Archive for April, 2013

The TBTF Act Just Revived the Spirit of Glass-Steagall

130 | By Shah Gilani

TBTF is the acronym for “too big to fail.”

It’s the crazy notion that certain banks are so large and systematically important (which really means so threatening to financial systems) that they must be kept alive by the government, because their failure would wreak havoc on the economy.

How will they be saved from their own greed? And how will we be saved from their greed so we can kneel at their altars another day?

Central banks and governments, who are not as powerful as central banks, will backstop them with printed paper and taxpayer blood. That’s how they’ll be saved, grow bigger, and one day rule the world.

Oh, that already happened… never mind

But wait. Now there’s a new TBTF on the block. And it’s even crazier than the first.

Last week Senator David Vitter (R-LA) and Senator Sherrod Brown (D-OH) introduced their own TBTF bill; it stands for “Terminating Bailouts for Taxpayer Fairness.” I’m not kidding.

The Brown-Vitter Bill, as it’s known – I much prefer the “TBTF Act” official title – is a thing of beauty.

It’s so “in your face” (if you’re a TBTF bank) that it’s got a lot of those smirks on bankers’ faces frozen (momentarily), making them look like the Jokers they are.

Here’s what it says….

Brown and Vitter are pretty sure that the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is still mostly unwritten, is too ambitious to succeed.

Dodd-Frank is a joke because it is so unwieldy and so theoretically expansive. Not only will it never be completed, it was designed to be unwieldy so loopholes woven through all aspects of it would give banks the backdoor relief they need from it.

Brown and Vitter know this. So they’ve proposed legislation that leapfrogs the “molasses approach” to safeguarding the economy and the citizenry. Instead it attacks the very castles that are the TBTF banks.

They want to break them up. And they’ve come up with a simple way to do it.

The TBTF Act calls for banks with between $50 billion and $500 billion in assets to maintain an 8% capital ratio. Basically, that means they have to have 8% of their assets in equity, which amounts to an 8% buffer against all their assets losing 8% of their value.

Beyond that, it gets scary.

Because the too-big-to-fail banks are so much bigger and so much more of a threat on account of their size and interconnectedness, the TBTF Act calls for them (those with more than $500 billion) to maintain a 15% capital reserve ratio.

According to Goldman Sachs, who looked at the B-V bill, the big banks have raised their capital levels to $400 billion since the financial crisis, but will need an additional $1 trillion in capital if the B-V bill becomes law.

In other words, it’s such a tall order, and one they won’t be able to meet now, that they will have to sell assets and essentially break themselves up in order to comply.

Oh the humanity!

And that’s not all the TBTF Act calls for.

It calls for bank holding companies (BHCs) to separately capitalize their affiliates. (BHC entities, by the way, are a device to manipulate regulations and capital requirements…yeah, that’s what I said, because that’s what they are.) That means no more shuffling assets and liabilities to play dangerous parlor games.

The Act also calls for banks to count off-balance sheet obligations (for real) and incorporate onto their balance sheets the counterparty risks they face with the trillions of dollars of derivatives exposure they routinely want regulators and us to assume is all kosher.

And what I especially like is that BHC affiliates that are not depository institutions, which will have to have their own capital, won’t be granted any FDIC backstopping and won’t have access to the Fed’s Discount Window. Of course, they’ll have to expand those ring-fence plans so the Fed doesn’t create backdoor help by other means.

There’s more to the TBTF Act, but suffice it to say, it essentially calls the breakup of too-big-to-fail banks and simpler, more straightforward “laws” that – to my greatest hope and enthusiasm – essentially reconstitute that old, venerable humpty dumpty… Glass-Steagall.

Will the TBTF Act have a snowball’s chance in Hell?

No. Not without our support.

I look forward to hearing what you all think about the proposed bill – please leave your comments below. And I’m going to see what I can do about creating an avenue here, for us to reach out to our Congress, and everyone who needs to hear our footsteps, so we can be cause in the matter.

That includes telling them that we want TERM LIMITS.

We are watching them.

The Pros and Cons of Congressional Term Limits

167 | By Shah Gilani

I, for one, believe there is a problem with how America is governed.

I know many of you agree. You voice your frustration to me every week.

It’s not “one” problem. There are many.

Congressional insider trading (still alive and well)… an inability to work together… fiscal irresponsibility… the ridiculous taxpayer-funded benefits and perks our leaders enjoy, while we struggle… highly politicized capital markets… and the financiers and money men our “leaders” are in bed with.

The worst problem of all – or perhaps the reason all of the above is allowed to persist – is the “permanent political class in Washington [that] is able to skirt the rules and laws that apply to the rest of us.” That’s what author Peter Schweizer of “Throw Them All Out” fame – referring to our leaders – said to me when I interviewed him for you in 2011.

So what if there was one “resolution” that, by itself, would set in motion a chain reaction that would fundamentally change how America is governed?

I’d be for it. Better yet, I am for it. It’s here. It’s on the table as of Tuesday.

The idea, introduced in Congress on April 23rd by Rep. Matt Salmon (R-Ariz.), is a proposed amendment to the Constitution to limit how long legislators, Representatives and Senators, get to represent us.

