No - Americans, Paradoxically, Do Trust The Big Banks

Tyler Durden's picture

Overnight, Frank Partnoy and Jesse Eisinger released an epic magnum opus titled "What's Inside America's Banks", in which they use over 9000 words, including spot on references to Wells Fargo, JPM, Andy Haldane, Kevin Warsh, Basel II, Basel III (whose regulatory framework is now 509 pages and includes a ridiculous 78 calculus equations to suggest that banks have to delever by some $3 trillion, which is why it will never pass) to give their answer: "Nobody knows."

Of course, while this yeoman's effort may come as news to a broader cross-section of the population, is it well known by anyone who has even a passing interest in the loan-loss reserve release earnings generating black boxes formerly known as banks (which once upon a time made their money using Net Interest margin, and actually lending out money to make a profit), and now simply known as FDIC insured Bank Holding Company hedge funds. This also happens to be the second sentence in the lead paragraph of the story: "Sophisticated investors describe big banks as “black boxes” that may still be concealing enormous risks—the sort that could again take down the economy." So far so good, and again - not truly news. What however may come as news to none other than the author is that the first sentence of the lead-in: 'Some four years after the 2008 financial crisis, public trust in banks is as low as ever" is, sadly, wrong.

Why is it wrong?

Because as we showed a week ago, the general public's "trust" and faith in banks is not expressed through the stock price of their equities, something which these days is largely determined by the Federal Reserve and the banks themselves, who not only give each other "Conviction Strong Buy" upgrades on a frequent basis but also buy each others' stocks in the biggest circle jerk imaginable, or even through slurred anecdotes at the local pub bashing Ken this and Jamie that. Instead it is expressed by how much trust the general population - the public - has put on deposit, literally, in the form of money, in either checking or, worse, savings (because under ZIRP there is no interest income, and having a savings account merely locks up one's withdrawal options) accounts with various financial institutions, or as The Atlantic calls them black boxes.

The truth is, that as of December 18, there was a record $9.2 trillion in total bank deposits: this is not only the evil 1%-ers money, but money from mom and pops - the public - who have saved cash all their lives, the bulk of it from hard work, and instead of keeping it in cash have decided to hand it over to the banks for "safe keeping." As a reminder, deposits (even savings deposits under ZIRP) are the effectively equivalent of currency in circulation. Or physical money. Money, which in a fractional reserve system is created by the fed and by private commercial banks (sometime it is surprising how much confusion there is about the money creation process: we will address this in a later article) when they create loans.

The problem, as we noted recently is that since the Lehman failure, US commercial banks have not created one incremental dollar in loans, and in fact the total amount of loans outstanding has dipped by some $120 billion in the past 4 years! And yet US bank deposits keep soaring, and as noted above have just crossed $9.2 trillion for the first time ever. Thank you Federal reserve excess reserves and shadow banking system repo (and other) transformations.

In other words, so explicit is the trust in banks and stability of the Fed-backstopped banking system that a whopping $2 trillion in excess deposits over loans have been parked at US banks.

Notably, all of the above ignores the fact that as of January 1, 2013 the FDIC's Transaction Account Guarantee program expired, making millions of depositors effecitvely unsecured creditors in what are the world's most insolvent (and most central bank backstopped) banks. This consolidated unsecured claim according to the WSJ amounts to some $1.5 trillion.

And it gets worse, because one aspect untouched in the Atlantic piece is that it is this excess differential in deposits over loans that allows banks to all be glorified, depositor-insured hedge funds and use the excess delta to gamble with risk free, Treasyrt backed depositor capital (courtesy of the Gramm Leach Bliley act which ended Glass Steagall) in the way that the JPM CIO was nothing but a massive "hedging" hedge fund with $323 billion in AUM.

This is money that the "London Whale" and his team used to distort the fixed income market so much they effectively became the market (as the Atlantic piece touched upon).

One can only wonder what other assets the banks have invested using this excess deposit base, although we are confident that valiant mainstream media effort to truly uncover the depth of the US banking system's manipulation of the US saver will gradually become apparent and known to all. 

It is precisely this "money on the sidelines" that allows the banks to bid up risk assets to such stratospheric levels that the Fed can claim victory, that the financial system can continue the theater that it is capitalized thanks to a substantial equity tranche, and that social orders can be preserved in a society in which the only thing that appears to matter is the closing trade of the Russell 2000.

Yet the paradox deepens when one considers that it is precisely this money being parked with the banks, instead of being demanded for circulating purposes that has so far avoided rampant inflation. Putting the $2 trillion in just excess deposits over loans in perspective (not the entire $9.2 trillion): there is $1.1 trillion of currency in circulation. Should all this money be pulled and enter the broader economy, one can kiss any CPI data massaging goodbye.

