consolidate the industry in unpredictable ways.”   (Click here for the complete Investorguide.com story.) 

For another thing, the money dumped into the financial system is causing inflation to jump.  Look at the price of food and energy.  The next bailout will dump even more funny money into the system, and gold will be sent sailing past the moon on to Mars right along with inflation.  Unemployed people with no money don’t need things to cost more, but they will.

Mega money managers Mark Mobius and Ray Dalio also say nothing is fixed.  Both predict and say another financial crisis is on the way.  Dalio, who manages around $100 billion, gives an end of 2012 or beginning 2013 time frame.  In closing, two years ago I said, “Right now the “default option” is voluntary, but if we get this wrong and do not really fix this problem, then default may be forced on a lot more people than just the incompetent bankers.”  It looks like we did get it wrong, but that doesn’t mean the system will not get fixed.  It is just going to be a lot more painful than it needed to be.

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Comments
  1. iknowbetter

    Poor Greg. I don’t think you realize that this (ongoing) story will never be read by disbelievers. It seems you are preaching to the choir.

    And it’s not just disbelievers. The average person is too busy salvaging a job, a family, or house, to even pay attention to the dirty details you so eloquently iterate.

    Sadly, nobody wants to hear Default! shouted in a crowded theater of banking executives. (Without that warniing, how do you save yourself?} When IT hits the fan, the citizens will be screaming “why wasn’t I warned?”

    Truth is, citizens shouldn’t be in this place created by banksters. And there is no warning system other than articles like this one.

    Keep fighting the good fight,

    ….ikb

    • Greg

      IKB.
      If I help save one person from poverty it will be worth it. Thank you for your comment and support.
      Greg

  2. MasterLuke

    What a game. . . Who can buy the most gold first to control the game . . . The snakes in control or the middle class lion.

    • Greg

      Thank you Master Luke.
      Greg

  3. James Bouris

    Greg, How do you fix a system that is so corrupt, those who make the laws are beholding to the banks!! Thanks for saying what the main stream media refuses to tell us. We may be a little more sophisticated, but we are no better than any other third world country! Please continue to keep us informed!

    • Greg

      James,
      Good point my friend. We are headed for a crash, but a few years ago it could have been a controlled crash. I pitty the bankers when the general public figures out how screwed they are. It will be ugly. Peace.
      greg

  4. brian

    If only water would flow up hill, if only the economy would not react to the violent expansion of the money supply, if only a bank could just tell us how much money it had and it would be so, if only people would turn a blind eye to what is going on in front of their faces and just carry on like everything is fine………if only the government and their banking buddies had more power over us, if only our natural purpose in life was to bend to their every need and whim, if only the truth would just finish dying and get out of the way…….oh yes then everything would be just fine wouldn’t it.

    • Greg

      Brian,
      Your sarcasm is profound! Thank you for the comment.
      Greg

  5. Art Barnes

    Greg, The fed and the government will bail them out (banks) again and again regardless of who is controlling congress or the presidency. Their rationale will be we can’t have a 30’s type run on the banks, you can see the next bailout coming can’t you? Inflation be dammned for the working people. At all cost the central bank and the government no matter who is on top will take care of the big banks. For sure we will continue to see small or minor regional banks go into receivership (FDIC)and be taken over (given for pennies) to the big boys. One thing I have learned from watching our esteemed politicians, the fed, MSM, & wall street over the decades is that they will take care of the elite no matter what. So, in closing, just another bailout is about to happen; its a sure thing. It can and will be justified usuing our “professional” MSM opening the doors on the way to the vault and or the printing press.

    • Greg

      Art,
      I agree, but at some point they sink the U.S. dollar, and who will bail it out? That is the problem, but your point is well made and well taken!
      Greg

  6. LD

    It was the American dream done the American way. Glass-Steagall was repealed. Build the homes and people will come. Cities governments were teased with tax revenues, growth and expanded city services. Land developers, real estate professionals and bankers were in hog heaven! Home ownership is American as apple pie. Meantime, there was “the giant sucking sound” (to use Ross Perot’s colorful phrase) of jobs being leaving America. Free enterprise at its best — seeking cheap labor and new markets — exporting the American dream. Perhaps we should have known something was amiss when Enron collapsed. What ever happened to folks like Phil Gramm?
    Give this a viewing for a journey down memory lane. Good comments to this.

    http://www.youtube.com/watch?v=kNqQx7sjoS8

    On December 16, 2003, President George W. Bush signed into law the American Dream Downpayment Assistance Act,[1] which was aimed at helping approximately “40,000 families a year”[2] with their down payment and closing costs, and further strengthen America’s housing market.”