Take a look at H.J. Res. 41…


April 23, 2013

Mr. SALMON (for himself, Mr. SCHWEIKERT, Mr. RICE of South Carolina, Mr. DESANTIS, Mr. BRIDENSTINE, and Mr. PITTENGER) introduced the following joint resolution; which was referred to the Committee on the Judiciary


Proposing an amendment to the Constitution of the United States relative to limiting the number of terms that a Member of Congress may serve.

    Resolved by the Senate and House of Representatives of the United States of America in Congress assembled (two-thirds of each House concurring therein), That the following article is proposed as an amendment to the Constitution of the United States, which shall be valid to all intents and purposes as part of the Constitution when ratified by the legislatures of three-fourths of the several States within seven years after the date of its submission for ratification:


    “Section 1. No person who has served 3 terms as a Representative shall be eligible for election to the House of Representatives. For purposes of this section, the election of a person to fill a vacancy in the House of Representatives shall be included as 1 term in determining the number of terms that such person has served as a Representative if the person fills the vacancy for more than 1 year.

    “Section 2. No person who has served 2 terms as a Senator shall be eligible for election or appointment to the Senate. For purposes of this section, the election or appointment of a person to fill a vacancy in the Senate shall be included as 1 term in determining the number of terms that such person has served as a Senator if the person fills the vacancy for more than 3 years.

    “Section 3. No term beginning before the date of the ratification of this article shall be taken into account in determining eligibility for election or appointment under this article.’

Sounds good, right?

Don’t get your hopes up too much.

According to government transparency website, there have been 28,537 bills related to “term limits” since 1973. Their prognosis, or probability that the bill will be enacted, is a sincerely disheartening 0%. (Click here to see how they calculated this probability.)

Yes, “throw them all out” may be a tired refrain and one that you’re getting sick of hearing.

But instead of defaulting to our collective cynicism (which is wholly justified) that “this” will never happen, today I want us to discuss the pros and cons of this Resolution.

Personally, I think it could work as a first step to return us to Democracy. It’s pretty simple.

If we limit the tenure of legislators, we theoretically impose on them a time limit in which they have to exercise their efforts to realize the campaign promises they make. They get a couple of tries and they’re out.

If they are successful, they get another shot. Or if there is more work to do on what they’ve started, new candidates would want to promise to finish what voters elected their predecessors to do.

Conversely, voters would replace agents of inaction, self-serving shysters, or ineffectual panderers more quickly, simply because regime change calls for it.

Now, I’m guessing here, but I imagine that this would cause the whole electorate to become more engaged in the issues, the debates, and outcomes, because they would start believing, and eventually know, that change isn’t just possible… it’s the law.

The U.S. Constitution is nothing short of magnificent, in every way. For all it lays down, it also leaves plenty of room for change. Our Founding Fathers knew that the young nation would forever experience growing pains, so instinctively, the Constitution was written to accommodate our evolution from our revolution.

Why shouldn’t our evolution include another revolution?

Let’s exercise our collective voices and march our tens of millions of pairs of boots on the ground to “demonstrate” and vociferously demand the return of the Democracy that’s been stolen from us.

This space, right here, is where I respectfully ask you, us, to start discussing whether we need a new revolution, or whether the status quo is the way to go.

Help me figure this out…

  • What do you think about term limits?
  • What are the pros and cons of term limits vs. the status quo system?
  • Is this an “all or nothing” proposition, or should we consider allowing additional terms if high percentages of voters (popular votes not any of this Electoral College stuff) want a good person back in office?
  • What are the unintended consequences we might face with term limits?

Today there are more than 250,000 of you who read Wall Street Insights & Indictments. That’s an army. Let’s mobilize and be part of the solution, part of the revolution, part of the army to save Democracy.

Be heard!


Why Big Bank “Safety” Is an Illusion

22 | By Shah Gilani

Thank goodness we have the FDIC and the Federal Reserve and Congressmen and women.

Thank goodness they’re willing to tap the captive citizenry for as much cash as they need to back the Fed and the FDIC to safeguard our big, beautiful banks from… themselves.

Only, there’s a problem.

Big bank “safety” is only a myth.

And if you think the latest Basel Accords – we’re up to Basel III now, developed after the 2008 financial crisis – will make them “safer,” I’ve got a bridge in Brooklyn I’d like to sell you.

Remember, the Basel Accords are drawn up by a group from the Bank of International Settlements, basically central bankers, who want to set the standards for bank safety. In Friday’s “indictment,” I pointed out that Basel I made securitization the Holy Grail. And that Basel II, which was even tougher on poor banks, gave them the right to use their own “models” to calculate what risks their “assets” posed.

Well, in keeping with their all-the-time-tougher standards, the new proposed rules in Basel III call for still-higher capital ratios.

Will it never end…? These poor wee banks are always up against tougher and tougher standards! This assault has gone too far.

Prior to the financial crisis, banks had to have a 3% capital ratio (also known as “capital adequacy ratio”), which is the percent of assets funded with equity. Obviously that wasn’t anywhere near high enough to safeguard banks when all Hell broke loose. But rest assured, the hard-nosed Basel Committee – who some skeptics (know any?) say are shills for the banks – stepped up again for our collective good and have now mandated a 4% capital adequacy ratio.

Oh, the humanity!

Things are now so dicey for the future of big banks that Senator Richard Shelby, the ranking Republican from Alabama on the Senate Banking Committee, wants a law that requires an extensive look at Basel rules before they crimp American banks into shrinking bonus pools and other ensuing tragedies.

