Defaulting banks - where will it stop?

[Jan Klimkowski]

Mike Whitney's latest, expanding upon the Ticker Forum "non-American assets" analysis. The banker's coup continues:

http://www.informationclearinghouse.info...e20915.htm

Not One Dime!

By Mike Whitney

01/10/08 - "ICH" - -- The mystery has been solved.

For nearly a year, we have been asking ourselves why the investors and foreign banks that bought up hundreds of billions of dollars of worthless mortgage-backed securities (MBS) from US investment banks have not taken legal action against these same banks or initiated a boycott of US financial products to prevent more people from getting ripped off?

Now we know the answer. It's because, behind the scenes, Henry Paulson and Co. were working out a deal to dump the whole trillion dollar mess on the US taxpayer. That's what this whole $700 billion boondoggle is all about; wiping out the massive debts that were generated in the biggest incident of fraud in history. Rep Brad Sherman explained it like this last night to Larry Kudlow:

"It (The bill) provides hundreds of billions of dollars of bailouts to foreign investors. It provides no real control of Paulson's power. There is a critique board but not really a board that can step in and change what he does. It's a $700 billion program run by a part-time temporary employee and there is no limit on million dollar a month salaries....... It's very clear. The Bank of Shanghai can transfer all of its toxic assets to the Bank of Shanghai of Los Angeles which can then sell them the next day to the Treasury. I had a provision to say if it wasn't owned by an American entity even a subsidiary, but at least an entity in the US, the Treasury can't buy it. It was rejected.

The bill is very clear. Assets now held in China and London can be sold to US entities on Monday and then sold to the Treasury on Tuesday. Paulson has made it clear he will recommend a veto of any bill that contained a clear provision that said if Americans did not own the asset on September 20th that it can't be sold to the Treasury. Hundreds of billions of dollars are going to bail out foreign investors. They know it, they demanded it and the bill has been carefully written to make sure it can happen."

So, why hasn't the Treasury Secretary explained the real purpose of the bailout to the American people? Could it be that he knows that his $700 billion bailout would end up like the Hindenburg, vanishing in sheets of flames?

This is a terrible bill, and it confers absolute authority on one of the central players in the scandal, Henry Paulson, who was the Chairman of Goldman Sachs at the time this MBS garbage was being peddled around the planet to credulous investors. Now Paulson will be in a position to buy up any "troubled asset" he that he believes could pose a threat to "financial market stability". That's just great! It is clear that Paulson will use his unchecked powers to wipe the slate clean and remove any possibility that foreign investors will take legal action against the real perpetrators; the giant Wall Street investment banks.

So, how do the American people like paying off Paulson and Co. future legal bills? Is that how taxpayer revenue should be spent instead of on education, health care and infrastructure?

There's another reason why Paulson is working so hard to pass the Bailout for Tycoons Bill; it's a windfall for the banking giants. Citi did not simply pick up Wachovia by happenstance nor did JP Morgan purchase Washington Mutual because it wanted to perform its civic duty and prevent a full-system meltdown. No way; they were clearly aware of the way the wind was blowing. In fact, neither case manages to pass the smell test.

This is from AP's Sara Lepro:

"Citigroup agreed Monday to purchase Wachovia's banking operations for $2.1 billion in a deal arranged by federal regulators, making the Charlotte-based bank the latest casualty of the widening global financial crisis.

The deal greatly expands Citigroup's retail franchise—giving it a total of more than 4,300 U.S. branches and $600 billion in deposits—and secures its place among the U.S. banking industry's Big Three, along with Bank of America Corp. and JP Morgan Chase & Co.

But it comes at a cost: Citigroup Inc. said it will slash its quarterly dividend in half to 16 cents. It also will dilute existing shareholders by selling $10 billion in common stock to shore up its capital position.
In addition to assuming $53 billion worth of debt, Citigroup will absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio, with the Federal Deposit Insurance Corp. agreeing to cover any remaining losses. Citigroup also will issue $12 billion in preferred stock and warrants to the FDIC.

(Ed; Here's the punch line) "The government's proposed $700 billion rescue plan for financial institution, being voted on Monday by the House of Representatives, likely will prove of added benefit to Citi.

While the plan broadly aims to prevent banks from profiting on the sale of troubled assets to the government, there is an exception made for assets acquired in a merger or buyout, or from companies that have filed for bankruptcy. This could allow Citigroup to sell toxic mortgages and other assets it gained from Wachovia for a higher price than the bank actually paid for them." ("Citigroup to buy Wachovia banking operations"

Huh?!? So Citi not only gets an army of depositors (the cheapest capital available!) but, at the same time, is going to be able to dump it's mortgage-backed junk on the taxpayer? And, guess what? The JP Morgan deal looks nearly identical.

Is this "insider baseball" or not?

Does anyone want to wager that G-Sax will also get a privileged spot at the public trough sucking up billions of taxpayer dollars to patch together its tattered balance sheet?

And what will the net result of Paulson's Bailout for Fraudsters be; more consolidation of the financial industry and the utter annihilation of local and regional banks. That's a sure thing. The mom and pop banks across the country are going to take it in the stern sheets if this bill is passed. Bet on it.

