Large Banks Cannot Fail Because Wall Street Won't Let Them Fail

Federal Reserve Punishes Savers By Subsidizing Big Banking Bailouts

Federal Reserve punishes savers by subsidizing big banking bailouts — Two largest U.S. banks offer a paltry 0.05 annual percentage rate while increasing service fee charges and upping loan interest rates. S&P 500 not cheap.

April 2, 2011

mybudget360.com - The challenge most Americans are facing is first, trying to save money. If that hurdle is accomplished the next tougher question becomes where the money should be placed. The Federal Reserve by default with a negative interest rate policy has punished savers at the expense of massive debtors.

The Fed for many decades since the 1960s had held the Fed funds rate over 5 percent. What this also meant was that Americans if they decided to step aside from the risky stock market would at least yield a decent return in U.S. Treasuries. Those days seem to be long gone with the funds rate near zero. Banks are using their easy access to the Fed to borrow cheap and to lend at much higher rates. They are also borrowing cheap and investing in global stock markets. The two biggest banks in the U.S. give depositors merely a place in the bank’s digital vault and pay almost no interest.

Savings accounts the new virtual mattress

Bank of America, the largest U.S. bank in assets offers the below interest rate for depositors:

The annual percentage yield is 0.05%. In other words, if you had $10,000 saved in Bank of America in this savings account you would end up with $50 after one year. At the same time the average credit card rate is over 14 percent and mortgage rates are still above 5 percent. This margin is enormous and it is little wonder why banks are doing so well while many Americans are struggling financially. Bank of America isn’t the only one offering this low rate:

JP Morgan Chase offers the same rates. After taking over Washington Mutual with free checking they are now charging customers with less than $5,000 or other caveats a $10 or higher monthly service fee. There goes that $50 assuming you even have $10,000 to begin with.

We already know that 1 out of 3 Americans don’t even have a penny to their name saved. What use is it charging these monthly fees especially when these are the banks that were bailed out to help protect consumers? The bailouts appear more and more a method for these banks to pickpocket what is left in the wallets of Americans leaving only lint and a penny if you are lucky.

The Federal Reserve is content moving this way because it forces prudent savers into a precarious situation. Either you are forced to gamble in the overpriced and casino like stock market or suffer terrible rates that will dissolve after inflation is induced. Even the dubious headline inflation rates will tear apart that 0.05 percent savings rate so you are losing money by having it sit there. The stock market rally is largely on bailout funds and speculation. Take a look at the current P/E ratio:

Part of this is orchestrated. The Federal Reserve is doing everything within its power to get people to spend or speculate in the stock market and hopefully over time create enough inflation to devalue our current debts. This is why mortgage lending has gotten tougher (aside from government backed loans), getting a credit card is now for credit worthy customers, and getting a small business loan is much more stringent.

The purpose is to work through the current banking led fiasco by pushing on the debt to working and middle class Americans through lower savings rate and a push for higher inflation. The gamble that most have to take is whether they want to compete with high frequency traders and Wall Street investment banks that have little vested interested in long-term company sustainability. They can be in and out.

Buy and hold in this current model is tantamount to playing craps at a casino. This is why last May the stock market fell 1,000 points in a matter of minutes for no apparent reason (we still have no clear answer). Someone robs a bank for $50,000 and it is front page news but somehow the stock market loses over $1 trillion in wealth in a minute and it is buried in the press?

The challenge for Americans trying to save money with a per capita income of $25,000 after daily expenses is a challenge. Many younger workers are facing a prospect of a dwindling Social Security future so what will be left for retirement?

The days of sustained 10 or 15 percent stock market gains are largely gone thanks to the technology bubble and real estate bubble. Those gains were simply unsustainable and even Bernard Madoff struggled to get those returns after a certain point and he wasn’t exactly doing things above board.