Shelby, who might be considered a “friend” to the bankers, or a “lover,” whatever, thinks the new Basel rules could cause capital levels to fluctuate even more. He’s so worried, he introduced legislation last week to prevent regulators from passing them without conducting a study first. He wants to know, would risk-weighted assets rise or fall? And more importantly, he wants to know what impact any rule changes regarding what internal bank modeling management tools can be used will have on lending… at a time where banks need to be flush with cash to lend.

He’s my hero, Richard Shelby. Especially the way he trades. With only a modicum of insight on the markets, given his full-time attention to being a senator and having to learn all about what’s going on with banks and banking and stuff that could move markets, or options, whatever, he manages to have an enviable trading record. Just ask “60 Minutes”…

I wonder, what’s the point of Shelby trying to delay the implementation of Basel III into infinity when it’s infinitely stupid in the first place? Is he looking for more campaign money?

U.S. banking regulators have already looked at the new rules and issued reports on their impact.

The Fed’s own analysis by its division on banking supervision and regulation said last fall (to lawmakers on the Hill) that the majority of banks would not have to raise any additional capital (a big fear of Richard Shelby’s), because they already meet the minimum new standards under the proposed rules. Michael Gibson of the Fed testified that even 90% of community banks meet or exceed “proposed buffers.”

It’s all rubbish, or worse, but I can’t use that language here.

You see, the truth is, it doesn’t matter what the ratios are. Banks were given the right to manipulate their books when they got the right to use internal risk-modeling math (hocus pocus) to tell the regulators what their capital ratios are.

As usual, the bankers and their shills are crying that new standards are tough on them (they’re not), but they don’t mention that they now rely even more on their own internal risk-weighting scales to lie about their true state of being.

FDIC board member Jeremiah Norton says banks’ reliance on internal models “do not adequately capture risk.”

How off are they when it comes to being honest about how risky their “assets” are?

Sheila Bair (who I love, because she is the only person who always tells the truth), the former Chairwoman of the FDIC, penned an opinion piece in The Wall Street Journal on April 1, titled “Regulators Let Big Banks Look Safer Than They Are.”

It was no April’s Fool joke.

On the subject of banks risk-weightings being bunk (my word, not hers), Bair points to the latest Fed stress tests. Bank of America says it its capital adequacy ratio is 11.4%, but Bair says if you take out the nonsense (my word) internal modeling of risk-weighting adjustments, their real ratio is 7.8%.

Morgan Stanley came out looking good with a 14% ratio, which, when wrung through the honesty rollers is really 7%.

Bair points out that banks generally risk-weight at 55%. That means they have a trillion dollars’ worth of assets, and they say their models show that they only have risk on 55% of that book.

What’s in the book they juggle? Oh, that would be securities and derivatives.

Let me make it simple, because it is. These liars are saying that the riskiest stuff on their books – the stuff that Basel I said they didn’t have to hold as much capital on, because this stuff could be traded away and out the door before it could be a problem – the same stuff that brought us to the edge of financial Armageddon – is adequately modeled internally to reflect their true risks and that their homespun capital adequacy percentages make them safe.

And of course, it’s even worse than that…

Banks assign a “zero risk” to their holdings of U.S. government paper and a 20% risk-weighting to other big banks’ debt.

Well, thank goodness there is no risk in holding U.S. government bonds (what’s a little deficit here or there or a downgrade here or there?). And as Sheila Bair (I love you) points out, “The rules governing capital ratios treat Citibank’s debt as having one-fifth the risk of IBM’s.”

In case you missed the point, she is saying, “In a financial system that is already far too interconnected, it defies reason that regulators give banks such strong capital incentives to invest in each other.”

There you have it. The banks are safe, and myth-busting is nothing more than an internal model gone awry.

Sleep tight… on top of that lumpy mattress stuffed with cash.


The Next Bank Meltdown Will Be No Accident

27 | By Shah Gilani

Big banks turned in a pretty stellar first quarter. All but one beat profits expectations. But as I told you earlier this week, I’m now out of these stocks completely.

Do you want the truth about what shape banks are in right now? Sure you can handle it?

I’m sorry; I can’t tell you the truth.

Regulators can’t tell you the truth.

And the Federal Reserve won’t tell you the truth.

No one can tell you the truth. That’s because banks don’t tell the truth. And neither does the Federal Reserve.

You won’t know the truth… until the next meltdown (which, by the way, is coming). Because in an acceptable kind of way, it’s hidden from regulators by banks themselves – with the aiding and abetting winks and nods of central banks.

Of course, to the untrained eye, it’s all a matter of unintended consequences that result from trying to regulate and safeguard the world’s agonizingly complex financial systems.

That’s what they want you to believe. It’s not the truth.

The truth is, the next meltdown will be no accident, either…

Twenty-five years back, a complex regime was set up by central bankers (gee, who do you think they work for?) to establish ostensibly “self-regulatory” standards that everyone thought would safeguard banking systems better.

Instead, what they did in phases was undermine simple, prudent safeguards and accounting standards to unleash big banks’ extraordinary risk appetites to fatten their bottom lines and bonus pools.

I’m talking about The Basel Accords.

Stop – don’t get turned off and assume that this is some boring explanation of an esoteric subject that you don’t care about because you can’t see how it affects you.

