The Fed has been funding an enormous and ever growing confidence game for decades. The gangsters that run the game always get paid. Always.
Related to that, I got this note the other day from a Liquidity Trader subscriber which I thought raised some great issues and questions that other folks might be asking themselves.
Hi Lee,
I’ve been looking at your chart of the ratio of capital to total bank liabilities. It’s pretty staggering. I wonder why concerned parties aren’t screaming from the rooftops. Aren’t bank executives aware of this? If they are, then why aren’t they sounding the alarm? Doesn’t the Fed have access to the same data and charts to which you do? They should, shouldn’t they? If they did, wouldn’t they be taking emergency action? Or are they turning a blind eye as you suggested in your subsequent report?
kind regards,
Aaron
Here’s the chart and related discussion that Aaron referred to. It was in this report.
The Flip Side of Falling Bond Prices
The flip side of falling bond prices is rising yields. Rising bond yields raise the cost of debt to corporate issuers. That’s partly responsible for the increasing issuance of stock. Equities issuance at these prices is free money to them. This is especially attractive to companies with little or no earnings.
Or those that had been profitable but are now experiencing growing losses. In fact, it would not surprise me to see Primary Dealer bank holding companies doing stock secondaries in the months ahead as they get battered by the relentless fall in bond prices. They will also need to raise capital to cover huge unrecognized losses in their commercial mortgage portfolios. The moment of recognition is coming. They’ll need capital.
This chart illustrates. It is current through March 10, courtesy of the Fed’s H8. The red line is bank capital. The green line is bank liabilities, mostly deposits. The blue line is the ratio of capital to total bank liabilities. Look at that. That capital ratio is below the worst level of 2009, at the bottom of the crash. And there’s no end in sight. Because Jaysus says, “Remain calm. All is well.” So he does nothing. He’s frozen in place by fear.
They’re saying he’s a wizard. I’ll say. Look at that. He’s making bank capital disappear.
The moment of recognition is coming.
To respond to Aaron’s points, first, I’d say that sure, the Fed has this data. It’s their data. I just put a couple of data series together on a chart, and do a little basic division to show things that I think might matter. I create these when it dawns on me that if I chart x/y, it might tell an interesting story. I was just as surprised as Aaron was when I saw the result.
It… is… SHOCKING.
Is the Fed aware? I sent Aaron a brief note yesterday before I had time to write this post.
“They have 1500 research economists and god knows how many statisticians and technical analysts watching and analyzing every bit of data. Fed governors, district presidents, and most high level staff have IQs of at least 160, I would guess. They know what’s going on, that’s for sure.”
Are bank executives aware? The ones who run the big banks that have Primary Dealer subsidiaries getting clobbered in this market sure as hell are. Your local regional banks aren’t getting hit like this, so maybe they aren’t or don’t care. But they don’t matter. The Wall Street money center wiseguys like JPM’s Jamie Dimon, and GS’s David Solomon, sure as hell do.
Why aren’t they ringing alarms and shouting from the rooftops? Because they are Wall Street wiseguys. When they create enormous problems like this, as they are wont to do every couple of decades as their schemes grow and metastasize, they are sworn to a code of omerta. In other words they shut the fuck up and lie through their teeth. They want to keep the game going as long as possible while they line their own pockets with cash before the system blows up again.
The system will blow up, and it will be their malfeasance, frauds, and theft that caused it.
Why would they raise an alarm? They always get away with it. The last time any big banker was prosecuted for this kind of massive fraud was 30 years ago under Ronald Reagan. Ever since then, it’s been hands off. Wink and nod, and the Fed has your back.
Barack Obama even went so far as to say publicly in a talk to Wall Street bank mafia godfathers in 2009, after that crash, “I am the only one standing between you and the pitchforks, in a veiled message that it was time to pay for their Get Out of Jail Free cards.”
Obama handpicked his consigliere, Eric Holder, from one of the biggest Wall Street consigliere firms, Covington and Burling. Obama had Holder run a protection racket from the DoJ, that reaped the US Treasury hundreds of billions in fines from the Wall Street bank crime syndicates. Check out this chart from DW, the big German news outfit.
But while collecting those fines for crimes the banks admitted to committing, not a single Wall Street banker was ever charged with wrongdoing. The banks broke the law. No humans were involved.
All of these guys are Fed Primary Dealers except SunTrust. See where the chart points out that the $57 billion or so of fines paid by BoA were due to the malfeasance of Merrill Lynch and Countrywide, the biggest US mortgage lender at the time.
Countrywide was committing all kinds of fraud in the process of originating, packaging, and selling mortgage securities. Because BoA took over Countrywide, Holder’s DoJ protection racket collected nearly $60 billion in fines from BoA. That cost the shareholders dearly. But the wiseguy who ran Countrywide, the other orange-a-tan mogul, Angelo Mozilo, was never charged with a crime. He walked. He walked away with hundreds of millions of dollars that he stole while running this criminal enterprise that collapsed, and helped cause the financial system to collapse
Gangsters never sing unless they’re facing jail time. Not only are they not facing jail time, the Fed keeps bailing them out whenever their frauds grow too large, and finally cause systemic implosion.
No one ever learns, because no one ever pays a price.
So is the Fed turning a blind eye? Nope, I don’t think so. The Fed knows what is going on, but I think it is like a deer frozen in the headlights.
The Fed has to play to the public while keeping the game going. So of course Jaysus and his lieutenants play the old con of, “Remain calm, all is well. Nothing to see here, move along.”
They’re like the cinema caricature of the Old Irish cop on the beat, who’s actually in the pocket of the mob bosses. While the Fed tries to play the good cop, pretending to be on the job, it is really in on the con.
The Fed is Meyer Lansky to Wall Street’s Bugsy Siegal, Al Capone, Lucky Luciano, and Mickey Cohen. They’re the gangsters who ran Vegas in the early days. Lansky was the guy who kept the books and ran their finances. They were vicious, ruthless criminals.
At least back then, we had an FBI investigating crime and arresting criminals. Many were prosecuted and spent serious jail time.
The Fed would be in that position except for one thing. The gangsters own the Fed. So it pretends to be the good cop while it plays the game of funding their schemes until the system breaks down. Then because the Fed has the infinite power of imagining money into existence, it just increases the funding of the scam by several orders of magnitude. The bosses return and restart the game, even bigger than before.
The criminals have gotten away with this crap for too long. One day, those schemes will have grown too big. The game will finally be finished for good.