Which brings us to the jist of the story: on one hand, the public may be disenchanted with the US banking system, but on the other, the explicit trust has never been greater. And therein lies the rub: should this trust evaporate, and should deposits be pulled for whatever reason, not only will banks be forced to unwind a myriad in risk positions they likely still have on, but the sudden increase of what even the Fed would have to admit is M1 would result in an explosion in the prices of goods and services as suddenly three dollars are chasing what previously there was only one dollar in demand for.

So, yes, the Atlantic wrote a great story on the black box nature of the US bank system, but they missed the true punchline: America's banks and the American public are gripped in the most hated yet symbiotic "love hate" relationship in history. Should the trust truly evaporate, then the banks will have no choice but to pull the proverbial pin and send risk tumbling, and inflation soaring.

Perhaps that is the precise reason why nobody: not bank management teams, not sellside analysts, not regulators, not accountants, certainly not the Fed, not legislators, and last but not least, not the US public, is ready or even cares for a true peek inside the black boxes that make up the US banks?

Pick your poison?

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IvyMike's picture

People trust City-Statism (Civilization) too, another ponzi scheme. What else would you expect?

economics9698's picture

"State power ultimately depends on the perpetuation of a body of beliefs and superstitions about the benevolence and necessity of the state, and the alleged evils of private property, free enterprise, individual liberty, and the civil society. Because the citizens always outnumber any ruling class by many orders of magnitude, they must somehow be made to acquiesce in the ruling class’s plundering of their society in the name of “progress,” “nationalism,” “the greater good,” “socialism,” or whatever.

Beatings, imprisonment, torture, and mass murder are time-tested tools of the state, but they can be very costly and can instigate a revolution. Therefore, relentless propaganda is often relied upon instead to secure the power and privileges of the state and statists.

Once the people of the Soviet empire finally understood that socialist propaganda was all a big lie, the regime was doomed. At that point it was always just a matter of how much beating, imprisonment, torture, and mass murder the thugs and criminals who ran the Soviet government could get away with to keep the system going."


NotApplicable's picture

The implicit backstop of TBTF cannot be considered "trust," but rather the lesser of two evils.

AldousHuxley's picture

I wouldn't put too much stock into what Americans do or trust en mass as they are pretty much ignorant bunch waiting for hard life lessons to be taught.
But stupidest are great to exploit and also entertaining according to Chinese

IvyMike's picture

State society = agricultural civilization, and needs brutal force in every one of it's various sociopolitical variants, whether babylonian, roman, socialist, or capitalist.

"Agriculture creates government." ~Richard Manning, Against the Grain, p. 73

"Civilization [State society] originates in conquest abroad and repression at home." ~Stanley Diamond, In Search of the Primitive: A Critique of Civilization, p. 1

"...we chose the latter [agriculture] and ended up with starvation, warfare, and tyranny." ~Jared Diamond, PhD, (UCLA School of Medicine,) The Worst Mistake In The History Of The Human Race

So anybody who advocates or promotes Civilization (City-State, State society) is necessarily a Statist.

economics9698's picture

Ivymike aka Greenbacker Mike.

SafelyGraze's picture

"but also buy each others' stocks in the biggest circle jerk imaginable"

urban dictionary suggests that perhaps this term is not quite sufficient as a metaphor

SAT 800's picture

It's possible he's referring to a particularly unfortunate thermonuclear test shot called "Mike", which, if I remember correctly, was in the "IVY" test series; hence- IVYMIKE-. it was a nice example of state authority gone coo-coo.

Ghordius's picture

"Monopoly on force", not "brutal force"
States or Cities have no monopoly on brutality

IvyMike's picture

A monopoly of force isn't brutal?


Ghordius's picture

ON force, not of. Like to spin-doctor?
"Free brutality is better?" two can play this game

Ghordius's picture

Upps... I advocate civilized behaviour... Damn!

IvyMike's picture

"Civilized" behavior = WAR.

"War is a staple of civilization. Its mass, rationalized, chronic presence has increased as civilization has spread and deepened."

~John Zerzan
On the Origins of War

Ghordius's picture

Staple? Perhaps. But no exclusive rights on it

IvyMike's picture

Study anthropology instead of parroting City-State (Civilization) bromides that soothe and comfort.

The only way to have an organized and prolonged conflict -- that's what war is -- is to have the agricultural surplus of Agricultural Civilization.

An army does march on its stomach.

akak's picture

And a troll apparently marches on his keyboard.

IvyMike's picture

Any "libertarian" who defends Civilization (State society) while calling others "statists" has both Stockholm Syndrome and a full-blown case of the Stupids.

The liberty that sincere libertarians seek was destroyed long ago when State society (Civilization) annihilated Non-State society.