The country has no time for this cynical scavenger-hunt. The system is listing badly and we have ONE chance to get this emergency bill right. There is no way an industry rep like Henry Paulson, who has spent his entire career feathering his own nest and handing out plums to his buddies, can operate in the best interests of the American people. Paulson has got to go!

According to Bloomberg News , Sept 29:

"The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression. The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

The crisis is reverberating through the global economy, causing stocks to plunge and forcing European governments to rescue four banks over the past two days alone." (Bloomberg)

Get it? The Fed has ALREADY brushed aside Congress's "No" vote and pumped money into the system; and look what happened.

Nothing!

Libor is still at historic highs, the Ted spread has widened to record levels and interbank lending is grinding to a standstill. There's a run on the money markets that is reducing the ability of businesses to turn over short term debt. The system is shutting down, folks, and Paulson's snake oil won't help. Why throw another $700 billion down a rathole? 400 reputable economists--not the "faith based" industry hacks that work for the Bush administration--are opposed to this bailout. It has to be stopped.

This is a "real time" meltdown and it requires real solutions, not bailouts for foreign creditors and Wall Street Goliaths. (Foreign victims of this scam will have to sue the perpetrators not the US taxpayer) As Nouriel Roubini, chairman of Roubini Global Economics, points out, we are on the verge of the "mother of all bank runs", a cross-border savaging of reserves that would crash the entire financial system. Here's Roubini on the next shoe to drop:

"The next step of this panic could become the mother of all bank runs, i.e. a run on the trillion dollar plus of the cross border short-term interbank liabilities of the US banking and financial system as foreign banks as starting to worry about the safety of their liquid exposures to US financial institutions; such a silent cross border bank run has already started as foreign banks are worried about the solvency of US banks and are starting to reduce their exposure. And if this run accelerates - as it may now - a total meltdown of the US financial system could occur. We are thus now in a generalized panic mode and back to the risk of a systemic meltdown of the entire financial system. And US and foreign policy authorities seem to be clueless about what needs to be done next. Maybe they should today start with a coordinated 100 bps reduction in policy rates in all the major economies in the world to show that they are starting to seriously recognize and address this rapidly worsening financial crisis." (Nouriel Roubini's EconoMonitor)

We have no time for Paulson's self serving shenanigans. This is not how one goes about recapitalizing the banking system or bringing stability to the financial system. It's time to get rid of the lobbyists and banking vermin and bring in the economists and the people with real experience. Paulson's plan is loser. Not one dime should go to this latest Wall Street swindle. No bailout!

[Peter Lemkin]

What is amazing is that 'they' were able to keep this now unraveling financial collapse from happening for SO long. It is long overdue IMO. It seems we will soon see a repeat of the Great Wall Street Crash and Depression [in a modern form]. Yes, hedging and leverage was behind it all...and 'assets' not backed by anything but magic and fast-taking [i.e. lies]. The bail-out is sickening. Socialism for the rich and avoricious, free-market capitalism for the others. I'm not surprised the disease has started in the USA, but is starting to spread worldwide. The weakest persons will be hurt the most [as usual]. I presume the powers that be will use the standard most powerful distraction to divert attention and complicity - and that is War [sadly]! This 'accounting' was long overdue and predicted by many, including some posting here and others. I think we've only seen the first preliminary events in the collapse. The USG administration will do everything to keep it a bit under control until the elections...I presume after that [35days] it will be in freefall. How low we go is unknown - but I'd guess quite low, indeed. What Wars and other such diversions they invent, as well. This is NOT going to be 'pretty'. What upsets is that few are even entertaining a new model of social / financial / polity structures - only trying to 'fix' a morally bankrupt system - now going financially bankrupt to match its ethical basis......

Interesting reading is works on internet by Korten and Tarpley long predicting the events unfolding. The writings and vidoes of Naomi Klein on her 'Shock Doctrine' are also apt now...as I think this financial shock was planned in many ways, and is being used now, to 'soften up' the Public for changes they'd not have allowed otherwise - this was done in Chile and many other places by the same financial forces - but is now being done 'at home'. A kind of thirdworldization of America and Europe....how nice.

"AMY GOODMAN: While the collapse of this country’s financial system continues to send shock waves around the world, I’m joined on the telephone by bestselling author of The Shock Doctrine, Naomi Klein. Her latest article for the Huffington Post is called “Now Is the Time to Resist Wall Street’s Shock Doctrine.” Naomi Klein, welcome to Democracy Now!

NAOMI KLEIN: Thanks, Amy. Great to talk with you.

AMY GOODMAN: Explain. What do you mean?

NAOMI KLEIN: Well, the thesis of my book, what I mean by the “shock doctrine,” is that it is in times of crisis, it is in times when people are panicked, when we’ve seen again and again the right push through radical pro-corporate policies, what they call “free market reforms,” precisely because it is in a crisis where the space for debate rapidly closes, and you can invoke this state of emergency to say we have no choice.

