America’s Big Banks Are Begging For the Next Financial Crisis

43 | By Shah Gilani

Our Too-Big-To-Fail banks are at it again…

The Volcker Rule is supposed to ban the banks from making hazardous and speculative trades.

But the big banks are begging for the chance to make the same kind of moves that got us into the 2008 global credit crisis, one of the worst in the modern world.

It’s like they never learned their lesson…

They’re even enlisting Congressional cronies to do their bidding.

One way or another TBTF banks are going to find a way to speculate us all into another crisis…

Here’s everything you need to know…

Trading For Trillions… At Our Expense

The truth is the banks have been fighting the Volcker Rule since it was first floated.

The Rule, named after legendary former Federal Reserve chairman of the 1980s, Paul A. Volcker, goes into effect in 2015 and has lots of moving pieces.

For instance, it says banks can’t have ownership stakes in hedge funds or private equity shops and can’t gamble in the markets like they did in their good-old “Trading for Trillions” days.

Collateralized Loan Obligations (CLOs) are one of the “instruments” or “products” banks still want to trade.

The Volcker Rule says they can trade the simplest version of CLOs, those that have commercial loans in them.

But they’re not allowed to trade CLOs that contain bonds, or equity, or other assets papered around CLO packages.

Not that there’s anything simple about collateralized loan obligations.

They’re complex from the get-go. And some varieties are a lot more complex and dangerous than others, though to the naked eye they look pretty much the same.

What the banks are bitching about is how they’ll be restricted in their ability to trade the CLOs they want to own. Did you catch that?

That’s right: They want to “trade” these things. That’s important.

A lot of the CLOs will be put together by hedge funds and private equity shops. And that’s one of the big problems: Hedge fund and PE products are supposed to to be off limits.

What are collateralized loan obligations anyway?

For the most part, the ones being targeted are made up of leveraged loans. Hedge funds and private equity (PE) shops and banks make loans to commercial companies that already have above (their industry) average debt on their balance sheets, hence they are said to be “leveraged.” The issuers of these loans to leveraged companies call the loans “leveraged loans.” Makes sense, right?

But because leveraged loans are made to leveraged companies there may not be any buyers willing to purchase them from the original issuers, who have no intention of keeping these loans on their own books.

So, to sell them, issuers and other product factories lump a bunch of these leveraged loans into a pool.

Yes, like a giant mortgage-backed pool. And since these are leveraged loans made to leveraged companies they’re a tad bit closer to those infamous subprime mortgage-backed securities.

Just because you pool a bunch of leveraged loans into a package, doesn’t mean they are less leveraged, higher rated and more desirable. That is until you add the magic elixir called collateralization, sometimes referred to as structuring.

This trick works the same way it worked for subprime mortgage pools.

The pools are sliced and diced into “traunches” that are sub-pools. These sub-pools are assigned certain rights over other sub-pools in the big pool. They may get more interest payments directed to them. They may have more collateral backing their portion of the pool. The end result is that each of the traunches have different risk and payment structures and different ratings.

And like magic the total pool becomes a series of sub-pools that will fit the bill of the investors they are structured to attract. They get sold off and everyone is happy.

The banks are crying that these products are loans, and banks are supposed to be in the loan business. They want to own these loan products even if they were originated by hedge funds or private equity shops.

It usually gets lost in translation, but I’m here to remind you. The original loans are made to leveraged companies because they are usually part of a leveraged buyout deal.

That’s right, leveraged companies need more money because their LBO owners (leveraged buyout owners) want to leverage them up more to pay themselves the fees they extract for taking them private in the first place.

Or, they leverage them up to pay themselves dividends with the money they borrow from the PE shops and hedge funds who only lend it to them temporarily. No wonder they want to package them up and get them off their books.

Enter the banks. They like the yield on these loans. They want to buy them. The big banks own most of these CLOs. And they want to be able to sell them, like they can do with their other loans. If they can buy these CLOs and sell these CLOs they are trading them, buying and selling amounts to trading. They want to be able to trade them.

The big banks that want to play in this sandbox are enlisting their Congressional cronies to do their bidding.

Andy Barr, a House Republican from Kentucky introduced a bill recently to allow banks the latitude they demand. He was speaking on behalf of the “small banks” in his state that would have to let go employees if this seal-clubbing was allowed to continue.

