Sunday, July 19, 2009
On April 2, 2009, control of the planet’s banks was turned over to the secret decisions of eleven men—board members of a Swiss organization with a troubling Nazi past.
Banking wasn’t always that way. . . .
My secretary would come into my office every morning at 9:00 a.m. with a room-service smile and an armload of computer printouts.
She would place the reports on my desk as if she were serving a fine meal and arrange them just so, with the overdraft report on top, and then slip out of the office as if she were trying not to wake anyone.
The customer’s name was on the left side of the page followed by the date the account was opened, the six-month average balance, and a listing of the offending checks that had sentenced the account to the OD report. The amount of the checks and the total overdraft were featured prominently on the right-hand side of the page like perps in a police lineup.
The decisions were twofold: do I pay the checks and, whether paid or not, do I assess overdraft charges? Overdraft charges have gotten rapacious in recent years, but they were $4.00 an item back then, and believe it or not, it takes time, money and effort for bank personnel to track down the impostor and send it home branded with banking’s scarlet letter—insufficient funds.
I would usually let the charges stand, but I was not a tough close if someone called in with a plausible story on why the check beat the deposit to their account. This was usually good for one round of reversed OD charges, but rarely repeated despite screenplay-quality presentations.
A friend of mine had a leather shop down the street where he handcrafted sandals, belts and wallets adorned with peace symbols, which, in those days, were found on everything from condoms to dog collars. He was of the genus Hippy, drove a ratty VW van covered in flowery orange and yellows, and wore iconic bell-bottomed Levi’s. There was great profit in leather goods, but Jimmy paid no attention to his bank balance and overdrew the account with such regularity I sometimes wondered if he was trying to ensure the branch remained profitable.
Banking was more personal then:
"Jimmy, you’re OD again."
"That’s bullshit, man."
"No, Jimmy. It’s not bullshit. You’re overdrawn $312."
"I can’t be overdrawn. I just gave you guys a bunch of bread. You probably held it so some checks would come in first and you could hit me with a bunch of overdraft charges."
"Lay off the weed, Jimmy. When did you make the deposit?"
"Yesterday. Seven hundred bones. Gave it to that foxy black chick with the Afro."
“Yes. I see it. But you’re still OD."
"You’re bummin’ me out, man, really bummin’ me out."
"When was the last time you reconciled your account, Jimmy?"
"Don’t put that on me, man. That form is a bad trip. Gives me a migraine."
"Bring your last three statements down to the branch and I’ll have bookkeeping reconcile the account for you."
"Groovy. You gonna reverse the OD charges?"
"Not a prayer. Bring $312 with you."
Your local bank was also where you went to get a loan to buy your new home. And there it stayed until it was paid off.
A customer would come into the branch, fill out an application and, if approved, we would finance 75%–80% of the purchase. The borrower would come up with the balance. When the loan was approved, we would issue the funds to escrow at the appropriate time and put the loan on our books, where it would stay, earning the bank the going rate of interest for home loans.
I’m sure there are still some community banks that offer personal service instead of having you talk to someone in the Philippines about your credit card, but I wrote this to make the point that banking—and mortgage banking in particular—had changed.
Banks started selling loans to investors while keeping the servicing. In other words, the borrower would keep making his mortgage payments to the bank that made the loan but the payment would be sent on to the investor who had purchased the loan from the bank. The investors were usually pension plans or large investment funds.
But this change in mortgage lending was just beginning.
A group of leading bankers would soon turn mortgage banking into a cancer that would eat the industry alive. What follows is the earlier beginning to our story “The Financial Crisis: A Look Behind the Wizard’s Curtain”—a chronicle of the men and institutions who designed the current crisis: a crisis by design.
The purpose of this financial crisis is to take down the United States and the U.S. dollar as the stable datum of planetary finance and, in the midst of the resulting confusion, put in its place a Global Monetary Authority—a planetary financial control organization to "ensure this never happens again."[emphasis mine, Steve]
But I am getting ahead of myself.
It is 1985 and the Land of the Rising Sun has become the planet’s largest creditor nation. Words like Toyota, Panasonic and Yamaha have become part of the lexicon in places such as Omaha, Cleveland and Des Moines. In 1970, the ten largest banks in the world were American. By the end of the eighties, six of the ten largest banks in the world are Japanese.
The Japanese banks were pampered and protected by their government like corporate rock stars. They were permitted to operate with small amounts of reserve capital, which gave them an advantage over other banks and enabled them to expand their market share at the expense of their competition—the major money-center banks in New York and London represented by the dual-headed Darth Vaders of international finance, the U.S. Federal Reserve Bank and the Bank of England.
The Gunfight at the O.K. Corral had nothing on what was about to occur to the banking samurai of Tokyo.
In the eighties, governments had varying regulations about how much capital their banks had to maintain. These standards were supposed to ensure that banks had enough in reserves to protect themselves and their depositors against bad loans.
These “capital adequacy standards” were set as a percentage of the bank’s assets. In other words, if the capital requirements were 8% and a bank had $8,000,000 in capital, they could expand their balance sheet to $100,000,000 in assets (loans and other investments).