And I think we’re seeing a very dramatic example of this tactic right now with this really extortionist kind of tactics playing out in Washington. You know, “Sign this blank check, or we’re all going down, or Main Street is going down, or taxpayers—you know, the sky will fall in on them.”

I’m also arguing that this is only stage one of the shock doctrine. They’re getting this—they’re lobbying for this huge bailout, obviously, but this bailout is a kind of a time bomb, because it’s all these bad debts, and they are going to explode on the next administration. I mean, we know that the Bush administration has already left the next administration with huge debt and deficit problems. They’ve just exploded those, expanded them. And what that means is that whoever the next president is is going to be inheriting this economic crisis that is being exacerbated by this bailout.

So, in the case of McCain, I think—if he’s the president, then I think we know what he’ll do, because we know he wants to privatize Social Security, which is something that Wall Street’s been wanting for a long time, another bubble. We know he has said in the next—in the first 100 days of his administration he’ll look at every program and either reform it or shut it down. This is really a recipe for economic shock therapy. So, while you have all of these trivial issues being discussed in the election season, I think what we could—what we’re really—you know, under the surface, they’re actually being quite clear. They’re going to take—if they take power, it will be in the midst of an economic emergency. They’ll invoke that emergency to push through very, very radical changes. So, you know, what I’ve been saying is, this is not four more years of Bush; it’s much, much worse in the case of another Republican administration.

But there’s huge problems for Democrats, as well, if they win this election, because, you know, we need to only think back to the situation in which Clinton took power, where he ran an election on an economic populist platform, promising to renegotiate NAFTA. Then there was an economic crisis. Clinton came under intense lobbying by people like Robert Rubin, who’s also advising Obama right now, and by the time he took office, he had embraced economic austerity.

So, people need to understand these tactics, need to put pressure on the candidates, the parties, and reject this tactic. And I’ve actually been really heartened, Amy, that people are onto these shock tactics and aren’t falling for it. And, you know, to the extent that we’re seeing a little bit of spine from the Democrats, it is only, as Chris Dodd said, because they are hearing it from their constituents. So people need to keep up this pressure right now.

AMY GOODMAN: Naomi Klein, one of the things you write about in this piece in Huffington Post is the wish list that comes from former Republican House Speaker Newt Gingrich—

NAOMI KLEIN: Yes.

AMY GOODMAN: —laying out policy prescriptions for Congress.

NAOMI KLEIN: Yeah. I mean, there is pressure being put on Congress from Democrats who—you know, we’ve heard the proposals to cap executive pay and to have a moratorium on foreclosures. It’s coming not from all Democrats, but from some. But there’s something going on on the Republican side, where you have people like Newt Gingrich, and you also have the Republican Study Committee, which is a group of very influential Republican lawmakers who are saying that they’re opposed to the bailout, and they also have their wish list. And I think it is that it’s not that they’re going to oppose a bailout completely; it’s that they want economic changes, right-wing, pro-corporate economic changes, attached to a bailout. So, Newt Gingrich has his list. He’s got eighteen demands. But I think even more important than that is the Republican Study Committee, and I raise this because they’ve just issued their ransom list. It starts with suspending the capital gains tax, privatizing Fannie Mae and Freddie Mac, suspending mark-to-market accounting, which is the rule that requires companies to assess their assets at current market values.

So, what’s so stunning about this, Amy, is that here you have a crisis that everyone seems to agree is borne of deregulation, and they’re actually calling for more deregulation. We have a situation where the debt is exploding on American taxpayers, and they want to suspend corporate profits—sorry, corporate taxes, which is actually what might defray some of those costs from regular taxpayers. So it’s an incredible display of opportunism. And this is what I mean by stage two of the shock doctrine. The first stage is just the bailout, but the second stage are all of these radical reforms that are going to be invoked in the name of the crisis that the bailout is creating, whether it’s pushed through right now or whether it’s pushed through later.

But what’s important—you know, Amy, in the book, I talk about—I start the book with a quote from Milton Friedman that has really made the rounds a lot lately, which is that—and this is a Friedman quote—that “only a crisis, actual or perceived, produces real change. And when the crisis occurs, the change depends on the ideas that are lying around." And then he goes on to say, “That, I believe, is our basic function: to keep the ideas ready until the politically impossible becomes politically inevitable.” So I think it’s really important for people to look at the ideas that are lying around.

There’s enormous corporate lobbying going on to, for instance, eliminate the post-Enron collapse regulations, to actually say that the way to save the American economy—you know, you heard Henry Paulson equating—still equating the interests of the financial sector with the interests of everyone else. We know that’s simply not true. But it’s that—precisely that logic that then is used to say, OK, these are the—this is what the financial community, this is what the corporate world needs in order to revive the economy: they need less regulation, they need less taxation.

So, we should be really, really wary of this claim that we’re hearing that free market ideology is dead, that this marks the end of, you know, of capitalism. You know, I’m sorry, that is not the case. It may be going dormant for a little while to rationalize these massive bailouts, but it will come roaring back, and the crisis that is being deepened right now through these bailouts will be invoked for even more radical deregulation, privatization, tax cuts and so on.

