Fed President Admits US Banks Have Only "Half The Equity They Need"

Tyler Durden's picture

Submitted by Simon Black via SovereignMan.com,

In a scathing editorial published in the Wall Street Journal today, the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, blasted US banks, saying that they still lacked sufficient capital to withstand a major crisis.

Kashkari makes a great analogy.

When you’re applying for a mortgage or business loan, sensible banks are supposed to demand a 20% down payment from their borrowers.

If you want to buy a $500,000 home, a conservative bank will loan creditworthy borrowers $400,000. The borrower must be able to scratch together a $100,000 down payment.

But when banks make investments and buy assets, they aren’t required to do the same thing.

Remember that when you deposit money at a bank, you’re essentially loaning them your savings.

As a bank depositor, you’re the lender. The bank is the borrower.

Banks pool together their deposits and make various loans and investments.

They buy government bonds, financial commercial trade, and fund real estate purchases.

Some of their investment decisions make sense. Others are completely idiotic, as we saw in the 2008 financial meltdown.

But the larger point is that banks don’t use their own money to make these investments. They use other people’s money. Your money.

A bank’s investment portfolio is almost entirely funded with its customers’ savings. Very little of the bank’s own money is at risk.

You can see the stark contrast here.

If you as an individual want to borrow money to invest in something, you’re obliged to put down 20%, perhaps even much more depending on the asset.

Your down payment provides a substantial cushion for the bank; if you stop paying the loan, the value of the property could decline 20% before the bank loses any money.

But if a bank wants to make an investment, they typically don’t have to put down a single penny.

The bank’s lenders, i.e. its depositors, put up all the money for the investment.

If the investment does well, the bank keeps all the profits.

But if the investment does poorly, the bank hasn’t risked any of its own money.

The bank’s lenders (i.e. the depositors) are taking on all the risk.

This seems pretty one-sided, especially considering that in exchange for assuming all the risk of a bank’s investment decisions, you are rewarded with a miniscule interest rate that fails to keep up with inflation.

(After which the government taxes you on the interest that you receive.)

It hardly seems worth it.

Back in 2008-2009, the entire financial system was on the brink of collapse because banks had been making wild bets without having sufficient capital.

In other words, the banks hadn’t made a sufficient “down payment” on the toxic investments they had purchased.

All those assets and idiotic loans were made almost exclusively with their customers’ savings.

Lehman Brothers, a now-defunct investment bank, infamously had about 3% capital at the time of its collapse, meaning that Lehman used just 3% of its own money to buy toxic assets.

Eventually the values of those toxic assets collapsed.

And not only was the bank wiped out, but investors who had loaned the bank money took a giant loss.

This happened across the entire financial system because banks had made idiotic investment decisions and failed to maintain sufficient capital to absorb the losses.

Nearly a decade later, Kashkari says that banks still aren’t sufficiently capitalized.

(He also points out that banks today are obsessed with pointless documentation and seem “unable to exercise judgment or use common sense.”)

The banks themselves obviously don’t agree.

As Kashkari states, banks feel that they currently have TOO MUCH capital.

Bizarre. They’re basically saying that they want to be LESS safe, like a stunt pilot complaining that his helmet is too sturdy.

I’ve written about this many times– the decision for where to hold your savings matters. It’s important.

In addition to solvency and liquidity concerns, there are a multitude of other issues, like routine violations of the public trust, collusion to fix interest and exchange rates, manipulation of asset prices, and all-out fraud.

(I personally got so fed up with our deceitful financial system that I started my own bank in 2015 to handle my companies’ financial transactions. More on that another time…)

Yet despite these obvious risks, most people simply assume away the safety of their bank.

They’ll spend more time thinking about what to watch on Netflix than which bank is the most responsible custodian of their life’s savings.

There are countless ways to figure this out, but here’s a short-cut: much much “capital” or “equity” does the bank have as a percentage of its total assets?