It doesn’t matter that small banks don’t trade this stuff and the handful that buy them certainly don’t have trading desks to trade them. But the big boys do.

That’s why House Financial Services Committee chairman, Jeb Hensarling, a Texas republican, said the Volcker Rule is a job destroyer.

Oh the humanity!

If big banks think these are good loans to hold, why don’t they just originate them themselves and keep them on their books? Why do they want to trade them?

Maybe because if they can trade them, they can hedge them. If they can hedge them, they can over-hedge or under-hedge or cross-hedge, all of which means they want to use their hedging operations to engage in their favorite game… speculative trading.

BTW: If you want the chance to make some real money on situations like these… and you don’t mind going against the grain… and making Wall Street’s blood boil… I’d like to show you how to do it. You’ll be surprised how easy it is.

43 Responses to America’s Big Banks Are Begging For the Next Financial Crisis

  1. Robert in Vancouver says:

    Canadian banks have tried to play the same games big US banks play (as described in the article).

    But any time they try, our federal government has stopped them.

    Both the Chretien and Harper governments deserve some credit for keeping our banks in line and our economy strong. That sustains our social programmes and helps businesses create real jobs.

    • Don in Winnipeg says:

      Robert in Vancouner, if Harper did such a good job, why did he and the US Federal Reserve secretly bail Cdn. banks out to the tune of $ 114 Billion during 2008 – 2010. We were told it was to provide more liquidity. Why, when companies were not borrowing or investing in their operations?

      The CIBC, BMO, & Scotiabank were over the precipice, with TD & RBC heading in that direction.

  2. Charles Long says:

    A lot of “collateralized” loans are auto loans to poor credit risk customers. When these customers default on their loans, which they will do in large numbers, used car prices will plummet and nobody will be able to purchase new cars because Congress will overreact, as it always does, and make it difficult for even good credit risk customers to get auto loans. Buy 6 mo PUT’s on GM.

  3. Ron says:

    There are times when I think objective reality has been done away with, and Alice In Wonderland would have been incredulous.

  4. H. Craig Bradley says:


    Obviously, a lot of A-Type personalities are in-charge of the trading units of most TBTF U.S. BANKS. So, the Federal government regulators are asleep or in-bed with the bankers. What a surprise! (Shocking). I’ll bet she is pretty good, as former New York Governor Elliot Spritzer said of one of his “high end” call-girls he got caught sleeping with. Since his resignation, he has failed to make a political comeback. Career ender.

    Face it Shah, most individual retail investors are not going to learn to become adroit traders, no matter what. So, what is the next best thing, given the limitations of the retail broker investment firms, financial advisers whom most people deal with outside of their IRA or 401 (K)’s accounts.? Lets see.

    I would suggest that if you are unable to quickly and proactively spot the point at which a market is going to turn into a major trend reversal ( or crash) then you must maintain a high state of constant readiness. By this I mean you must hedge yourself in such a manner that you are reasonably prepared for any contingency 24/7, be it bull or bear and at any time. Ever notice at Morgan Stanley that accessing your broker or financial adviser is a hit or miss proposition. They have to do a huge volume of business and have hundreds of clients to attend to. They are very busy, to say the least. Morgan Stanley and other Wall Street Firms are greedy and after maximum fees and income, all the while adding clients. There is no “off-season” (summer) any more.

    What this means is that if you want advice or to make a trade on a dime, you probably won’t be able to do it in real time (when you call-in). This means you might lose fleeting market opportunities. Basically, the big firms can not guarantee the service level that once was practiced in the current, post 2008 paradigm. It does not mater if you have a big account ( $1 Million or more) or a relatively small one ( $300,000). Its a volume business nowadays and the old system is not keeping up. Nobody really is in any industry. Too many mergers and cutbacks. Something has to give (quality) and its not going to be profitability, for sure!

    Sure, this means you won’t extract every last penny out of the latest bull market advance. So what? Keith-Fitzgerald stresses most investors won’t time the market successfully 85% of the time anyway. This means you have to invest for the long haul and assume the long term direction of markets is upwards, with some variation, and not linear all the time. In between, you must hedge yourself in such ways as to be prepared for a stock market decline of up to -30% at ANY TIME.