But let’s say the capital requirements were 4%. Taking the same bank with the same $8,000,000 in capital, they could carry $200,000,000 in loans and other assets, generating a great deal more income and profit for the bank.
If the capital requirements were 10%, that same bank could have assets of $80,000,000—fewer loans, less income.
You get the picture: the capital requirements dictated what amount of assets the bank could carry. And the amount of assets determined how much income the bank could generate.
The Japanese banks had low capital requirements—one central banker reported them to be as low as 3%. Others claimed 6%. But in either case, they were low. The low capital requirements enabled them to hold more assets, which in turn spun off more income. The elevated income enabled them to offer lower interest rates on loans than the competition could. Their market share grew.
In time, Japanese banking became the Godzilla of international finance—a condition that did not sit well with Alan Greenspan, the recently appointed Chairman of the Federal Reserve Bank, who dealt with the matter like a Mafia chieftain whose turf had been violated by the yakuza.
As soon as he assumed the throne at the Fed, Greenspan, complaining about advantage enjoyed by the Japanese banks, went to his comrades in coin at the Bank of England and executed a two-party agreement establishing capital adequacy standards for U.S. and UK banks. The two of them then turned on their pinstriped Nipponese brothers and told them that they were going to be excluded from Western markets unless they agreed to an international standard of capital adequacy.
The Japanese, dragged to the agreement like a dog to a bath, signed the agreement on July 15, 1988, along with the central bankers of nine other industrialized nations, setting forth “international . . . regulations governing the capital adequacy of international banks.”
The agreement was signed at the secretive Bank for International Settlements in Basel, Switzerland, and is referred to as the Basel Accord. However, since a second accord was signed in 2004 (which we deal with in “Behind the Wizard’s Curtain”), this agreement is now referred to as Basel I and the 2004 agreement as Basel II.
I have dealt with the Bank for International Settlements in the two previous articles on the financial crisis and am going to take the liberty of quoting from them here. First, "A Look Behind the Wizard’s Curtain":
Central banks . . . govern a country’s monetary policy and create the country’s money.
The Bank for International Settlements (BIS), located in Basel, Switzerland, is the central bankers’ bank. There are 55 central banks around the planet that are members, but the BIS is controlled by a board of directors, which is comprised of the elite central bankers of 11 different countries (U.S., UK, Belgium, Canada, France, Germany, Italy, Japan, Switzerland, the Netherlands and Sweden).
Created in 1930, the BIS is owned by its member central banks, which, again, are private entities. The buildings and surroundings that are used for the purpose of the bank are inviolable. No agent of the Swiss public authorities may enter the premises without the express consent of the bank. The bank exercises supervision and police power over its premises. The bank enjoys immunity from criminal and administrative jurisdiction.
In short, they are above the law.
And from the second article, "Hitler’s Bank Goes Global":
But then the Bank for International Settlements (BIS) . . . has never seen transparency as one of its core values. In fact, given its fascist pedigree, transparency hasn’t been a value at all. Known as Hitler’s bank, the Bank for International Settlements worked arm in arm with the Nazis, facilitating the transfer of gold from Nazi-occupied countries to the Reichsbank, and kept their lines open to the international financial community during the Second World War. . . .
It is like a sovereign state. Its personnel have diplomatic immunity for their persons and papers. No taxes are levied on the bank or the personnel’s salaries. The grounds are sovereign, as are the buildings and offices. The Swiss government has no legal jurisdiction over the bank and no government agency or authority has oversight over its operations.
Basel I established the terms for the minimum capital requirements for the ten central banks that signed the accord: Belgium, Canada, France, Italy, Japan, the Netherlands, the UK, the U.S., Germany and Sweden (Switzerland signed later).
A standard had been set: banks had to maintain capital of 8% of their assets. But according to the agreement, all assets were not the same. Basel I introduced a special system of weighing the risk of different kinds of assets and loans—they referred to it as risk-weighted assets. For example, corporate loans to businesses called for a higher percentage capital than mortgage loans. As a consequence, banks started cutting back on corporate loans and seeking ways to expand their mortgage portfolios.
As for the Japanese banks, they had to adjust. But the Nikkei Index (the Japanese stock market) was booming at the time, so they didn’t consider it a big problem. Between 1984 and 1989 the Nikkei had risen from 11,500 to 38,900. As stocks increased in value, the capital base of the Japanese banks (made up largely of stock) increased as well.
Things were cool. Sake flowed, geishas danced and banker-san was happy. But the good times were short lived. Less than a year later, in May of 1989, the Nikkei began a decline that eventually brought the index down to below 8,000.
As went the Nikkei, so went the capital structure of the banks. Down they went, slashing their ability to lend and sending the entire Japanese economy into a recession that has been called the “Lost Decade.”
You don’t cross the Fed and the Bank of England and get away with it. Not on this planet.
It was a different story for the U.S. banks. The new capital adequacy standards laid down as Basel I had loopholes through which the American bankers were able to drive their Porsches to bonuses larger than the budgets of several third-world countries.