You’d better believe it affects you. Plus, it’s simple to get. So, when you’re reading stuff buried in the back pages of financial newspapers about this – and it’s out there right now – you’ll understand it and… get sick.

But don’t blame me.

The Basel Committee on Banking Supervision was formed in 1974 in Basel, Switzerland, under the auspices of the Bank for International Settlements (BIS). The BIS is nothing more than a collection of central bankers acting like they’re the central banks’ central bank.

They aren’t. They don’t have any money. They just write a lot of rules and regulations that they call “standards,” that they expect banks, regulators, and legislators in countries with banks to implement.

Hmm. I guess that covers the entire world.

Back in 1988 the Basel Committee came up with the first Basel Accord, commonly called “Basel I.”

It was fairly straightforward at only 30 pages long. It had a lot to do with mandating prudent capital reserve requirements – the safety net banks set aside against loans and liabilities. The Committee wanted to raise reserves to make banks safer.

Gee, what a good idea. That’s because it was supposed to look like a good idea.

But, ask yourself, why would central banks who work for banks want to crimp their lending and profit-making ability by making them hold aside more reserves, which they can’t then use to make loans (and profits)?

(And no, central banks don’t work for governments. They partner with governments, to back them when they need government’s unlimited power to backstop central banks’ supposed unlimited power… to backstop banks when they get in trouble)

The “unintended consequence” (rubbish!) of one of these little changes actually changed banking forever.

Gee, I wonder who benefitted there?

Under the new rules of how to measure the risk of bank assets, and what reserves to set aside against those risk categories, the Committee decided that holding a 30-year mortgage was risky, because (duh!) you are holding it for 30 years. But mortgage-backed securities, because they could be traded instantly – supposedly – weren’t as risky. So banks would only have to set aside a tiny amount against those “less risky assets.”

Now, bankers aren’t stupid. They all packaged the mortgages they held into mortgage-backed securities and got to reduce their reserve requirements. Sweet!

You see where this is going, right? You should, because we went there.

Securitization exploded, and now you know why.

Then it got better… for banks, that is.

Basel II came out in 2004. It was “tougher” than Basel I – and boy, was that ever tough on the poor banks. Basel II required still higher reserve requirements. But surprise, surprise, trade-offs would soften them.

Gee, I wonder who would benefit from those trade-offs?

The European Union wanted foreign subsidiaries of American investment banks to follow Basel II, and they wanted their parent holding companies to be regulated. In a grand compromise, the Securities and Exchange Commission made a deal with big American investment banks. The SEC got the right to monitor and regulate the “bank holding companies” that owned the big investment banks in return for letting the investment banks determine how much capital they needed to set aside to meet capital reserve requirements. The E.U. went along.

What happened was that the old “net capital” rule in place for broker-dealers since 1975 – a calculation that requires broker-dealers to use set “haircuts” to discount the value of assets they hold to account for their true liquidation value if they have to be sold – was pushed aside for the big investment banks.

In its place, the banks were given the right to determine how much capital they needed to hold as a cushion against potential losses by calculating the value of their assets using their own internal models.

The result was catastrophic.

Under the old net-capital rules, broker-dealers’ leverage ratios got as high as 12 times their capital. But under the new arrangement, leverage soared as high as 40-to-1.

Investment banks used internal models to reduce the capital they needed to set aside. They then passed along that freed-up capital to their BHC parents, who applied more leverage to that capital.

In the end, they all collapsed. All of them.

Bear Stearns went first, then Lehman Bros., then Merrill Lynch. And then on a Sunday in 2008, Goldman Sachs and Morgan Stanley ran to the Fed to beg to become commercial banks so they could feed at the Fed’s discount window and its other liquidity troughs.

And this is where we still are.

Only it’s worse now.

Okay, so if you’ve read this far, we might as well dissect this all the way.

You want the truth about where banks are now and how they’re lying? I’ll give it to you on Monday, and you will need an airsick bag… trust me.


Are Big Banks a Buy?

4 | By Shah Gilani

I’m not buying any bank stocks here. I don’t own any at present. And if I did, I’d either sell them or at least hedge them.

It’s not that they’re doing poorly. They’re not. Bank stocks have been strong because they’ve been making record profits. It’s been a good ride if you’re a Too Big To Fail bank or a shareholder.

But, being the cautious trader I am, I’m inclined to take profits when I have them in hand. That’s why I’m out of the banks. I’ve banked my gains and turned cautious.

Citigroup is up this morning. They beat analysts’ expectations.

Wells Fargo and JPMorgan Chase didn’t do badly last week, in terms of their earnings and profit numbers, but investors were disappointed.

But here’s why I’m cautious…

I’ve turned cautious on the group because I’m not seeing domestic or global GDP growth at levels that justify a continuing upward trajectory for big bank stocks.

Citigroup made a nice $3.8 billion profit in the first quarter by reducing costs, unloading troubled assets, and from “strong” loan demand. And they reaped nice rewards from their investment banking unit.

Okay, they’re dumping 11,000 people in the months and quarters ahead. That’s good, I guess. But what were they doing with so many excess employees on the heels of the financial crisis and their near-death experience in 2008? Were they expecting to keep them busy when business skyrocketed? Are they letting them go now because they don’t see the growth they were expecting?

I like that Citigroup’s international footprint deposits rose 3% in the quarter, and I like that total loans rose 5%, But I don’t like that revenue from fixed income, equities, “markets” and debt and equity underwriting rose 31%.