    Acknowledge that you won’t be able to respond in time once the market turns against you unexpectedly and starts a fast, swift, and steep correction. Brokers will be busy, phone lines busy, computer trading systems overloaded and systems frozen as was the case during the “Flash Crash” of May 2010. The trading systems are accident prone and not fully integrated. Therefore, potential risk is much higher commonly assumed.

    • Tactical111 says:

      I trade online myself as probably most people do. In that case I can react as quickly as any broker not to mention trailing stops and automatic sell orders when goals are hit. Not sure getting ahold of your “broker” is as big an issue as it used to be, no?

      The games these so called “bankers” are playing to line their pockets can only end one way sooner or later resulting in another Financial Sector crash and/or a big bailout from their pals in Gov.

    • arblaster says:

      @H Craig Bradley

      Completely agree with you. My son was working for a stockbroker back in 2008. The computers crashed and they had to use some of their staff as runners. As you say, anybody trying to sell would be stuck with their shares while the stock market tanked.

      I am a retail investor, and I have a system of selling when a companies’s shares get overbought, and not replacing them with more shares, and holding onto the money in anticipation of a big crash.

  5. Will Harden says:

    The ’08 crash was caused by congressional meddling in the old rules of banking.
    Since the times of the “Merchant of Venice” the # one rule of banking was to never loan money to someone who might not pay it back.
    Rule # 2 is never brake the first rule.
    So, in the late 90ies and into the early single digits, Wall Street lobbied congress to do away with the foundations of banking by reducing, and eventually ending the mortgage requirements of jobs, collateral and down payments.
    I believe that an insider group knew what they were doing was going to explode and used derivatives to bet against AIG and other securities.
    Volcker would not have allowed any of this.
    When the market fell in ’08, 99.9 % of all Americans lost heavily.
    The 1/10 of one percent who made money, made out like bandits
    Hank Paulson, Bush’s Secretary of the Treasury, personally made 3.2 billion.
    I know of one other who made eight billion, and that is the” B” word.
    I got so mad that I wrote a novel “Hit Squad” where a bunch of unemployed guys get together to take out ten of the worst crooks in one day. It has not been published yet.
    I compare the ‘banksters’ to a burglar who breaks into a jewelry store and steals a few thousand in loot, then fences it for a few hundred before setting fire to the entire city block to erase evidence. The man caused thousands of times more damage than he ever got.
    In this case a lot of insiders made billions while the damage to the economy ran into the trillions.
    Clinton arrested the S&L crooks when he came in. Obama did nothing even though the robbery was 20 to 50 times as big..

    • David M says:

      It was Clinton who signed the bill that got rid of Glass-Steagal. I wonder how much he made off of Sandy Weill (or, I mean, the investors in Citibank) when he signed the law. Like most politicians, it probably wasn’t much relative to the amount of money Weill and Wall Street made.

    • Ken says:

      The big complaint I have about Clinton is that, though he is very intelligent, he knew
      nothing about economics, and he allowed Glass-Steagall to be repealed. This
      opened the door for the thievery which led to 2008.

      • Will Harden says:

        Don’t come down on Clinton on the repeal of Glass Steagal.
        When congress first passed the bill, Clinton vetoed it.
        So they tried in 99 and overrode Clinton’s veto by 2/3. What can a president do if Congress overides him? Not much.
        Clinton also jailed 300 of the S & L crooks when he came in.
        What did Obama do in ’09 after the crash of ’08?

  6. Susan raben says:

    Dear Shah,
    Feel that I know you after reading your columns for years now. Was it you who wrote about the banks of Europe wanting to make “pools” of insured obligations in much the sme manner as the subprime mortgage pools? Never read any more on that, but it looked like a bad idea to me. Anyway, the bankers do think they are above the laws of everyone else. Reading about Vanderbilt and how he made his millions. Realize the “money” people (not just banks) have been doing this for years. My family likes the use of “family banks” and keeping all that interest in the family. Of course, that requires the family to be honest with each other. Fortunately we are. Thanks for your columns as they keep me thinking and I’m sure ward off the dreaded Alzheimer’s. SBR

  7. RayLang says:

    Where are our lazy congress people? They spend their time getting in the way of “progress” and don’t do their jobs their either — its time to get rid of the whole lot of them!!! Vote them out!!!