These are easy numbers to find. Just Google “XYZ bank balance sheet”.

Look at the bottom where it says “capital” or “equity”. That’s your numerator.

Then look above that number to find total assets. That’s your denominator.

Divide the two. The higher the percentage, the safer the bank.

Kashkari thinks the answer should be at least 20%, especially among mega-banks in the US.

Do you have a Plan B?

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nuubee's picture

Half? Isn't that over stated by maybe 100x?

Jim Sampson's picture

I'd say you're half way there at 100X

HRClinton's picture

Don't worry. The Goldman Sachs people in Trump's Administration will fix it all.

When I gave my paid speeches to GS, I heard them say that they "got just the right Fix".

When GS speaks, the Fed listens. 

NidStyles's picture

These fuckers are essentially bankrupt and they want to go around threatening the public and the President for not complying with their demands...

 

I'm not giving them a damned dime until they fix their own shit, and remove the foreign citizens. No foreign citizen should ever legally be allowed to be on the payroll for any financial institution. It goes the same for governmental positions as well.

 

Fuck them, they can get a real job, or shut the hell up and get back in their seat at the back of the bus.

 

The Banks should be shut down for mismanagement and the banksters rounded up and imprisoned as terrorists until they can stand for trial.

 

 

Croesus's picture

You gotta love this:

"the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, blasted US banks, saying that they still lacked sufficient capital to withstand a major crisis."

Just this morning, on Lefty NPR's news, they interviewed Tarullo, who said the exact opposite...basically that the banks are practically whole again, 'keep moving, nothing to see here'.

Lying pricks.

WhyDoesItHurtWhen iPee's picture

Say, isn't Neel Kash n Karry a criminal sociopath with quite a sordid history.

Now getting truthy.  End must be near.

BennyBoy's picture

 

Bank depositers are voters.

Hence the continuing bailout of lying cheating frauding banks by politicians.

And why lying cheating frauding banks will not change.

Delving Eye's picture

Let them print cake, er, money.

philipat's picture

Coming from the point man who gave away Billions of taxpayer funds to the Banks in exchange for nothing in the way of restructuring requirements or any accountability doesn't this seem a little hollow?

major major major major's picture

gotta listen between the lines... T-man was just saying they have a better understanding of their couterparty risk... not that they were in any better position to deal with it... just that they have a better grip on how fucked they are...

 

pitz's picture

Yup, the Fed actually uses H-1Bs.  Incredible, isn't it, that of the most prestigous government institutions in America, that the Federal freakin' Reserve (which has no reserves and isn't really "Federal") needs to use foreign guest workers.

East Indian's picture

Orwellian language: "guest workers" for slaves... what a little facade of "freedom" can do to slaves. they not only work for low wages, but the oligarch doesn't have to worry about their health, housing or feeding them.

JRobby's picture

(Laugh Track Deafening!!!!)

For years now this has been true. Years.

Small banks better be up to snuff or they will be sold off to TBTF so pay attention!!!!!

TheRideNeverEnds's picture

Simple solution, print more money and buy more equities. How is this a problem?

Dr. Richard Head's picture

Banks pool together their deposits and make various loans and investments. - 

WRONG.  Fractional reserve banking allows banks to creat money out of nothing, with no collateral backing. 

A. Boaty's picture

Only a bankster would down vote that.

Mikeyy's picture

That's not exactly right.  They DO create money, but the "fractional" part of of "fractional reserve banking" means they have to keep a fraction of the money created in reserve.  That may or may not be comforting to you...

Also, their assets (loans they make) are constrained by their capital.  Whether or not that capital is sufficient is the current discussion.

LawsofPhysics's picture

bullshit. ALL stimulus is in fact fungible.  Look at the total global money supply and global debt.  Remember in the current system debt=money.  BOTH are claims on real assets and work...

 

Good luck motherfucker.

barysenter's picture

One wooden nickel is a fraction. The 3 bars of tungsten are marketing props.