Any time a big bank is making big gains in “markets” it worries me. It also worries me that Citi’s revenue growth slackened in the first quarter.

It worries me that Citi got hammered in the fourth quarter on mortgage woes.

Why does that worry me if it’s in the past? Because Wells Fargo, which has been hiring lenders and support staff to bolster its mortgage business, said last week that their re-financing business slowed in the first quarter and origination volume fell 13% in the first quarter from the fourth quarter. So, maybe Citi’s mortgage woes aren’t behind them.

As the housing market has been firming up, Wells, which now originates one out of every four mortgages made, has been a beneficiary. But what if the housing market pauses? What if rates start rising? What if confidence starts eroding?

Can Wells continue its streak of eight consecutive quarters of record net income?

JPMorgan Chase saw a decline in deposits, and total revenues actually fell 3.6% from a year ago.

Still, they posted a record first-quarter profit of $6.5 billion.

But loan demand was weak. The bank saw revenue from consumer and community banking fall 6.1%.

So, how did they book another record?

They had gains from cost cutting and they’re cutting another 17,000 jobs over the next two years. Sound familiar?

Chase got a nice push in net from backing out $1.2 billion from loan loss reserves. That’s a big number to say won’t be needed, because they see strength in mortgages and consumer credit card losses are looking less troublesome.

Another thing that worries me about the big banks was borne out by something Chase’s CFO Marianne Lake said. She’s concerned about “mounting competitive pricing for loans.” Since there isn’t a lot of across-the-board loan growth, and loan pricing could see margins impacted, I just have to wonder where this is all going.

China’s GDP growth came in today with a 7.7% advance. That is well below the 8% plus growth rate that analysts were expecting.

Is global growth slowing?

News flash… it hasn’t exactly been robust lately – as in the past five years.

All these little factors add up to some fluttering of red flags for me. That’s why I’m out of big bank stocks.

If I’m wrong and they all head higher, that’s okay with me.

They’re still facing headwinds, like Dodd-Frank rules and regulations that will eventually get written and implemented. That could have a potentially dramatic impact on certain revenue streams. Can you say the Volcker Rule?

If you still like the big banks, good for you. I’m not always right. But if you want to sleep a bit better, why not buy some puts to protect your exposure to lofty prices and lock in your gains in a what-if world?

It can’t hurt.

It never hurts to ring the register.



Bail-ins, Magic Wands, and Con Men

18 | By Shah Gilani

Last week, I was emailed a link to Barry Ritholtz’s “The Big Picture” site. That’s where David R. Kotok, Chairman and Chief Investment Officer of Cumberland Advisors, posted a piece on the “bail-in” of Cypriot banks, versus the bailout fixes that we’re used to seeing.

As it was an email, a lot of people were copied on it. And a lot of them hit “Reply All,” and forwarded their reactions and comments.

I read everyone’s responses.

No one had any clue about what’s really going on, or how to fix the banking mess the world faces, or whether bailouts or bail-ins are the answer.

Myself? I got really angry.

I can’t believe so many smart people can be so oblivious, or worse, are themselves knowingly a part of the problem – to the degree that they twist the truth. Like great prestidigitators (magicians) who point to over “here” while manipulating tricks over “there.”

Watch the birdie. Pay no attention to the man behind the curtain…

David Kotok, by not legitimately addressing the real cause of bank failures, performs the usual trick. He obfuscates, clouding the issue by addressing bailouts versus bail-ins.

It bothered me that Mr. Kotok, representing Cumberland Advisors, an independent fee-for-services money management firm with approximately $2.2 billion under management, was talking up his services – and not cutting to the chase instead.

He said, “At Cumberland, in thinking about bail-in vs. bailout, we see the following issues in portfolio management. First, credit analysis is important. Risk needs to be identified and evaluated with the highest standard of integrity. In a private firm, one can give counsel to banking clients and portfolio-management clients and act to sell securities in which there may be very early warning signs of credit deterioration. From a portfolio-management point of view, one should not wait around. Our approach is to run quickly from credit deterioration and hope it does not get worse. Let someone else take that risk, not our client.”

What’s my problem with that?

It came on the heels of addressing the “transformation underway with regard to bank-deposit safety” in terms of government and taxpayer bailouts being potentially augmented with depositor exposure, where deposits above insured amounts are seized. That’s the new “bail-in” bailout of insolvent banks.

Mr. Kotok advocates that depositors do credit analysis and due diligence on the institutions they bank with.

Of course, not many depositors have the skill set to do that. And virtually none of the hundreds of millions of depositors – trusting their money to the very institutions that are supposed to be safe – have the time to do that.

That’s where Cumberland comes in. They do that for their customers. Sure, that’s talking up his “book” of services, but you can’t blame the guy for that. He has a job to do.

He also points out that there are problems with crying wolf when it comes to analyzing banks. Crying fire in a crowded bank could cause a run and get you in trouble.

With regard to analysts offering warnings, Mr. Kotok himself warns, “providing that warning also puts the service provider at great risk, because there are laws, in most jurisdictions, against sharing information that might trigger a run on a bank.”

I’m writing this and I’m getting really angry… again.

The whole game is rigged. So how in the world can depositors trust any bank?

How can anyone do due diligence when bank transparency is a myth?

