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Forget Ebola - Here's Why US Banks Are Now Extremely Vulnerable
Submitted by Simon Black via Sovereign Man blog,
For a casual observer of the US economy (most “experts”), you could say that things look pretty good. Unemployment is at its lowest rate in six years. Earnings of S&P 500 companies are higher than ever, while their debt is lower than it’s been in the last 24 years.
Nonetheless, rather than getting excited for good economic times, the big commercial banks are all battening down the hatches. They’re preparing for bad times ahead.
I often stress the importance of being prepared, so in theory, that should be a great sign.
But then, you look at what they are “defensively” investing in, and you see that what they consider as prudence is simply insanity.
What banks are stockpiling these days are US government bonds, and they’re not doing this casually, they’re going nuts for them.
In just the last month alone American banks increased their holdings of US treasuries by $54 billion, to a record $1.99 trillion.
Citigroup, for example, held $103.8 billion worth of bonds at the end of June, up 19% from the end of last year.
This is like preparing for an earthquake by running out and buying whole new sets of porcelain dishes and glass vases.
All it’s going to do is make things more dangerous, and even if you somehow make it through the disaster, you have a million more shards to clean up.
With government bonds you are guaranteed to lose both in the short-term and the long-term. Bonds keep you consistently behind inflation (even the deceptively named TIPS—Treasury Inflation Protected Securities), so the value of your savings is slowly being chipped away.
But that’s nothing compared to the long-term threats of the US government not being able to repay the loans.
Facing $127 trillion in unfunded liabilities – which is nearly double 2012’s total global output – and with no inclination to reduce those numbers at all, at this point disaster for the US is entirely unavoidable.
Never before in history has a government stretched itself so thin and accumulated anywhere close to this amount of debt.
So when the day comes, it won’t be a minor rumble. It will be completely off the Richter scale.
These facts about the US government are in no way secret. Every bank out there knows it, yet they keep piling in.
Why do they keep buying bonds that they know the government will never be good for?
Even though people know in their guts that the government has no earthly possibility to ever repay its debt, on paper it’s a no risk investment.
The US government’s sovereign debt has an AA+ rating after all. They might not make money off it, but no fund manager and investment banker is going to get fired for investing in “risk-free” US government debt.
Under the rather arbitrary Bank of International Settlements Basel capital adequacy rules government debt rated at least AA continues to carry a “zero risk” weighting. Meaning that banks do not need to set aside capital against it.
Beyond that, regulations imposed after the last crash to reduce risk require banks to hold $100 billion in liquid assets, which of course includes bonds. Thus, they are not only encouraged, but actually forced to buy government bonds.
With a combined position of nearly $2 trillion in US government debt, against which they hold little or no capital buffer, US banks are now EXTREMELY vulnerable to a bond market sell-off.
In the aftermath of the meltdown of 2008, banks were made to pay multi-billion dollar fines for having “knowingly sold toxic mortgages to investors”. Will politicians and central bankers ever be held responsible for not only “knowingly selling” their toxic debt to investors, but actually forcing it on the banks?
The global economy shivered when the consequences of lending to subprime homebuyers came to fruition. Just imagine how it will quake when the US government – the largest subprime borrower in history – eventually defaults (or hyperinflates) its debt away.
There’s nowhere in the world the tremors won’t be felt.
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I've been yapping about this for years. Some of us remember the S&L meltdown, not a few, but the whole industry.
Financial upside down on interest rates = Road Kill.
#EBOLA
Who Do They Think We Are?
The administration’s Ebola evasions reveal its disdain for the American people.
https://tersee.com/#!q=ebola&t=text
Hey wait a minute, how do you expect us to forget scamola when ever other article is about it, WTF?
Note: ebolie and scamola may be used interchangeably. LOL :)
US Banks, only?
Perhaps Ebola is a distraction from a looming economic catastrophe? Of course, this presumes enough intelligence exists, to coordinate such a distraction.
I do remember bankers actually going to jail during the S&L crisis.
LOL. Analysts will always be analysts.. They do calculations.
People, hear me out.
Calcuations assume there is rule of law. We all know there is no rule of law.
Market is no longer calculations. Market is simply digits on computers which can easily be marked up or down manually.
It does not matter whether X bank is solvent or not, it matters nothing.
What matters is who makes the decision that they will remain alive or not.
The system is centrally managed, that's why the world is moving on.
I see your point, but it matters for those who are not Too Big To Fail.
Consider this. Even the largest European countries have only a handful of banks.
Depending on what you count, the US has ~ 7,000 to 10,000,
It's astounding how so few can see the facade that Wall Street is.