  8. FrasIssunset says:

    there is no such thing as money for nothing tell the big banks and they will take no notice of you Lock the banks in a mental hospital not a jail. frank. (unleveraged)

  9. Ken says:

    We can certainly tell that the banksters are ignoranuses when it comes to economics. They still believe that anything they want to do to make obscene amounts of money is OK, regardless of the harm they do to the world economy. They are so totally oblivious to the rest of the world, and Congress will support them down to the complete and total destruction of the world economy.
    Isn’t there anyone left who is willing to stand up to these crooks? Why don’t we all boycott those
    big banks and put them where they ought to be – in the poorhouse. There are so many ways we can retaliate. All we need is an informed populace who will do what needs to be done. Otherwise, we will see the complete destruction of all those things we hold dear – our civilization, all of those nice things which our science and technology have given us, all of the great art and nice things we have come to take for granted.
    Or are we mere sheeple who will blindly accept whatever these criminals want to take from us?

    • Ken says:

      We elect the Congress, yet with an approval rating of 6%, we still continue
      to send them back to D.C. every time. We need to get together and put up
      our own candidates who will be committed to do what we want them to do.
      But it’s still the old game of bread and circuses, until the final curtain rings
      down on a collapsed society, and guess who the new warlords will be.

  10. b terfloth says:

    as long as the profit from any speculation at banks causes large bonus for the decision maker from money belonging to the depositors and such profits enrich those decision makers and such action is not considered a theft that triggers jail sentences like for Madoff there will be trouble.

    it should be addressed by the supreme court and the voters
    and not by self-enriching government representativess

  11. robert gude says:

    Commercial bankers have been notorious for not learning from their mistakes. Why should it be differen this time?

  12. Kevin Beck says:

    As I see it, the main functions of banks in regard to loans is: Originate, and then hold to maturity. NOT operate trading desks based upon the loans they originate.

    While it would probably result in interest rates on individual loans being higher due to less marketability, it would more clearly define the roles of lender and borrower. If banks want to be in the business of doing safe functions, then they should be entitled to operate as banks. And banking is supposed to be a boring business.

    The problem with the understanding of those who disagree with that is: Boring is NOT bad. In fact, it is good.

    Imagine yourself as a shareholder in one of these institutions. And I mean a shareholder that can think like a manager, not someone just renting the shares (a trader). As such, you would actually think as an owner. Would you like to walk through the front doors of your business one day and find that the employees suddenly decided that you were no longer operating a bank? Or whatever your original business was?

    Managers get hired by business owners for the purpose of managing the owner’s business; not for the privilege of tearing apart the owner’s business and operating it as something completely different. This is a concept most of these Wall Street bankers need to learn. And if their learning comes quick and hard, then they will realize what the real function of their business is.

  13. Joel J. Carlson says:

    Does this really surprise you?? YOU and I the TAXPAYER, payed for the bailout. Now, they are doing it again. Gee, I wonder who will bail them out this time?

  14. M. Ridenhour says:

    One thing any of the “average citizens” can do is find out what committees your US Rep’s and Senators are on. Check and see who contributes to their campaigns. Then write to the Reps and Senators and tell them of your concerns and especially about the concerns you have if they are being funded by banking firms. Inform your friends, write to your local news outlets. Give your friends “sample” letters to send via email to send to their Reps and senators. Make a noise whenever you can. Paper letters get more attention than emails. Phone calls to your local reps/senators offices get more attention than emails. But emails are better than ranting to your like-minded friend.

    There is some truth in the “squeaky wheel” axiom. And as Horton taught is (in Horton Hears a Who) if we shout together, we are more likely to be heard.

    “Voting them out” gets another freshman into office who needs the campaign support of bankers, even more than the one who has a well oiled machine in place to keep the door open to the Washington Office.

    Voting them out is an easy but ineffectual answer, as many have seen. It takes work to effect a make a long-term difference. And that entails more than going to the polls every 4 years. It took a while to get us into this mess and only work by concerned citizens will get us out. The citizens have to be part of the answer. I might add, educated citizens are the answer, not exasperated, enraged citizens who stand on soap boxes. One idea is to take away the “free speech” rights that have been accorded corporations, by Supreme Court. There are several organizations trying to rally citizens to that idea.