Ink Pusher's picture

The USD is actually worth $0.04 today.

I am thinking I might start accepting Canadian Hardwood Nickels as international trade settlement.

 

East Indian's picture

"constrained by their capital" 

 

The only constraint on the banker is the paper money in circulation, as ultimately the lenders have to collect enough papers out of circulation to repay their loans. And that is why they want to get rid of physical cash. No physical cash = 0% fractional reserve; and that means the banksters can create infinite "money" even with one dollar as their "reserve"; they can never fail. And they can by anything in the real world, any thing or service that we do spending our time and energy, for free. 

 

Banksters of the world, unite! We have pwned only one planet, and there are billions more out there. 

LawsofPhysics's picture

...and no real work or real risk!!!

fuck em, they have made themselves nothing but useless middlemen, stuck between the printer/computer and the producer/consumer in the real economy...

...time to execute the middlemen.

barysenter's picture

Equity is inversely proportional to Ctl+P. FRB stole it.

aliens is here's picture

Where is the fking money you people stole? Where is it?

Ink Pusher's picture

My bet? Cayman Islands, Monaco,Bermuda and  Hong Kong.

East Indian's picture

Cayman, Monaco or Bermuda are only the entrance to the wormhole; these wormholes end in the US. All the money ever invested in the tax havens ultimatly has to come back to the US for investment. How else will the Cayman bank earn its profit? 

 

This is what Dr Michael Hudson said; the tax havens were invented to collect back the dollars held abroad, for reinvesting in America, and in worst case, to cheat the foreign depositers. As this money is illegitimate in the customer's country, (untaxed, "black" money) even if a Cayman bank cheats a foreign customer, he cannot complain anywhere. Banksters stealing from the thief.

Unless, the customer is Russian mafia, in which case, not the bank, but the EU will openly steal their offshore money. 

booboo's picture

Mini Paulson Speaks. I hope many of you realize Neal is just trying to connect with the common man with the full intentions of running for office. I don't trust him no further than I could punt his bald ass head. or as the indians used to say, he speaks with forked tongue.

Pa Kettle's picture

"as the indians used to say, he speaks with forked tongue."

How'd that work out for them?

booboo's picture

Mainly refering to .Gov at least they knew where they stood which by the way is the same way it is going to work out for you assuming you are in your 20's but by your handle that is a bad assumtion. Hows Ma Kettle by the way? Sweet lady, funny as shit.

any_mouse's picture

Watch his eyes as he speaks. The dude is a more than a little strange.

After Paulson he hung out at PimpCo with El Erian and Gross.

Never Forget! [stolen from the Zionists.]

FreeShitter's picture

When the bail ins come then they will get the other half..

pitz's picture

Of course.  The other half was stolen by the employees/directors/boards and given to themselves as compensation dramatically in excess of what ordinary labour market principles would dicates (Goldman Sachs throws out how many applications of young finance grads!??).  Banks need a lot more equity to deal with the losses associated with rising long-term interest rates, something which has completely been lost in the "higher rates are good for banks" bullshit narrative that the media (ie: fake news) is trying to push these days. 

BGO's picture

Isn't Kashkari the tool who was famous for sucking on Hank Paulson's nuts during the last financial crisis? How the FUCK did this assclown end up in charge of Fed Bank oh wait nevermind.

1.21 jigawatts's picture

1/2 the equity but overflowing w/ Joos

MASTER OF UNIVERSE's picture

Ca$h-n'-kari is attempting to develop 'trust' amongst the Financially Illiterate by taking shots at his corrupt colleagues in the Investment Banks & Bank Holding Companies, but the Financially Illiterate need to remember that Ca$h-n-kari was instrumental in ripping off the Goyim American taxpayers back in September of 08 when Lehman Brothers imploded due to Ca$h-n-kari's lack of attention to detail on the Securities & Exchange Commission increased LEVERAGE for the cocksucking top five banks on Wall Street.