A pyramid of money that’s only free for predators to slave the many, and the world, through usury.
Listen.
I think I see his point also. Confidence is the foundation of their system. Those that perfect, and add to the "NOTION" of confidence in the CB's product are the one's that advance.
See GS. Open your doors to the politicians. "Respectable" folks add instant confidence.
TRADE is the only thing that matters, period. Time and time again this is demonstrated. Once productive countries/people/corporations feel that they are not getting something of real value in exchange for their labor, they stop trading...
...then the world will go to war in earnest.
Same as it ever was.
https://www.biblegateway.com/passage/?search=Ecclesiastes+3&version=NIV
barter is the nature of the economy.
Few people know that Germany holds no more than $200 billion reserves, They don't want digits on computers for their machinery. They want real stuff, almost barter
the government/central planners will enforce their system with ever more force that take our liberties until there is either a revolt or compliance. look to china and japan. are we different?
many would say we are different- euro judeo christian roots. ha, it is all churned to a melting pot of compliance imo. look what hiltler did to the sheeple in germany. history has its fair share of revolutions. many more compliances as it creeps upon people until the hammer comes down.
imo it is all about ammunition supply, plain and simple-stock up so you at least have a tool of last resort to defend what liberty you or i have left...
Listen ekm1,
Careful bro!
"People, hear me out."
Agree with you. It's sort of like talking about how you'll retain your ethics if you're starving. It's all well and good to discuss it, but in the end you'll steal and kill your neighbor for food. Bonds going up is the equivalent to a government being like a starving man. Bonds will be defended at all costs, including changing laws, war, government theft, etc.
It depends on who is ruling.
If oligarchs who are harmed by artificial defense of the financial system take over, then they will obliterate it like they almost did it in 2008.
There is always oligarch infighting.
Those 2008 guys eager to wipeout financial system, they are coming back strong again, with the help of King Abdullah of the Kingdom of Saudi Arabia.
Ultimately, King Abdullah is the actual chairman of the Federal Reserve when he wants to be, of course, with Pentagon approval
Fair enough. Though it's hard to see what players wouldn't be significantly harmed. It would be the end of the US and would destroy many other countries. It would be difficult to predict or control the outcome.
It is abundantly clear
Bank lobby is ruling since 2009 when they brought Obama to power and they are trying to subdue Military Complex under their control.
That is like a cat trying to subdue a tiger.
The tiger will eventually get really upset, like in 2008
Ah, OK, I understand your point a bit better now.
The rating of the USA is AA+ . How is it possible with a debt ot about 18 trillions ? Either the rating agencies tell selective fibs or it is just a joke !
To the CDC Director.
Marcy Playground - St. Joe On The School Bushttp://m.youtube.com/watch?v=QPWZZ4QaSQ0&desktop_uri=%2Fwatch%3Fv%3DQPWZ...
The bankers can find a scrap of rope and hang themselves.
I imagine the fed has also blackmailed the banks to buy the bonds. after all, they MUST OBEY the hand that feeds.
Running out of places and people to take 'em, the FedRes is stuffing them in every nook and crannies they can find.
What happened to the big buyer in Belgium?!
An American, not US subject.
"Don't forget to write the banksters' CONgressman from your district..."
jim willie says the belguim bulge was china off-loading treasuries to finance the BRICS new bank.
"Never before in history has a government stretched itself so thin and accumulated anywhere close to this amount of debt."
Merica', FUCK YEA!!
Ebankola!
Funny I haven't felt sorry for the poor bankers for days or even thought about them.....hmm?
This article is a crock of shit. The bonds will ALWAYS be paid in nominal terms. A sell-off in bonds won't sink the banks since they are no longer required to recognize their (paper) losses thanks to mark-to-maket being abolished nigh on five years now.
Fear mongering article. Not even a good one.
Certainly, European Banks are in several times worse shape. and they let one go bankrupt every now and then; could be a disaster over there at any time. I agree about the article; it's "click bait" I think it's called.
I'm sort of getting the idea that "Simon Black" is a crock of shit?
B-Movie Doom Porn?
wish i could have my debt back, since it don't mater,ha...
if you want your debt you can keep yor debt, because you didn't create that debt!
Well said ... thanks for saving me the keystrokes. For the life of me I can't figure out why they keep letting this guy post articles on ZH ..
The communistic system you write about will fail and collapse, no matter how many lousy tricks are being invented by the fiat money schmucks. Megalomane junkies, they simply never learn. The most hated word combination in the world after a few years: "financial engineering".
yes agreed, and what is the bank going to put on its balance sheet besides t's? corporate debt, stocks, houses, commercial r.e. its all in a bubble. maybe gold and oil.