AMY GOODMAN: It seems clearly, Naomi Klein, what’s needed, a key ingredient here, is speed.

NAOMI KLEIN: Yeah.

AMY GOODMAN: You see this happen right after 9/11 with the USA PATRIOT Act being pushed through. You saw it with the vote in October of 2002 for the invasion of Iraq. It’s speed and the idea of an imminent threat.

NAOMI KLEIN: Absolutely.

AMY GOODMAN: And then, of course, this week it’s not only about passing this legislation, but it is passing it by Friday.

NAOMI KLEIN: Absolutely. You know, and a lot of people have even described this Paulson plan as an economic PATRIOT Act. You know, one of the mistakes that I think they made, honestly, Amy, is how short it is. It’s just three pages, which means—you know, usually these pieces of legislation are much longer, so people don’t even bother reading them in that moment of extortion—you know, “Pass it now, or else…or else the sky falls in.” So, you know, in this case, I think they made a miscalculation. You know, there was an interesting article in Time that just came out, where they actually say that they have been working—you know, this is a quote—it says, “[Paulson] and his team [have] been working on [this] proposal for more than six months.” So, it’s quite surprising that it is as pared down as it is. It’s three pages. And the craziest thing has happened: people have read it. Regular people have read it. It doesn’t take that much time. And, you know, you read Section 8, which is just so stunning, just so bold in its demand for total and complete impunity. And that’s really what’s getting in their way, is people are reading this text, and they’re frankly shocked by it.

You know, we heard Henry Paulson say that he thought it would have been presumptuous to put in clauses calling for regulation. This is absolute nonsense. Section 2 of the same document talks about how they have the right to hire contractors to administer this huge operation, and we know that that means contracting with some of the very firms who are going to be bailed out. And then it says that it would be—they would be contracting them without regard to any other provision of law regarding public contracts. Amy, that is just as—that’s Iraq levels of impunity, or even more. I mean, basically what they are saying is that we want to be able to contract with companies but exempt those companies from the existing laws that bar conflict of interest, that have whistleblowing laws. I mean, the laws exist on the books, and they are actively excluding these contracts from those laws. So the idea that they didn’t want to be presumptuous is complete nonsense. They are being extremely presumptuous, because they are actively excluding these contractors, these would-be contractors, from existing oversight. We have to be very clear about this.

AMY GOODMAN: It’s interesting who Treasury Secretary Henry Paulson is, served as an assistant to Richard Nixon’s assistant, John Ehrlichman, and moved right from there to Goldman Sachs, then became head of it when, well, the now-Senator and then-Governor Corzine left Goldman Sachs.

NAOMI KLEIN: You know, Amy, I don’t think we can stress this enough. Henry Paulson is one of the key people, the top people, responsible for creating the crisis that he is now claiming he will solve, you know, and this is—if we think about the 9/11 analogy and, you know, the state of shock that Americans were in after 9/11 and the emergence of Rudy Giuliani as the savior—and, you know, people have so much regret about that. And in the book, I write about this as the state of regression that we go into when we’re frightened. And I think Henry Paulson has really been cast in this role as an economic Rudy Giuliani, saving the day, impartial, bipartisan, a strong leader.

I found this article in BusinessWeek that ran when Paulson was appointed to the Treasury, and I just want to read you one sentence, because I think it’s all we need to know about Henry Paulson. This is from BusinessWeek, when he got the appointment as Treasury Secretary in 2006. The headline of the article is “Mr. Risk Goes to Washington.” It says, “Think of Paulson as Mr. Risk. He’s one of the key architects of a more daring Wall Street, where securities firms are taking greater and greater chances in [their] pursuit of profits. By some key measures, the securities industry is more leveraged now than it was at the height of the 1990s boom.”

Then it goes on to say that when Paulson took over Goldman Sachs in 1999, they had $20 billion in debts. When he—in these high-risk gambles. When he left, they had $100 billion, which means he took their risk level from $20 billion to $100 billion. So it is absolutely no exaggeration to say that Henry Paulson, far from speaking for Main Street, is actually bailing out his colleagues for some of the very debts that he himself accumulated. This is an extraordinary conflict of interest.

AMY GOODMAN: And then, of course, there’s the question of his own interests in Goldman Sachs today.

NAOMI KLEIN: Well, you know, allegedly, he divested from the company, so I can’t comment on that, but I think there’s some good investigation to be done.

AMY GOODMAN: Naomi Klein, I want to thank you for being with us, award-winning journalist, syndicated columnist, author of the bestselling book The Shock Doctrine: The Rise of Disaster Capitalism."

[David Guyatt]

Hey Peter, most pleased to see ou back in your usual form.

David

[Jan Klimkowski]

OK - if the following (grabbed from Ticker Forum) is genuine and accurate, it begs two questions:

i) how long have They been meticulously planning this "shock therapy" for the "first world"?

ii) effectively abolishing the reserve requirements of banks will cause a huge, short-term, bubble, and the Mother of all burstings. At first glance, it appears equivalent to saying the global economy can adopt the accounting rigour of Enron.....