 

 

Neil Ca$h-n-kari may now get in line to lick my balls in deference to my intellect & intelligence over his own.


Seal's picture

Hey Neel, Ur Fired!

Txpl9421's picture

He is a creepy looking bastard....

buzzsaw99's picture

[while dunking the Dude's head in the toilet]

Blond Treehorn Thug: Where's the money, Lebowski? Where's the fucking money, shithead?

The Dude: It's uh... uh... it's down there somewhere, let me take another look.

MASTER OF UNIVERSE's picture

Another great head-in-toilet movie scene is in the trailer fight in Kill Bill where Daryl Hanna gets here head stuck in the toilet. Her character says nothing about the toilet, but when the bacon grease gets chucked at her in the kitchen she reacts by saying...'gross' whilst wiping it off her face. The 'toilet scene' seems to be becoming a staple in contemporary movie making.

Cthonic's picture

The bigger the bank, the bigger the capital cushion should be.  Curve of increase should have a variable exponent that is greater than one, based on percentage of assets exposed to derivative counterparty risk.  Same framework should incorporate the massively undercapitalized Fed and its reverse repo operations.

Know shit's picture

Please stop it.

Every one who would like to know, should know by now your money is not save at the bank, and one should not put its wealth in fiat, never was, never will.

Stop the talk, and walk the walk.
Someday enough people will do so and no one will need to be informed about it either.
When it goes it will go with such a boom it will even surprice me.

Take care.

hannah's picture

they have half...BS....they need 1000 times more than they have to cover all the debt. probably a million times more....

LawsofPhysics's picture

So, even after TARP and TALF and hundreds of trillions in free money (ZIRP/NIRP) the primary dealer banks still cannot make a profit?

Fuck em, take their motherfucking heads.

pitz's picture

I used to go onto the Seeking Alpha boards and explained the facts of life to bank stockholders thinking that higher rates would help their investments.

But I gave up.  People are just way too stupid.

TeethVillage88s's picture

https://datahub.io/dataset/fed-once-secret-loan-crisis-data-compiled-by-...

Over 300 Corporations got bailouts, internationally, based on corporate paper as collateral, CPFF

- 1979 Chrysler bailout, Iacocca approached the United States Congress in 1979, Chrysler was required to reduce costs

- 2009 Chrysler bankruptcy, Because of the Chrysler bankruptcy, Iacocca may lose part of his pension from a supplemental executive retirement plan

- 2008 BMW Auto Bailout, CPFF
- 2008 Caterpillar Inc Bailout, CPFF
- 2008 Chrysler Financial Bailout, CPFF
- 2008 Ford Auto Bailout, CPFF
- 2008 General Electric Bailout, CPFF
- 2008 Genworth Financial Insurance, CPFF
- 2009 GM bankruptcy & Bailout
- 2008 Harley Davidson Bailout, CPFF
- 2008 Hartford Financial Insurance, CPFF
- 2008 McDonalds Bailout, CPFF
- 2008 METLIFE Bailout, CPFF
- 2008 PACCAR Bailout, CPFF
- 2008 Verizon Bailout, CPFF
- 2009 Toyota Bailout, CPFF

GreatUncle's picture

I don't reckon all the Sorosite fucking politicians realise the true economic state, half of them can't add simple numbers up let alone get the head around how much corruption is in the system.

The gimme is when they think millions are big, when they are fuck all compared to billions, yet the toxic debt out there is in the order of trillions.

They really do not understand the scale of the problem ... or they do and they are playing dumb to sell the people out.

Idiots or treason are the only two explanations.

 

Ink Pusher's picture

You've got Soros all wrong, he's interested in profit by any means necessary, politics isn't even a hobby, it's only a tool /mechanism towards growing his profit. Not a core belief.

You can't shit on a capitalist for being a true capitalist.