    http://georgewbush-whitehouse.archives.gov/news/releases/2004/08/20040809-9.html

    • Greg

      LD,
      Whatever happened to Phil Gramm? He should hang his head in shame for the Gramm–Leach–Bliley Act of 1999. http://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bliley_Act It effectively killed Glass-Steagall act of 1933 that separated investment banks from commercial banks. In other words Non FDIC insured banks and insured FDIC banks. It allowed the TBTF banks to be what they are today–TBTF! I do not mean to give you a hard time the rest of your point is well made and well taken. Thank you for your comment and links!!!
      Greg

      • Ambrose

        Greg,

        As you already pointed out in your reply, it was the bad policy that changed the banking structures. Just like bad trade agreements destroyed business and caused job loss. As long as we have all those idiots in the government who only care about party war and make stupid policies, the whole country is going to suffer.

        One thing I would like to clarify. It is the BIG Banks that are causing the problems. I was sad to see that many small banks were either closed or acquired by bigger banks. Instead of saving the small banks, the Fed bailed out the BIG Banks and helped them to acquire the smaller ones. Who said bigger is not better?

        LD is correct that the Fed will bail out the Big Banks again and again. If any of the Big Banks fails (again), FDIC will not have the money to pay off the insurance covered for each account. It will be the Fed to rescue the BIG Banks.

        Ambrose

        • Greg

          Thank you Ambrose for the continued analysis. It is sound!!
          Greg

  7. Jerry

    Greg, Just get your money out of the federal reserve banking system. Yes, kill the bank, by not using them. Put it in a “dividend paying whole life insurance policy”. It is your own personal private bank. You can even get loans against your policy anytime you want one. It’s called the “Infinite Banking Concept”. It will change your life. If a small fraction of Americans do it, the banker crooks will be starved to death because no one uses them. It’s been around for over 150 years and is perfectly legal. Remember “whole Life”, not “term life”. I hope to see you write an article on this soon. Jerry

    • Greg

      Jerry,
      If the currency goes “poof” then no dollar instrument of bank will be safe. We are headed for a currency collapse, and everyone should hedge their bets with precious metals. They bare money and have a 5,000 year track record. You make a good point but this is historic and it will destroy the dollar as there are more than a quadrillion dollars in OTC derivatives that cannot be taken out of the system. (1,000 trillion) It will never be paid back! Please take steps to protect you and your family. Thank you for the comment.
      Greg

  8. Todd

    Good day, Greg

    Oh, they’ll get fixed alright — with chains, padlocks and plywood.

    There’s no other way. It’s stage four bank cancer and the chemo ain’t working any more.

    And here’s the kicker: This is a good thing.

    • Greg

      Todd,
      For most it will mean a lifetime of poverty but I sadly agree with you.
      Greg

      • Todd

        We have been sold a culture of notional fiat currency. And to the extent that we have participated, we shall suffer; you’re quite right and it’s sad. Let us learn from our mistakes.

  9. Martin

    Greg,

    The FASB rule changes hide fraudulent accounting by the banks as you have implied and have thrown another major financial assault on the U.S. Taxpayer, that being the FDIC guarantees on banks that fail with only a fraction of their stated value.
    What has quietly (intentionally) faded to black is the MERS (mortgage electronic registration system) mess which has thrown who actually owns all those troubled housing mortgages into serious doubt. As Fannie and Freddie have been the main dump for these assets (?) it became easier to shield them from investigation. Every lawsuit initiated so far disputing home Deed titling has been won by the delinquent homeowner, a very scary and undertold story about our fraudulent banking system so closely tied with the bundlers in Wall Street.
    This mess was the Ponzi scheme of all Ponzi schemes with the amount of capital involved so large there is probably no solution other than some feel good Perp walks of expendable banking soldiers — much like the Mob — you never will get the Capo.

    • Greg

      Thank you Martin but never underestimate the anger of a mob. If I was a banker, I would be more worried about an angry citizen who has lost everything than law enforcement. You do make an excellent point though!
      Greg

  10. AndyB

    The TBTFs will never come clean because, even under the weak D/F legislation, they might (OMG!) have to be broken up. We must not be allowed to stop the incremental destruction of the US economy and the debt enslavement of its people even since the Creature From Jekyl Island reared its ugly head.