Hidden in the Emergency Economic Stabilization Act of 2008
Posted October 2nd, 2008 by OFallonBrent
In yesterday’s Senate bailout bill, also known as the ‘‘Emergency Economic Stabilization Act of 2008’’ is the following, seemingly innocent section.

SEC. 128. ACCELERATION OF EFFECTIVE DATE.
Section 203 of the Financial Services Regulatory Relief Act of 2006 (12 U.S.C. 461 note) is amended by striking ‘‘October 1, 2011’’ and inserting ‘‘October 1, 2008’’.

So they moved the date of the Financial Services Regulatory Relief Act of 2006 up by 3 years. Big deal you say, and what the heck is the FSRRA of 2006? It was a series of amendments to 12 U.S.C. 461 of course! Well, okay, I don’t expect you to know what that is, so here it is (and the other related documents).

The bailout bill - http://money.cnn.com/2008...

Financial Services Regulatory Relief Act of 2006 - http://www.govtrack.us/co...

12 U.S.C. 461 - http://www.law.cornell.ed...

You may want to open those in new tabs, we’ll be bouncing around them a bit.

Okay, lets follow the trail.

They changed the effective date from 2011 to yesterday!

The Financial Services Regulatory Relief Act of 2006 made changes to the United States Code TITLE 12 - BANKS AND BANKING, CHAPTER 3 - FEDERAL RESERVE SYSTEM, SUBCHAPTER XIV - BANK RESERVES.

The changes do a few things, none of which seem to be good for us citizens.

The changes eliminated the requirement for banks to keep reserves of cash on hand to cover deposits, they abolished the Federal Reserve’s Earnings Participation Account, they granted the ability for the Fed to create their own rules for distributing their earnings, and they granted the ability to make payments to foreign banks.

These things were not scheduled to go into effect for 3 more years. Unclear is why they needed these changes at all, the other is why they need them now.

Okay, there it is, the conclusion. You can take my word for it and stop now and have some disgust at the whole thing, or you can continue on and get really mad about how convoluted and cryptic things in Washington are.

Fair warning. Continue at your own risk.

Still here? You really are brave. Actually you probably have no idea the mess you are in for. Don’t say I didn’t warn you.

Okay, I gave you the conclusion, now here is how to get there. I’ll go fast now, try to keep up, it gets complicated.

‘‘Emergency Economic Stabilization Act of 2008’’
SEC. 128. ACCELERATION OF EFFECTIVE DATE.
Section 203 of the Financial Services Regulatory Relief Act of 2006 (12 U.S.C. 461 note) is amended by striking ‘‘October 1, 2011’’ and inserting ‘‘October 1, 2008’’.

Okay, we know the date has moved. Let’s look at what moved.

Section 203 is a part of the following Title. It states when the entire title goes into effect. So they made the entire Title go into effect yesterday.

TITLE II--MONETARY POLICY PROVISIONS
SEC. 201. AUTHORIZATION FOR THE FEDERAL RESERVE TO PAY INTEREST ON RESERVES.
(a) In General- Section 19(b) of the Federal Reserve Act (12 U.S.C. 461(b)) is amended by adding at the end the following:
`(12) EARNINGS ON BALANCES-
`(A) IN GENERAL- Balances maintained at a Federal Reserve bank by or on behalf of a depository institution may receive earnings to be paid by the Federal Reserve bank at least once each calendar quarter, at a rate or rates not to exceed the general level of short-term interest rates.
`(B) REGULATIONS RELATING TO PAYMENTS AND DISTRIBUTIONS- The Board may prescribe regulations concerning--
`(i) the payment of earnings in accordance with this paragraph;
`(ii) the distribution of such earnings to the depository institutions which maintain balances at such banks, or on whose behalf such balances are maintained; and
`(iii) the responsibilities of depository institutions, Federal Home Loan Banks, and the National Credit Union Administration Central Liquidity Facility with respect to the crediting and distribution of earnings attributable to balances maintained, in accordance with subsection ©(1)(A), in a Federal Reserve bank by any such entity on behalf of depository institutions.
`© DEPOSITORY INSTITUTIONS DEFINED- For purposes of this paragraph, the term `depository institution', in addition to the institutions described in paragraph (1)(A), includes any trust company, corporation organized under section 25A or having an agreement with the Board under section 25, or any branch or agency of a foreign bank (as defined in section 1(b) of the International Banking Act of 1978).'.
(b) Conforming Amendment- Section 19 of the Federal Reserve Act (12 U.S.C. 461) is amended--
(1) in subsection (b)(4)--
(A) by striking subparagraph ©; and
(B) by redesignating subparagraphs (D) and (E) as subparagraphs © and (D), respectively; and
(2) in subsection ©(1)(A), by striking `subsection (b)(4)©' and inserting `subsection (b)'.
SEC. 202. INCREASED FLEXIBILITY FOR THE FEDERAL RESERVE BOARD TO ESTABLISH RESERVE REQUIREMENTS.
Section 19(b)(2)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(2)(A)) is amended--
(1) in clause (i), by striking `the ratio of 3 per centum' and inserting `a ratio of not greater than 3 percent (and which may be zero)'; and
(2) in clause (ii), by striking `and not less than 8 per centum,' and inserting `(and which may be zero),'.
SEC. 203. EFFECTIVE DATE.
The amendments made by this title shall take effect October 1, 2011.