As the famous anthropologist Elman Service noted:

"Many people living? in non-state societies enjoy lifeways that a number of Americans seem intent on reinventing..."


economics9698's picture

USA 1776-1860, 1879-1912.

Victorio's picture

"Civilization" and the "State" or "State Society" are obiously not mutually inclusive....  stupid.



IvyMike's picture

Why are idiot LoLbertarian in denial of readily observable data? Civilization = City-State Society.

"The word civilization comes from the Latin civilis, meaning civil, related to the Latin civis, meaning citizen, and civitas, meaning city or city-state."

~Larry E. Sullivan (2009), The SAGE glossary of the social and behavioral sciences, Editions SAGE, p. 73

"Civilizations have distinctly different settlement patterns from ordinary societies...civilizations have a more complex political structure, namely the state. State societies are more stratified than other societies; there is a greater difference among social classes. The ruling class, normally concentrated in cities, has control over much of the surplus that constitutes wealth and exercises its will through the actions of a government..."

~The International Society for the Comparative Study of Civilizations
Western Michigan University

"Today less than 0.001 per cent of the world's people live outside of the direct control of state societies."

~Elman R. Service (1975)
Origins of the State and Civilization: The Process of Cultural Evolution.
[exerpt available here: NON-STATE AND STATE SOCIETIES ]

Victorio's picture

Bullshit. It is nothing more than the dynamic interaction of individuals that realte to technology, education, division of labor,art ect.  "Civilizaton" or the state of being "civilized" is mostly just a self proclimation used to justify the destruction of another groups life and culture as they are not worthy since they are not "civilized".   The creation of the "state" or mafia is not mutually inclusive with the expression of the aforementioned dynamics. I dont care what your bought and paid for indoctrinated academics or your self rightous ass thinks.       

p.s. since when is blowhard soft science vomit considered data?

Ghordius's picture

I'm always very fond of those theories about the return of the non-state societies

sadly I have to see it skeptically, they have a very powerful enemy: imperialism

(and of course it's newest head, corporative-financial imperialism)

if you want the return of the non-state, you'd have to get rid of that beast, first

interestingly, the internationalist socialists have this goal, too, btw

politics makes indeed strange bedfellows

IvyMike's picture

There is one possible City-Statism (civilization) destroyer: global thermonuclear war. It may well be inevitable.

"Every 'small' war pulls the trigger in nuclear roulette. Each of these probabilities, by itself, is small. But taken together over a year's time, they add up to a cumulative probability which is no longer small. Taken together over a century, they make nuclear war virtually INEVITABLE."

~Dr. Martin E. Hellman
Stanford University

But other than that, I don't see any return to Non-State society, such as "anarcho-primitivists" may hope. But those folks do have an extremely well-informed critique of State society (civilization.)

Ghordius's picture

American? Just asking
Meanwhile we have constantly and endlessly war, war, war

Syria: we don't even fucking know if 40'000 or 60'000 dead yet

There is a point when even fiat magic can't finance moar war

1. Thermonuclear
2. ???
3. Profits!

IvyMike's picture

Sure there's war.

"War is a staple of civilization [State society]. Its mass, rationalized, chronic presence has increased as civilization has spread and deepened."

~John Zerzan
On the Origins of War

Ghordius's picture

Btw, ever tried Gore Vidal?
Suggestion: "Perpetual War for Perpetual Peace", 2002

Element's picture

Hey dickhead, if you're going to troll, could you at least troll on topic?  Thanks

Ghordius's picture

my fault, I got sucked in and fed the poor starving creature

MeelionDollerBogus's picture

Humans are evolved for city & state society the way ants & bees are evolved to have a colony or hive.

It's critical to our survival. To remove it is to murder all humans.

Humans need infrastructure, running water, sewers, food transport.

We're past the point when all humans can be strong farmers, woodsmen, living off the land and if forced to do so with no city & no societal infrastructure 90% of humans today would be dead inside a month.

Then disease would wipe out the rest.

What foolishness to CHOOSE that.

sgt_doom's picture

I find TD's definition of deposits rather suspect, especially after perusing the last bankster derivatives report from the occ:


(It deserves a slow and careful read, especiall the parts about 97% of the derivatives being credit default swaps (CDS), while officially 40% of those swaps are in the speculative category (naked swaps, etc.).

As far as the American people, about 100% of everyone I come in contact with are clueless as to the causes of the economic meltdown (ultra-leveraged bankster run coupled with the largest insurance swindles in human history, e.g., AIG, Magnetar Capital, Ambac, MBIA, etc.) as well as still believing America is a consumer-based economy --- no way in perdition, when that 70% consuption figure derives mostly from the top 15% doing the vast majority of the consuming.