  11. Robin H

    Bailing out Lehman generated the greatest citizen opposition that any congressmen could remember (90%), Yet saving the filthy rich was deemed the appropriate path. It should come as no surprise that default was off the table, even though, as you’ve correctly pointed out, was the most logical path.
    They just needed more time to secure their private islands so they could make off with the booty from the greatest swindle in human history.
    Keep up the good work Greg, all that evil needs to exist is for good people to do nothing.

  12. Agent P

    While default and an honest house cleaning sounds righteous and good, unfortunately it is not realistic. The entire financial-cum-political edifice is now supported solely on confidence. As if people aren’t already nervous enough, imagine a whiff of a major bank (or 3), going into receivership? C’mon…

    There would literally be chaos in the streets as people rushed to pull (what’s left) of their $savings out of banks, and the government implemented immediate bank ‘holidays’ and so forth. All that, within the societal framework that we have today. Remember, this is not the same society that we had in the 1930’s…

    So yes Greg, we Are going to get it ‘wrong’, but I wouldn’t suffer it too much. After all, this ship has been taking on water since the early 1980’s, when the transformation began from a Savings & Production-based economy, to a Borrow & Spend, Debt-based, easy-credit economy.

    The signs have been there all along the journey, but the ride proved too fun to slow down – or even stop to look at where we were headed. The best we can hope for is to save what we can, get involved in the local community, and weather this through to the other side.

    • Greg

      Agent P,
      We could have had a controlled crash. Yes it would have been bad but the credit rating of the U.S. would have been protected right along with the buying power of the dollar. Now, the country is going to have an uncontrolled crash and this will prove to be historic and life changing. The U.S. dollar and treasury complex will provide the world with the biggest default in history and it will be global! However, I cannot disagree with your all of your points. They are well made and well taken. Thank you for contributing your perspective here!!!
      Greg

  13. Ken

    The year of jubilee is upon us, like it or not, it is an irrefutable fact. The debt will be canceled one way of the other, violently or peacefully, it will be done. I give the peaceful option little hope unless a massive awakening happens.

    • Greg

      Ken,
      Agreed!! and Amen to that brother!!
      Greg

    • Joanne

      Ken,
      Your words echo a brilliantly done documentary I saw not long ago on Netflix Streaming about how physically sick our world is and how our species is the first, that we are aware of, to destroy it’s survival KNOWINGLY. Not news, but extremely well done emotionally. We have deluded ourselves far beyond just the American Dream:

      “The world is saying look you have a choice, you can either fix it or I can fix it, and if I fix it you are not going to like it because I’m going to throw everything away. … ” -Blind Spot

      Greg,

      Found your site awhile ago and not only love it but admire you for stepping out of the glitzy game to help educate our masses. People like you are critical and need to be the voices we listen to (ego boost worthy). Most people sadly think that truth will be delivered to them on a silver platter if its bought and paid for. You only find truth if you search like hell for it. Not that it’s news to you but I literally feel as though I don’t know another person currently in my life that is even on the same planet as me. ALL of my friends and family have their heads in the sand while they go bankrupt and lose their jobs and homes etc. The only criticism is I wish there were even MORE posts by you or those in your “former” field that are like-minded and de-monkey-fied themselves from puppeteering on MSM 🙂 (I check this site fairly often and silently say in my head “aww no post today” Although that may be because I checked out on cable tv and MSM a couple years back and translated news is harder to come by)!

      I truly believe it will be more than just a currency loss that will come from all of this greed. ALL life is in jeopardy now due to just how greedy we humans interact with nature and each other. Rich AND Poor. It will be a short lived generation of mass specie extinction. Our true violent reawakening will be the after effects of a depression in this day and age. Corps like Monsanto have made their stamp much too deep. I think we will finally be reminded that we are social inter-dependent creatures who should succeed by working together as communities for survival vs. the notorious greedy selfish monsters we have become with no REAL rule of law. I am a believer in Darwin but this eats me up inside. Everyone’s out for themselves and it will just get more and more disturbing as this crisis comes to a head. All of our precious oceans, rivers, soil, and air have all been FUBAR’d with since oil got her first drill –> overpopulation, disgusting food that will make you more ill than healthy, pesticide pollution used for that yummy fluoride taste in our water, toxic mercury used to preserve mandatory “life saving” vaccines…. FARMERS THAT REFUSE TO EAT WHAT THEY SELL!

      Ladies and gents, we have been wasting all our precious resources that can’t be replaced with money, or gold, or silver, or ANY precious metal (and if the ozone doesn’t hold up, why even think about the rest). I’m VERY curious – I have 500 pure coins and i’m fixin’ to just have a drink of water because it’s LA and we don’t have fresh water if the tap water company doesn’t function – who in the hell is gonna take my gold for his precious water? Or sell me a plot of FERTILE soil?? Or dig a well into the-oh wait sorry, no ground table water left anymore… what’s peak oil?? and CRAP! where are all the bees??