Okay, so we can see here that 201 and 202 amend 12 U.S.C. 461. If we take 12 U.S.C. 461 section 19 (b) in the order of the amendments, the first is Section 19(b)(2)(A).

(2) (A) Each depository institution shall maintain reserves against its transaction accounts as the Board may prescribe by regulation solely for the purpose of implementing monetary policy—
(i) in the ratio of 3 per centum for that portion of its total transaction accounts of $25,000,000 or less, subject to subparagraph ©; and
(ii) in the ratio of 12 per centum, or in such other ratio as the Board may prescribe not greater than 14 per centum and not less than 8 per centum, for that portion of its total transaction accounts in excess of $25,000,000, subject to subparagraph ©.

this section is amended—
(1) in subsection (b)(2)(A), by striking “the ratio of 3 per centum” and inserting “a ratio of not greater than 3 percent (and which may be zero)” in clause (i) and by striking “and not less than 8 per centum,” and inserting “(and which may be zero),” in clause (ii);

Notice the change from a set percentage to a percentage “not greater than” and “which may be zero”. So depository institutions no longer have to maintain reserves against their transaction accounts. What is a depository institution? What is a transaction account?

(1) The following definitions and rules apply to this subsection, subsection © of this section, and
sections 248–1, 248a, 342, 360, and 412 of this title:
(A) The term “depository institution” means—
(i) any insured bank as defined in section 3 of the Federal Deposit Insurance Act [12 U.S.C. 1813] or any bank which is eligible to make application to become an insured bank under section 5 of such Act [12 U.S.C. 1815];
(ii) any mutual savings bank as defined in section 3 of the Federal Deposit Insurance Act or any bank which is eligible to make application to become an insured bank under section 5 of such Act;
(iii) any savings bank as defined in section 3 of the Federal Deposit Insurance Act or any bank which is eligible to make application to become an insured bank under section 5 of such Act;
(iv) any insured credit union as defined in section 1752 of this title or any credit union which is eligible to make application to become an insured credit union pursuant to section 1781 of this title;
(v) any member as defined in section 1422 of this title;
(vi) any savings association (as defined in section 3 of the Federal Deposit Insurance Act
[12 U.S.C. 1813]) which is an insured depository institution (as defined in such Act [12 U.S.C. 1811 et seq.]) or is eligible to apply to become an insured depository institution under the Federal Deposit Insurance Act; and (vii) for the purpose of sections 248–1, 342 to 347, 347c, 347d, and 372 of this title any association or entity which is wholly owned by or which consists only of institutions
referred to in clauses (i) through (vi).

So pretty much any place that handles deposits, most people just call them banks.

© The term “transaction account” means a deposit or account on which the depositor or account holder is permitted to make withdrawals by negotiable or transferable instrument, payment orders of withdrawal, telephone transfers, or other similar items for the purpose of making payments or transfers to third persons or others. Such term includes demand deposits, negotiable order of withdrawal accounts, savings deposits subject to automatic transfers, and share draft accounts.

This basically means bank accounts.

So there it is, banks no longer have to keep even a small amount of peoples bank accounts available as cash. They don’t have to fail, they can just say they are out of cash today. Your money is still there, FDIC does not kick in, but they just stop giving out money.

Okay, what else does the date change put into effect 3 years early?

(2) in subsection (b)(4), by striking subparagraph © and redesignating subparagraphs (D) and (E) as subparagraphs
© and (D), respectively

What was subparagraph ©? In order to understand subparagraph © we need to see the whole paragraph (4).

(4) (A) The Board may, upon the affirmative vote of not less than 5 members, impose a supplemental reserve requirement on every depository institution of not more than 4 percentum of its total transaction accounts. Such supplemental reserve requirement may be imposed only if—
(i) the sole purpose of such requirement is to increase the amount of reserves maintained to a level essential for the conduct of monetary policy;
(ii) such requirement is not imposed for the purpose of reducing the cost burdens resulting from the imposition of the reserve requirements pursuant to paragraph (2);
(iii) such requirement is not imposed for the purpose of increasing the amount of balances needed for clearing purposes; and
(iv) on the date on which the supplemental reserve requirement is imposed, except as provided in paragraph (11), the total amount of reserves required pursuant to paragraph
(2) is not less than the amount of reserves that would be required if the initial ratios specified in paragraph (2) were in effect.
(B) The Board may require the supplemental reserve authorized under subparagraph (A) only after consultation with the Board of Directors of the Federal Deposit Insurance Corporation,
the Director of the Office of Thrift Supervision, and the National Credit Union Administration Board. The Board shall promptly transmit to the Congress a report with respect to any exercise
of its authority to require supplemental reserves under subparagraph (A) and such report shall state the basis for the determination to exercise such authority.
© The supplemental reserve authorized under subparagraph (A) shall be maintained by the Federal Reserve banks in an Earnings Participation Account. Except as provided in subsection ©(1)(A)(ii) of this section, such Earnings Participation Account shall receive earnings to be paid by the Federal Reserve banks during each calendar quarter at a rate not more than the rate earned on the securities portfolio of the Federal Reserve System during the previous calendar quarter. The Board may prescribe rules and regulations concerning the payment of earnings on Earnings Participation Accounts by Federal Reserve banks under this paragraph.
(D) If a supplemental reserve under subparagraph (A) has been required of depository institutions for a period of one year or more, the Board shall review and determine the need for continued maintenance of supplemental reserves and shall transmit annual reports to the Congress regarding the need, if any, for continuing the supplemental reserve.
(E) Any supplemental reserve imposed under subparagraph (A) shall terminate at the close of the first 90-day period after such requirement is imposed during which the average amount of reserves required under paragraph (2) are less than the amount of reserves which would be required during such period if the initial ratios specified in paragraph (2) were in effect.