Terminus C's picture

I am also curious as to what constitutes a deposit in this case.  Are the bail out monies floating around in the TBTF's considered 'deposits'?  If this is truly the American people with this much money in the bank then why is the savings rate of Americans dropping?  Are these corporate deposits?

Inquiring minds want to know.  Something is fishy about this article.  I am not in dispute with the fact that most people are clueless to the whole meltdown and why it is happening but I don't think the American public has any money to put in the bank.

Dingleberry's picture

uh.....the unwashed re-elected Obama and 91% of Congress.

What did you expect? A fucking epiphany?

economics9698's picture

"What did you expect? A fucking epiphany?"

No just the shaft up the ass. 

dow2000's picture

Stockholm syndrome?


lolmao500's picture

And when they lose it all, they'll say they didn't know!

In other news :

New York Legislature to Introduce Bills Making Posession of Any AWB Firearms Illegal, Remove Grandfathering

The New York Legislature is set to consider a bill that would vastly expand the state’s current “assault weapons ban.” Here’s some of the, er, highlights:

- All firearms must either be rendered inoperative or surrendered to the police. No grandfathering, no exceptions.
- Removes the “grandfathering” exception for possession of magazines with a greater than 10 round capacity.
- Bumps up AWB-firearm possession from 3rd degree “criminal possession of a weapon” to first degree, putting simple possession of such a firearm at the same level of punishment as Rape 1 or Manslaughter 1.

Oh, and the whole thing is severable. So if one section is ever declared unconstitutional, the rest of it stays.

Jam Akin's picture

Something similar going on in IL now, only much sneakier, because the bill(s) give the appearance of permitting grandfathering but with mandatory registration for many guns in yesterday's published versions.  

otto skorzeny's picture

from : NRA says IL senate dems don't have the votes and are going to pull the bills. The war has just begun.

lolmao500's picture

I wouldn't trust the NRA much, after all, they've helped pass every gun control bill.

otto skorzeny's picture

I think they had a "come to Jesus" moment when Slick Willie got the gun ban and all of those Southern Dems got their asses kicked out after that to help the Repubs take Congress. The NRA is hopefully going to take a stand on any type of ban of anything. I think I'll go feed my AK 75 drums now

Silver Bully's picture

"I think they had a "come to Jesus" moment..."

Correct. There are PLENTY of Dems who are opposed to gun control or else they won't stay in office long - and they know it. Only those congress critters with a local constituency supporting gun control (like Feinstein) rub their hands in glee at the thought. Meanwhile, gun manufacturers are loving the short term effects of the bans because sales are spiking. But those bans have to get overturned or else gun sales will, uh, decline.

Meanwhile, Obama thinks he can get a gun control bill (not just assault guns, Feinstein's ban is small potatos) through Congress. He might. But everyone knows any gun control law is going to quickly face a hostile Supreme Court. There will be a lawsuit filed within an HOUR of the law's passage. Hint: precedents like the D.C. gunban getting overturned happen for a reason. Precedent matters. Unless the Dems have some kind of black mail on a certain chief justice, any gun ban faces a near-certain take down at the hands of the Supremes. Feinstein's relatively toothless ban (the gun registration database she advocates is the main cause for concern, not so much the ban itself) is an example: every U.S. politician alive knows how difficult it will be to craft a gun control law (let alone pass it).

itstippy's picture

"... every U.S. politician alive knows how difficult it will be to craft a gun control law (let alone pass it)."

That's why Congress on both sides, Democrat and Republican, would love a nation-wide slugfest debate on gun control.  Back and forth, cater to your constituancy, blather on and on (with emotion).  Wave flags.  Wave copies of the Constituation.  Wave frightening photos of "black" guns around.  It's the perfect issue.  Better than abortion even, which is also excellent.

Both sides want to debate ANY issue but the budget.  It's the one thing they need to focus on, but there's no "winning" position to take with their constituancies.  No matter what they do on the budget they're going to get collectively tarred and feathered eventually; it's that big of a mess.

Rustysilver's picture

CT legislation is talking the same $hit.

HD's picture

Bans will make everyone safer. Here's another weapon of mass destruction...

"...attacks in just seven months in 2010 that killed nearly 20 people and wounded more than 50."

 A store just for homicidal maniacs that needs to be shut down:

John Doeman's picture

Let's be honest. The best weapon of mass destruction is the economy.

It is the ultimate WMD. 


jayman21's picture

Let's be honest. The best weapon of mass destruction is the economy.


Let's be honest. The best weapon of mass destruction is the Private Federal Reserve Corporation.


Fixed it.

otto skorzeny's picture

would a cutlery block full of knives be considered a high-capacity mag?