Remember the financial crisis? Every single big American bank CEO came out in public and told us they were in excellent health. They were – and are – all liars. They were all taking money, indirectly and directly from the Fed and the Treasury.

The Chairman of the Federal Reserve is a liar. Ben Bernanke was flooding banks with “liquidity” through the Discount Window, and a whole host of multi-lettered programs they invented on the back of matchbooks. There was no planning.

They rushed money to banks here and around the world, and to insurers and corporations. Oh yeah, and they rushed it to governments, too.

And what was he telling the world? After he said that the subprime slump would pass without affecting the economy, he said the banks were all safe and sound, so sleep tight.

Now we know why they are all liars. They don’t want to be accused of causing a run on their own banks. What a bunch of hogwash.

I say, directly to them: You are all liars, and I challenge any and all of you to debate me in public. Afterwards, you presumably won’t mind taking a lie detector test.

This is what we’ve come to. Liars leading liars, lying to the public that banks are safe institutions. Liars are lying to equity investors, bondholders, and depositors to get their money just to make more for themselves. And central banks give them all the backstopping they need to lie their way out of insolvency, to play the game again until they are back in the business of making themselves and their protectors rich – make that richer.

So, what Mr. Kotok should have said is that he knows what the problem really is, and he knows how to solve it. But then he wouldn’t have so many clients coming to him, asking for analysis of banking institutions, and which ones they should put their money in.

There is no need for bank bailouts. And there is certainly no need for any bail-ins. Ever.

Banks are utilities, only they have the power to point over “there” and say they are capitalist tools, while over “here” they are making us tools of their trade in lies.

We can fix the lack of transparency problem with a few regulatory waves of the truth wand.

To end the problem of banks ruining economies – and people’s lives – all we have to do is raise the reserves they have to keep against loans and the other “assets” that they hoard.

What’s wrong with a reserve ratio of 25% rising to 50%? We have to put up 50% margin when we buy stocks, don’t we?

Nothing is wrong with substantially higher and more straightforward protective reserve ratios. Except that banks won’t be as rich and powerful – and dangerous – as they are, that’s what’s wrong with it.

I’ve haircut the answer to what ails banks to save we, the people – who rely on them as safe institutions – but it’s a start.

Of course, the details of what assets are, and how they are classified in terms of risk has to be addressed, as well as how to make banks truly transparent. But it can all be done easily.

The whole Basel regime is nothing more than a bunch of bankers pretending they’re making the system safer, when in fact they are pointing to over “there” while they take care of themselves under cover of what’s really in their interests over “here.”

If you’re not angry about the lies and the red-herring discussions constantly being used as a smoke screen for the power banks wield, you might want to learn to read between the lines of most of what you read.

Or, stop by the Magic Castle in Hollywood, California, and see for yourself how great magicians can use prestidigitation to make you believe that pigs really do fly.



[Editor’s Note: If you’d like to read David R. Kotok’s “solution” to the banking mess we’re in, click here. Just watch for the smoke and mirrors.]

Kickbacks are Just Distractions at an Acceptable Cost

32 | By Shah Gilani

Don’t blame yourself if you missed this tidbit last week, it’s only another indication that America is circling the drain.

Last Thursday, the Consumer Financial Protection Bureau hit the nation’s four largest mortgage insurers with a total of $15.4 million in fines for “allegedly” paying kickbacks to lenders to steer business their way. Of course, they didn’t have to admit they did it, and therefore, they didn’t do what they were fined for.

Back in the summer of 2009, the Inspector General of the Department of Housing and Urban Development handed the Justice Department evidence that laid bare a scheme by lenders (the usual suspects: Citigroup, Wells Fargo, Countrywide, and so on) to get kickbacks from mortgage insurers for making borrowers – who had to buy mortgage insurance – purchase coverage from those companies kicking back profits to lenders. In the industry, it’s called “forced placement”

Who did what here?

One estimate of the amount of kickbacks is $6 billion. But the Big Four insurers were only fined a total of $15.4 million. Genworth Financial and AIG’s United Guaranty unit each paid $4.5 million. MGIC Investment Corp. paid $2.65 million, and Radian Group paid $3.75 million.

Radian Guaranty’s president, Teresa Bryce Bazemore, speaking for Radian but summing it up beautifully for the group of grabbers, issued a statement that the settlement “was an opportunity to eliminate distractions at an acceptable cost.

Are the lenders being looked at? I hope so. After all, kickbacks aren’t paid into thin air.

But it won’t matter. The worst that will happen is that they’ll settle and pay some fines. Who cares how much they pay. It will come out of profits, and be considered an “acceptable cost.” Shareholders will whimper for a second – that is, until they cheer the next announced buyback or dividend hike – and all will be forgiven.

No one will go to jail.

It doesn’t matter that kickbacks are illegal and people go to jail for such blatant scheming. We’re talking about the protected financial services class – not any other industry or some easily picked-on punters.

America’s financial services class is above the law.

People scheme to get kickbacks. People pay kickbacks and people receive kickbacks. People benefit from illegal kickbacks. People – not companies are – to blame. People are guilty.

But financial services people are anonymous. Or they’ve all been issued cloaks of invisibility from Hogwarts Congress. Their companies pick up the tab for their scheming and illegal acts. Their names are rarely mentioned, no one is ever to blame…

The company did it.