So they make every bank pay into a reserve fund. It is maintained in an Earnings Participation Account. By deleting subparagraph © they abolished that account. They no longer have to maintain the account or pay the earnings. They can still impose a supplemental reserve requirement, they just don’t have to pay any earnings. I wonder what happened to the funds in that account. Remember, this went into effect yesterday.
Okay, what’s next? Ah yes, they added a whole new paragraph 12!

“(12) Earnings on balances.—
“(A) In general.—Balances maintained at a Federal Reserve bank by or on behalf of a depository institution may receive earnings to be paid by the Federal Reserve bank at least once each calendar quarter, at a rate or rates not to exceed the general level of short-term interest rates.
“(B) Regulations relating to payments and distributions.—The Board may prescribe regulations concerning—
“(i) the payment of earnings in accordance with this paragraph;
“(ii) the distribution of such earnings to the depository institutions which maintain balances at such banks, or on whose
behalf such balances are maintained; and
“(iii) the responsibilities of depository institutions, Federal Home Loan Banks, and the National Credit Union Administration Central Liquidity Facility with respect to the crediting and distribution of earnings attributable to balances maintained, in accordance with subsection ©(1)(A), in a Federal Reserve bank by any such entity on behalf of depository institutions.
“© Depository institutions defined.—For purposes of this paragraph, the term ‘depository institution’, in addition to
the institutions described in paragraph (1)(A), includes any trust company, corporation organized under section 25A
[12 U.S.C. 611 et seq.] or having an agreement with the Board under section 25 [12 U.S.C. 601 et seq.], or any branch
or agency of a foreign bank (as defined in section 3101 of this title).”;
(4) in subsection ©(1)(A), by striking “subsection (b)(4)©” and inserting “subsection (b)”.

So paragraph 12 deals with earnings on balances. So basically any money the Federal Reserve bank has from other banks can make earnings and the Fed can decide how and if those earnings are paid out.

Remember the definition of depository institutions? Of course you do, but we have an additional definition just for this paragraph, everything you already know with the addition of foreign banks. So what you ask, if they deposit money in the Fed bank, shouldn’t they make money. Well, maybe, but yesterday they did not.

Remember, this entire paragraph 12 was not supposed to go into effect until 2011.

Foreign banks were not in the definition of depository institutions until they changed the effective date from October1, 2011 to October 1, 2008.

If we rewrite the opening of the paragraph to use the words “foreign banks” it reads

Balances maintained at a Federal Reserve bank by or on behalf of a foreign banks may receive earnings to be paid by the Federal Reserve bank at least once each calendar quarter, at a rate or rates not to exceed the general level of short-term interest rates.

So, to summarize, by changing the effective date the following is now in effect.

Banks don’t have to have cash on hand.

The Fed does not have to maintain an Earnings Protection account for the supplemental reserve fees they charge banks which means they don’t have to give any of the money back to those banks.

They now include foreign banks as institutions they can pay earnings to. Let’s not forget, earnings is really just more American debt. Federal Reserve Notes are really debt, but that’s a topic for another monster blog entry.

Anyway, all of this from one puny and innocuous section in the ‘‘Emergency Economic Stabilization Act of 2008’’.

If you read this whole thing you deserve a gold star, or at least an attaboy.

Attaboy!

[Magda Hassan]

Scary Jan.

Many people in Australia at present are under the impression that governments guarantee bank deposits. This is not true. The Commonwealth Bank and other state-owned banks did carry government guarantees, but they have all been privatised and their customers lost that protection as a result.

[David Guyatt]

I wonder if the intent behind the new rule hat banks no longer have to have cash on hand is a sudden albeit somewhat covert transition to a cashless society -- something that has been on the back plate for a long time I understand?

[Jan Klimkowski]

Peter - thanks for posting the Naomi Klein exchange with Amy Goodman. Klein makes several important points, and I do think it's entirely possible we're being set up for some excruciating shock therapy in the "First World" so the elites can achieve fundamental changes that would otherwise be out of Their reach.