Writers have referred to the consequences of Basel I as unintended.
Were they really?
Greenspan not only sat on the board of directors of the Bank for International Settlements, he was also of course the Chairman of the Federal Reserve Bank. From this position he kept interest rates suppressed at abnormally low levels, ushering in a lethal binge of credit excess in America; advanced the Community Reinvestment Act, which mandated mortgage lending to anyone who drew breath (and some who didn’t); and, along with Robert Rubin and Larry Summers, actively fought efforts to regulate the exploding market in toxic financial instruments called derivatives.
This included using his influence to help eliminate laws that had been on the books for decades protecting people from speculative excess and abuse in financial markets (see “The Financial Crisis: A Look Behind the Wizard’s Curtain”).
Derivatives are what Warren Buffet has called “financial weapons of mass destruction”—financial products that seem to have been imported from a galaxy far, far away.
Derivatives are financial instruments that derive their value from some underlying asset. An example of a derivative is one you have heard a lot of lately: mortgage-backed securities.
Here’s how this works. Mortgage loans are packaged up and legally pooled into a financial document called a security. This simply means that there is a formal certificate that represents a group of loans. The investor buys the security. The security pays interest to the investor, which is based on the interest rates of the underlying mortgages.
You can see where the name comes from: the financial instrument, the mortgaged-backed security, is backed by the mortgages.
It is a derivative because the financial instrument, the security, derives its value from the underlying assets (the mortgage loans).
So what were the intentions of the central bankers when they crafted Basel I? One was to take out the Japanese banks. Mission accomplished.
The other was obvious: to curtail lending to corporations while focusing the attention and appetites of those same lenders on the increased income and bonuses available by investing in mortgage-backed securities.
Under Basel I, banks only had to have half as much capital to invest in mortgages as was required for corporate loans. Or put another way, they could invest twice as much in mortgages as they could in corporate loans with the same amount of capital. The more loans, the more income.
What else did the bankers of Basel think was going to happen other than an explosion in mortgage lending? Nothing of course. And later, when the lenders bought credit insurance for the securities, the capital requirements were reduced even further, pouring gas on what had by then become a raging inferno of credit speculation.
It wasn’t actually called credit insurance, though. It had another one of those off-planet names: credit default swaps, but in essence that’s what it was. Here’s how this piece of the puzzle fit.
The bank would buy a contract from an insurer that covered the credit risk of the derivative. In other words, the bank would pay a fee to the insurance company—just like an insurance premium—and if the security turned bad, if the loans failed to pay, the insurance company was obligated to cover the bank’s loss.
When banks bought credit default swaps for their derivatives from an AAA-rated insurance company, the derivative itself took on an AAA rating.
When the derivative received an AAA rating, the bank’s capital requirements—already reduced because the derivatives were made up of mortgages—were reduced even more, freeing up more capital, which enabled them to buy more derivatives, which . . .
There were just a couple of small problems. The credit default swaps—not technically being insurance—were entirely unregulated. This meant that the insurance companies that issued these—think American Insurance Group (AIG), which was the world’s largest insurance company and rated AAA, but which is now owned by thee and me—did not have to carry reserves to cover the loss if the trillions of dollars of derivatives they insured went bad.
The other was the fact that with the passage of the Community Reinvestment Act, the mortgage market was awash in subprime loans (borrowers with poor credit, low income, and no or low down payments). And it was these loans that were packaged into mortgage-backed securities by the trillions and sold to virtually every major bank on the planet, making the international financial structure pregnant with disaster.
It was at this point, having originally set the stage, that the world’s central bankers returned to the Bank for International Settlements in Basel, Switzerland, and issued a second set of rules referred to as Basel II. Included in the Basel II Accord was an accounting rule called mark to market, which brought the planet’s entire financial system to its knees. Mark to market was like pulling the pin on an enormous hand grenade made up of trillions of dollars of toxic derivatives.
On April 2, 2009, at a meeting of world leaders in London, the final card was played: terrified about the potential consequences of a planetary meltdown, they agreed to a plan that established a global financial dictatorship at the Bank for International Settlements called the Financial Stability Board. And this, dear friends, was the goal from the beginning.
If we are going to be realists, we must acknowledge that Greenspan—along with a few fellow monetary jihadists like Paulson, Rubin, Summers and Geithner—planted the bomb in Basel I, lit the fuse by ensuring any meaningful protection against it was removed, and then detonated it with Basel II. What followed the explosion was a global financial coup, which was executed in April.
It took a while for the fuse to burn and the bomb to detonate, but when viewed as a well-constructed plan, the intentions seem inescapable: this financial crisis was and is a Crisis by Design.
The story of how Basel II created the worldwide financial crisis and how the Financial Stability Board was created is covered in detail in my earlier articles on this subject: “The Financial Crisis: A Look Behind the Wizard’s Curtain” and “Hitler’s Bank Goes Global.”
It is the second article that spells out what action to take, and what can and should be done.
Written by Bruce Wiseman
Monday, 22 June 2009
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