This is not the America of laws and legitimacy that I grew up with. This is oligarchic America, a country where money rules and laws are bent and bastardized, to benefit the moneyed class at the expense of honesty, integrity, and basic human principles.

Wherefore art thou, my dearly beloved America?  



Q&A: April 2013

18 | By Shah Gilani

We’ll have a Q&A session today, covering everything from precious metals to reserve banking to the derivatives markets.

Remember, you can share your comments and questions with me by posting them at the bottom of any article, or by emailing them straight to me at I may not be able to respond to everyone, but I do read everything you have to say.

Let’s start with a very interesting question about gold and silver.

Q: Advisors frequently tell us not to be invested in gold/silver exchange traded funds (ETFs) as they could collapse and leave the investor with nothing but paper. Can that happen when one is invested in ETFs which are backed 98% by gold and/or silver bullion, such as the Sprott Physical Gold and Silver funds)? ~ Virginia R.

A: As long as ETFs are holding physical gold or silver, and essentially issuing certificates of pro-rata ownership in the form of stock, then there’s nothing to worry about in terms of them collapsing. That’s because the metal is there. Exchange traded notes (ETNs), however, are another matter. The structure of ETNs is complicated, and theoretically they are a much dicier proposition. When I look at an ETN, I look primarily at the “credit” and reputation of who is backing it.

Q: When will MF Global’s principals be brought to justice? ~ Jerry

A: Probably sometime in January because, as the saying goes, it will be a cold day in Hell before that happens. But, seriously, I’d be more than surprised to see justice done here. The power of the protected class just seems to be impenetrable. Should Jon Corzine be in jail? Yes, he should.

Let’s keep on going…

Q: The best advice you ever gave me was to read The Creature from Jekyll Island by G. Edward Griffin. But, here is my question – can you tell me and confirm it, absolutely? Is the Reserve Bank of Australia also owned by the Cartel? I’ve tried doing research on the Internet. Obviously, I’ve been to the Australian Reserve Bank’s website, I noted that its “objectives” are exactly the same as those of the US Federal Reserve. But I cannot find any absolute confirmation that the Reserve Bank of Australia is definitely owned by the Cartel. I would be very interested to know. This information would certainly solve a healthy family argument – especially if you could find and post the proof! Thank you once again for all of your insights. ~ Carolyn

A: I’m glad you read the book. It should be required reading for everyone in the United States. As far as the Reserve Bank of Australia, they are not “owned by the Cartel.” However, all central banks operate under the same principles as the Federal Reserve. And, as you know from The Creature, the Fed was fashioned directly on the Bank of England model. As my dear mother used to say, in her Scottish accent, “They’re all tarred with the same brush.” It’s only too bad we don’t tar and feather such rascals any more.

Q: Doesn’t the Board of Directors have any fiduciary responsibilities – responsibilities that would make them culpable for the misdeeds they permit in some of these companies? I mean, where does the responsibility begin and end, where does character and integrity mean something? How about a law that says the Board meetings must be open to the public, after a reasonable specified time, so that they can’t hide what goes on. I would think that at least the stockholders should have that right! I’m tired of the Good Ol’ Boy Network screwing the rest of us! ~ John P.

A: Yes, the Board has a fiduciary responsibility to shareholders. It has tons of responsibilities in every which way. And yes, they are culpable. Only they have Directors’ & Officers’ (D&O) liability insurance, paid for by themselves. So, when they are guilty of gross negligence – which is what they are actually guilty of and which is not insurable – which they pass off as Management’s mistakes and wrongdoing, they are covered, every which way. I agree with you. Board meetings should be made public. Why not? Oh, that would be to protect the insurance companies who insure the board from getting sued for their gross negligence. These issues, the problems that I call out, the ones that everyone sees as obvious, are all part of the problem. But they can be fixed with simple measures, such as demanding meetings to be transparent. But, once again, the protected class is never going to give up their positions – or their protections.

Q: It looks like the banks will steal 40% of all uninsured deposits in Cyprus, after having tried to even steal money from small insured depositors. I don’t understand this. Since the European Central Bank creates money out of thin air, why do they need to steal money from depositors? ~ Jerry C.

A: That’s a great question. Besides maybe sticking it to Russians outside the European Union, the move was a trial balloon. It was a blunt instrument delivering a blunt message: You, the public depositors, as well as creditors and equity investors in banks, had better start looking at the institutions you put your money into. Because We, the Germans, are tired of bailing out our EU neighbors – who can’t support their own house of cards.

In another sense the message is We, the European Central Bank, are actually a house of cards and We can’t do this bailout thing ad infinitum… so, we’re advocating "bail-ins," where we will make you all part of the solution – since you all haven’t figured out that we are the problem. In other words, the ECB and the EU are now incorporating innocent depositors in their backing of insolvent banks, being propped up by lies and extend and pretend games. It’s the rhetoric of failure.

Q: Shah, how far below the current price of a stock do you put stops? ~ Jimatl

A: There is no one-size-fits-all answer to that question. It depends on where I get in, what my expectations are for the stock, and what might happen to change those expectations. If nothing changes and I want to have an exit point once I enter a position, I use technical analysis. Again, depending on the stock, its inherent volatility characteristics, and under what circumstances I’m buying the stock, I would look for initial support levels, and if they aren’t too close to where I get in I usually (but not always) want to give the position some room-to-move. That’s what I use volatility measures for. I would place a stop-loss order maybe one to two percent (of the stock’s entry price) below that support.