Misread
"Facing $127 trillion in unfunded liabilities – which is nearly double 2012’s total global output "
WTF?
there's no liquidity problem here, move along...
it's not about what is said in the debate;
it's always about what is not said. as long as they don't sell; and why would they-- what sell off are we talking about-- what problem?
If the banks hold their US treasuries to maturity, then these cannot be counted as "liquid" assets to meet emergency needs.
In order to avoid insolvency, the banks arranged to change accounting rules to show their assets at cost, regardless of the market. This presupposes that these assets are held to maturity and are not liquid.
This is not the first time banks held an enormous amount of US treasuries on their books. It also occurred at the end of WWII.
In the current situation, the Fed and the Treasury simply cannot permit interest rates to rise significantly, as that would require most of the federal budget to be devoted to debt service. In order to prevent interest rates from rising, the Fed and the Treasury will continue to foster a lame economy, regardless of what they say.
Paper. Historians will write about it: how all of humanity bet their livelihoods, and even lives on what will soon become worthless paper. You can fool some of the people some of the time, but apparently with credit rating agencies you can fool nearly all of the people all of the time.
"The problem (with college graduates) it’s not ignorance, it is preconceived ideas"-- Hans Rosling
Cash, gold and UST. The new diversified portfolio. Sell all float scams and split between those three. Let companies like INTC ride because when the inevitable currency move hits, it will skyrocket.
The authorities are acting primarily to prop up governments as well as the economy by saving the financial system. It is important to remember these authorities are politicians and bureaucrats that want increased power and influence, and guess what, they may have hit the jackpot.
Those in power have joined with the banks to create the "Financial-Political Complex" that promotes the current financial policy and supports banks that are "to big to fail". These are the people who turn a market straight up at the blink of an eye. It should not bring comfort to the average man that these to unholy forces have joined together in such a union. More on this subject in the article below.
http://brucewilds.blogspot.com/2012/10/the-financial-political-complex.h...
All our allies who hate us now will truly hate us when their new masters begin recycling them.
http://www.usatoday.com/story/news/nation/2014/10/17/ebola-pentagon/1743...
its only funny for so long but you people literally need to shut the fuck up already
That is how the Consolidation game is played Simon.........
and along with keeping interest payments low on the debt, one sees the other reason why they need rates to be low. Low rates means these future cash flows of fiat (bonds) are 'bid' and keep an artificial valuation, and the discount rate on other 'collateral' stays low so cash flows are not discounted much and PV stays higher so balance sheets look better.
Package Debt as a Security.... Priceless.
China, Russia and India lastreando their currencies into gold.
Maybe Brazil and South Africa to do the same, mutatis mutandis.
Basket of currencies backed by gold according to the sweat of labor, commodities at fair prices.
The idea is to end speculation, insane greed.
Since time immemorial, banks were boxes of gold, not to the taste of the customer printed papers.
A country whose currency ballast is based on the production of weapons to kill innocent people around the world holding the largest war machine ever created will not end well.
The souls of many innocent cries justice.
: - /
The BRICS need to stop the mercantilism and let their currencies appreciate and turn to sound money, and liberalize their economy and trade will occur not under political reasons, but rather with other people who actually provide value in return, as opposed to worthless fiat.
and if that happens what is your plan? fight for the corrupt merican system? going to da front line, ta da ta da, cause i'm a yellow ribbon kinda guy, ha fucking ha, run for the hills and prep for the zombies called homeland security rounding up recruits to fight da war on false liberties imposed by dA GOVERNMENT WHICH HAS CONSOLIDAATED POWER TO CONTROL DA PEOPLE THAT NEVER SAW IT COMING...
you say what fellow snowtan? boundry waters permanent trip? superior national forest hangout?
Those who live under the "system", may find themselves crushed by the "system".
LOL. You are either ready, or you are not.
Unless they hold them to maturity. This article is worthless unless they tell us the average length til maturity.
It's all about having enough COLLATERAL, and not the chipping away of capital - that part is "hedged" in the derivatives casion. 2 T bonds when the interest rates derivatives are in the multiple 100 T...
All it took was an oil spill 20 years ago in Alaska to unravel our entire existence.
Christmas Even 2009 Obama signs the law giving the banks an emergency bail out of up to 4 trillion without having to go to congress. They can have one helluva party with the extra 2 trillion...........
Greshams Law works in bonds as well as currency.
They are all drooling over the 7000+ tons of Chinese gold about to be looted by America with the help of Hong Kong protests similar to what happened in Ukraine, Egypt, Thailand, Libya etc etc.
Wait for the US warships laden with gold gold gold
Yummy