What people forget is that there is nothing Federal about the Federal Reserve. It is a quasi-governmental agency largely designed to protect the big banking sector. The American people cannot audit the Fed in a live meaningful fashion yet this institution has the ability to conduct massive trillion dollar bailouts at the behest of the banks. If you really think about it, the Fed has done its job since their hidden mission is to protect the giant banking interests. In that they have succeeded but the cost will be shouldered by the American public.

People think that the bailouts have somehow concluded. This is not the case. There are close to $6 trillion in random programs that the Fed and U.S. Treasury are still involved in but we have no way of knowing exactly what is in these programs because there is no ongoing audit:

As your purchasing power falls in the next few years just remember that is your little way of contributing to the big bank bailouts.

Has Wall Street Made It Virtually Impossible for Large Banks to Fail?

April 1, 2011

Wall Street Works - It has been reported lately that the federal government will probably have to come up with about $2 trillion more besides the TARP money to purchase toxic assets from the banks to make them healthy. They also said that the government will have to pay a premium for those toxic assets instead of the Mark to Market price or else the banks will become insolvent. It was also indicated that if the government leaves the toxic assets on the banks balance sheet too long, the situation in the US could become similar to what happened in Japan in the 1990s creating the lost decade.

I wondered if it would be possible to allow the large banks to become insolvent so I investigated the Lehman Brothers bankruptcy which started the credit freeze and panic on wall street.

From my understanding it appears that Lehman Brothers had about $750 billion in debt and about $620 billion in assets making a discharge to creditors of about $130 billion. It appears that many banks suffered large loses since they loaned Lehman Brothers the money.

Besides the $130 billion discharged in bankruptcy, it appears that toxic securities that Lehman Brothers held had credit default swaps value at $360 billion issued against the toxic assets. This seems to indicate that the toxic assets were insured for at least 3x their face value. It appears that many of the credit default swaps were issued by insurance companies and other banks creating even larger financial loses for the financial institutions.

So it appears that the total loses created by the Lehman Brothers bankruptcy was about $490 billion or about 65% of its debt.

Since there are over 20 banks around the world that are larger than Lehman Brothers that are currently receiving government bailout money, it seems if all those banks were allowed to become insolvent and their situation was similar to Lehman Brothers, the total loses would probably exceed $10 trillion. It would then seem that the healthy banks and insurance companies would then become insolvent due to loans made to the bankrupt banks or credit default swaps issued against the toxic securities creating loses that would be anyones guess.

Beside the same problems that banks have, bankrupting insurance companies are even more complicated. Since states regulate and insure policies issued by insurance companies, states would be required to honor those policies with very little or no capital available from the bankruptcy court.

It almost seems that if governments allows several of the large banks to fail, they will immediately have to allow all banks and insurance companies to become insolvent so that the bankruptcy court can discharge the credit default swaps owed for toxic securities of the original banks that failed.

Since there is very little transparancy in the banking systems around the world and credit default swaps are unregulated, it would be impossible for anyone other than the central bankers to determine the economic effect of a large bank failure. However even the central bankers do not know which securities are insured by credit default swaps.

The point I was making was that during 1999 when credit default swaps became unregulated, wall street (brokers and investment bankers) introduced credit default swaps that now total $50-$70 trillion dollars.

Prior to 1999 the cost to the economy for a bankruptcy of a company like Lehman Brothers would be about $130 billion but today it costs $490 billion due to the credit default swaps that were sold to investors.

Larger banks may have cost $ 500 billion but today the same bankruptcy would probably cost $ 2 trillion.

Since the credit default swaps are unregulated the bankruptcy court cannot even determine which securites are insured and how many times.

Credit default swaps would be like an insurance company allowing all you neighbors to take out insurance on you. Then you better hope that on of your neighbors doesn’t kill you to collect the insurance. If one of the neighbors does kill you, all the other neighbors that insured you would also collect.

Meet The 171 Banks For Which The Margin Of Failure Is One Thousand Dollars