MSM has been as disgracefully supine as it was during the run-up to Gulf War 2. BBC business coverage has consisted of "breaking news" extravaganzas, theatrically delivered by Robert Peston, which in truth have consisted of blatant market manipulation by the government and bankers (Central & otherwise). Whilst the anchors are generally so clueless about the underlying economic reality, they just mouth the nonsensical scripts written for them about how "Congress must save Main Street USA".

I note the precise details of the Bush/Paulson $700 billion thieving won't be clear until after the US Presidential election. No wonder Dubya and Skeletor Paulson looked like the cats that got the cream yesterday... :mad:

[David Malone]

Is it possible to see this present economic crisis as a variation on the oldest kind of money crisis - That is, a crisis of a debased currency?

We talk about banks circulating money. But is what they have been circulating really the same currency as the one we use in our everyday transactions. It seems to me it is not. And that therein is a clue to the problem.

'Our' currency is regulated in its supply by the government/central bank. It has the explicit backing of the tax raising power of the government.

Surely what has happened over the last decade is that the international banking system has tired of being limited by the regulated flow of national currencies and invented its own unregulated currency? What else is the mortgage backed security if not a form of money. It is exchanged, it is bought and sold, it is valued it even has a 'I promise to pay the bearer' on it in the form of the signature of the person who took out the mortgage.

But right there is the problem. The promise is very weak. AND the amount of crap paper has been unregulated.

Seen in this light isn't one way of seeing this whole problem, that the banks made the most elementary mistake of all. They debased their currency.

They invented a currency. Then like every greedy idiot in history they wanted to be richer and decided the easy way to do it was to print more money. But there is only so much gold and silver (solid loans) out there. No problem - just mix tin into the gold and silver and don't tell anyone. IE write MBS paper backed not by solid gold promises but backed by tin, alt-a and ARM loans.

And to make it worse this debased currency has been leveraged 30-40 times and insured in a vast upside down pyramid of credit default swaps. The latter beinbg the financial world's equivalent of the network of mutual guarantees that bound the 'Great Powers' together before WW1 and led them all into the abyss like men roped together falling into a crevasse.

If you buy this analogy then it is clear that the 'bail out' cannot work. The problem is the tin is mixed into the currency. The tranches of worthless stuff are mixed in with the good loans. Result - no one trusts the currency at all.

The banks won't lend to each other because they know their vaults are stuffed with counterfeit, debased currency.

The banks want to exchange their debased currency for our 'real' money.

And what makes me annoyed is the talk about how their 'assets' will regain in value. Tin doesn't often magically become gold or silver just because you leave it in a drawer for a while.

Sorry, I ramble. I'd like to know if others with greater knowledge, think I have misunderstood or if there is some sense in this.

[Jan Klimkowski]

David - a very astute first post. I'd love to hear what some of our financial luminaries think of this analysis, but certainly metaphorically speaking the mortgage-backed securities (MBS) and credit-default swaps (CDS) are a form of "debased currency" which is now being dumped on "First World" taxpayers at far more than its "face" value.

Indeed, the first British "nationalization", Northern Rock, contained a huge scandal in the form of Granite, a legal-accounting fiction (its trustees & beneficiaries included a Downs Syndrome charity in the North-East who'd never even heard of Granite!), but which held the best quality tranches of Northern Rock loans - which in turn were being packaged up and sold on as MBS. Granite was not part of the nationalization, so the British taxpayer didn't even get the best part of Northern Rock - we had the rump dumped on us.

I note that:

- Goldman Sachs were paid advisors to Gordon Brown throughout the "nationalization" of Northern Rock, which in reality involved British taxpayers paying way over the odds for this "debased currency".

- (Former) Goldman Sachs Chair & CEO, Hank Paulson, essentially wrote the terms of the $700 billion "bailout bill", which will result in American taxpayers being lumbered with another huge chunk of "debased currency".

As Mike Whitney wrote some months ago, we're witnessing a "banker's coup".

[Magda Hassan]

A warm welcome David!
I probably don't fall into the category of others with greater knowledge but my first thought on reading your post is that, yes, I can see how the mortgage backed security is a form of currency. It is a good analogy. And it has been debased. More than that it is not backed by anything at all.

I first realized that this was turning into something a bit more than a garden variety financial crisis when I heard a radio report about how Deutsche Bank had taken about 8 people who had defaulted on their mortgages to court in the US. They wanted to foreclose as they (thought) held the title and get their money back. When the judge asked the bank to show their title to the properties they were unable to do so because of the way the mortgage backed securities had been chopped up and spread around. The judge then made a judgement to the effect that the bank did not have title to the properties the people could stay there but the bank still had the debt and that was their problem. I think it put shock waves through the banking system when they realised that the mortgages backed securities were not worth the paper they were written on.

I've never understood how even in 'normal' times a bank could produce money out of thin air and lend it but you have to pay back in hard earned real currency. It just seems like a sleight of hand conjuring trick. I had always thought they had to borrow other people's real money (in the form of deposits or from the Reserve Bank) to lend to others at interest to make the money to run the bank and pay the original lender. But I understand banking hasn't been done like that for some time. Time for me to dust of my copy of Das Kapital I think.

It really is just a ponzi scheme that I am seeing. Even when it's respectable.