      I’ve been following this info about gold and silver etc and understand the concept, but in the end, EVEN THOUGH its been sound for 5,000 years as mentioned here… we simply don’t have enough time when you think it through rationally. If we squandered away all our OTHER precious resources needed to make gold useful, how many of us will survive to make use of the shiny pretty metals? Only one possibility comes to mind: big oil releases all of the suppressed clean energy patents it has bought out or killed for if $$$ was refused. “Gashole” spells out this idea almost teasingly. But still, that would require the greedy to think of something other than themselves and owning the world. I hope they have fun on their sick planet when it’s only them in the end!

      Joanne

      • Greg

        Thank you Joanne for the kind words and comment.
        Greg

  14. Matslinger

    With each passing month we find ourselve’s redefing the definition of
    “outrageous”. The attournies general have prostituted themselves to
    concoct a scheme that will make unlawfull home repos and open eneded deal.
    Our own (sold out attourney general) here in Minnesota “Lori Swanson”,
    experienced an attack of conscience only 24 hours after “TARP” expired
    at midnight on a Sunday, saying : the actions of the big bad bankers,
    using fraudulent MERS documents, was outrageous, and had to be stopped !” she failed to mention that only hours before
    the TARP compenstion system had just been shut down! “way to go Lori”
    Countless homes are being forclosed and abandoned, we need to use our
    imaginations here, and think like cockroaches; what would be the next
    most important obligation that the banks would like to lose?
    I’ll bet good money that secret legislation is being prepared to vanquish banks from have to pay property taxes on their newly repossessed properties.

    • Greg

      Matslinger,
      I hope you are wrong but I fear you are right on target!! Thank you for the reporting and analysis!
      Greg

  15. steveo

    Over 90% of Americans were against the bailouts. Obviously when we are in agreement to this extent, we are 100% right.

    • Todd

      Steve, if correct, that statistic is absolutely stunning. I shouldn’t doubt it, I suppose, but boy howdy, that is a stunner. All I can say is OMG. [However “more than” is better than “over”.:] Yeah, it’s clear that this country is run by a power elite whose goals are the polar opposite of what the people want and need. It’s shameful and shocking and sad — testimony to the pernicious corrosion of greed and corruption.

  16. wxman2001

    Much of the money sent to foreign banks was to ‘buy back’ the toxic debt that the big US banks foisted on them, so that they wouldn’t get sued for fraud (at least by RBS, Barclay’s stc) but what about US pension funds that bought these worthless mortgage securites? They will have to sue to get buybacks, likely NOT at par value.
    Jim Willie CB at goldenjackass.com does a great job explaining this and much more, including why the Yen is appreciating (selling US treasuries for tsunami rebuilding, etc) and why gold continues to rise….as the above article explains, it’s because mark to market rules have been suspended, and most of the big banks are actually insolvent. Watch for the Chinese gold ETF (fully backed ounce for ounce sold) to start up this fall and then the real value of gold versus falling worthles fiat currencies will show, as COMEX and LME can’t sell enough puts to keep the price down any longer, and likely default. Got gold and silver in hand? KEEP it and sell your paper gold/silver now.

    • Greg

      wxman2001,
      I love Jim Willie!! Thank you for the comment.

      Greg

  17. Chuck

    Greg, I couldn’t agree more, however this problem will never be fixed this way, there are way to many vested interests for this to happen, & the one’s with this vested interest, are the one’s in the drivers seat, ie: the big banks, big corparation’s, politician’s,& the military industrial complex. Unfortunately we are going to have to wait until this whole Ponzi scheme topples of it’s own weight, then perhaps we can begin to rebuild on a foundation of real value based money. Until then to quote a brilliant man, Mr. Darryl Robert Schoon, “buy silver, buy gold, have faith”.

    • Greg

      Good advice Chuck!
      Greg

    • FamilyForce6

      Actually, if Ron Paul gets elected president I think there could be a realistic shot at liquidation. Dr. Paul has been preaching debt liquidation for years and support for his candicacy is growing.

      I encourage your readers Greg to get involved in his campaign. This is a man who wants to bring back a gold-backed dollar, bring our troops home and stop spending trillions on un-ending, undeclared wars.

      If you want to know more google “Who is Ron Paul” or check out the dailypaul.com

  18. NCdirtdigger

    Never have so few, made things so bad, for so many.