Support levels are often “tested,” so I don’t want to get shaken out if traders probe that level. Support levels are widely watched and sometimes traders (I used to do it all the time myself in my hedge funds) will test those levels. If I saw a thin support level on a volatile stock that I didn’t like, I’d short it down through support by hitting bids to knock it down, and see if I could break support. If I triggered a lot of stops and the stock fell, I’d win big. Don’t hate me for being honest. That’s what traders – with a lot of capital to play that game – do. That’s also why there is no one right way to figure your stops. Because traders will probe to hit stops at support levels, I go below them, so as to not get gamed by the professionals doing their job, trying to make money.

Q: I’m an enthusiastic reader and I enjoy your wisdom – especially when you uncover Wall Street’s crimes. I have two questions for your consideration. ~ Ted M.

  1. 1. Will there ever be any criminal charges coming from the billions of dollar bankers have ripped off?
  2. A: No! Sorry.

  3. 2. Please explain to us just what are the “derivative” instruments – I understand they are in the trillions of dollars – floating around the world markets.
  4. A: They are mostly credit default swaps, which are supposed to be customized hedging instruments on positions, real and synthetic (meaning made-up stuff) – basically anything you want to hedge against.

    But in fact CDS are not just for hedging; they are the ultimate customizable instrument for speculation in… are you ready…anything. As in anything you want to speculate in. A bank will always take the other side of your trade, on pretty much anything you want to tee-up. That’s because they can, and almost always do, sell the position you think they are taking from you to someone else – who they dupe into believing it’s a good position – for a fee, of course. But most of the time banks make up the positions themselves and sell them like arms merchants selling nukes to North Korea. If it keeps on raining… the levee’s going to break.

That’s all for today, folks. Keep the questions coming, please.

Until next time,


Posted in Q&A

Blame the Board of Directors

14 | By Shah Gilani

It’s a lot of work being on a board of directors. You have responsibilities too.

Actually, it’s more about responsibilities than work. Believe me, I’ve been a director.

Take the big banks, for instance. With all their problems they must have a lot of board meetings. Talk about work and responsibility. Forget the compensation, it’s not worth it.

Well, maybe it is for some directors. After all, these days a few hundred thousand dollars a year for making a bunch of meeting in exotic places – sometimes – and staying at top notch resorts and hotels, and eating all that rich food, is still worth the tip money.

According to compensation data firm Equilar, in 2011, the last year Goldman Sachs’ numbers were available, they paid their 13 directors an average of $488,709, annually.

That’s up 50% from 2008, which was a not such a good year. But it pales in comparison to 2007, which was a very good year, when directors averaged $670,295.

Here is just a sampling of compensation figures.

Equilar reported that, in 2012 Morgan Stanley directors averaged $351,080. Bank of America directors averaged $275,000. J.P.Morgan Chase directors got $278,000. Citigroup directors got $315,000. And Wells Fargo directors earned $299,429.

Now, don’t get me wrong. I would love to make that kind of compensation. Stocks are fine – if I can hedge them. Cash or stock grants or any of the other stuff… Maybe a loan or a special mortgage… Whatever. I’m on the Team, gosh darn it! But it doesn’t matter. As Dire Straits said, it’s good “money for nothing.”

Making meetings is work. Work, to me, is being required to be somewhere at some time to take care of your business. That’s work.

Now, if your work is eating and drinking and talking, or napping while other people are talking – or not talking – then that’s what I call a cushy job. A lot of directors think that is what they’re brought in to do – or not do. But it’s still work. And, like a lot of jobs, if you show up for work, you get paid.

The other part of being a director is the part that matters. It’s the part of the “job” that isn’t talked about.

It’s the responsibility thing.

The truth about the big banks is that their directors are (supposedly) responsible for their corporations. But they don’t take responsibility for doing their jobs at anywhere near the level that they should.

CEOs and everyone on down the line gets blamed – and they should – for their misdeeds. But no one blames the (usually) nameless directors.

They get paid a tiny fraction of what their executives – the ones they pick – get paid, from the compensation packages that they, the directors, grant them.

The executives pay their traders and rainmakers a ton of money to make them look good to the directors. And if they all make a lot of money, the board of directors has the power to give themselves raises and bonuses, too. Sweet!

The top-top dogs, the directors, executive and non-executive directors, are responsible for the mess they allow their companies to sink into.

But, because they’re mostly hand-picked by the cronies and sycophants on boards, they mostly act like traders in the trenches, figuring out how much risk they can take to get paid more at the top.

If they screw up royally, they have elaborate insurance policies that the company pays for to shelter them from the God-awful judgment and flagrantly abandoned responsibilities they were hired to exercise in the first place.

Nothing ever happens to them. They are the ultimate protected class.

There’s nothing wrong, in my playbook, from paying directors gigantic amounts. Even a lot more than what they are being paid now, even for a “part-time” job. If they do their jobs responsibly, then they’re worth it.

The problem is that they don’t do their jobs and they aren’t responsible for what happens.

I’m speaking about banks, in particular, but this applies to all corporations. Let directors earn what they’re worth. But if they fail, claw back all their compensation and make them pay all the insurance premiums shareholders paid out to cover their worthless behinds.

Okay, you directors out there, let’s hear what you have to say about that.