    • Tactical111 says:

      Ha! Right you are. “Voting out” a politician is like getting rid of a drug dealer. There are 20 more waiting to take his place and do exactly the same thing to get in power and STAY in power. It’s how the game is rigged and if you want to play and win you have to go by the “rules” which are sell out and line your own pockets in the process. Sad but true it’s how it is and NOBODY is going to change it. Lincoln, JFK, RFK, and MLK tried; get it???

  15. Love TO says:

    1.2 million people need to get together as a citizen jury, these juries will be divided into groups of 1000 individuals, each individual in the group of 1000 will submit 10 names of the crookedest man in America that year, all persons with matching list in the groups of 1000 will be put in a subgroup and one will be drawn at random to be sent forward as a representative in the next round. The 1200 forwarded representatives will convene then to vote for the top ten dirty rats in a convention forum and to elect 120 individuals who will lead them into battle so to speak. If each of the 1.2 mil people initially pledged $1000.00 to have a vote ,the 1.2 billion raised could be used to make every body on the dirty rat list life as complicated as possible for one entire year they would be sued by multiply lawyers, businesses picketed on a daily basis, and large media campaigns to expose their dirty laundry. If any body’s interested I have a more detailed version and think I can sign up the first 1000 in 60 days or less.

  16. Hapuna says:

    You gotta be kidding me! The TBTF banks nearly crash the entire world financial system in ’08 and now they want to try it all over again with this new financial product? Greed just knows no limits. The risk they would assume is way passed prudent and into foolhardy.
    The Volcker rule is a rare ray of sanity in the mind bending field of greed. But, of course, the TBTF banks feel they can handle the risk. Until they can’t!!
    What the TBTF banks conveniently forget is that the federal government will not and can not bail them out should the wheels come off the bus again. Next time, and there will most assuredly be and next time, the financial system will completely fail and take everyone with it.
    These pimps that call themselves legislators need to understand that there are major consequences to letting the banks have their way with other people’s money, ie. CLO’s.
    As for you giving us a way to profit from this debacle, I wouldn’t touch it with a ten foot pole.
    Look around. The world is on money printing life support as it is. This new game has the potential to destroy beyond redemption.
    When does such recklessness go from being merely stupid to criminal?
    Common sense seems to be at an all time low.
    The patients have taken over the asylum…again.
    There can only be disaster at the end of this fools at play.
    No, I will not participate in anything having to do with crazies playing with bombs.
    But thanks for the thought.

    • Tactical111 says:

      When it starts to unravel grab an Ultra Short Financial ETF like FAZ and get rich along with the Banksters.

  17. Michael Upper says:

    The big banks can just do what the White House, Federal Government Agencies, and Congress do: use lies, deception, and subterfuge and do whatever they feel like doing. When these components of our government disregard the laws, especially the constitutional laws, why should organizations in the private sector feel they have to follow laws and regulations that are supposed to protect the public?

    Michael Upper

    • Tactical111 says:

      Mike, talk into the receiver louder. We can’t hear you that well here at the Fusion Center. 🙂

  18. Bill says:

    Perhaps Congress should make it clear to these excessive risk takers that the taxpayer will not bail-out this insanity. They should not have been bailed-out in 2008. If any of these institutions fail, they should be put into receivership and sold or liquidated. The creditors of these institutions, including depositors, should consider the risk before they make their “investment”.

  19. Patti says:

    Dear Shah,

    You may not agree with me, but I know pooling is illegal and has been deemed illegal since 2001. They must have short memory spans where government sponsored mortgage giants are concerned, where many of us have long memories. These seem to forget the 2003 Freddie Mac and Fannie Mac accounting fraud case. They can not seriously be thinking what I think they are thinking….it is not the first time banks have been implicated in a variety of illegal acts, from bribery, fraud, money laundering. Surely does seem to be some sort of false billing scheme or a pass through scheme…magic…seems more like fictitious to me. Like making 20 million a year is enough, the problem with it is that they are ill gotten gains.

    Now if there is a legal way to boil their blood I am in.

  20. SORENO says:

    All of us should take the 3 minutes required to send a letter to our respective Congressman or Congresswoman, and both of our two Senators, and insist that the entire Glass-Steagal Act which was repealed a few years ago, be reenacted in full. That one act would go a long way toward preventing another meltdown like that of 2008. Each one of us need write only three letters — really one letter addressed to 3 people.

    • Tactical111 says:

      Right, and they’ll bring the letters to the bar and have a big laugh with the Banksters over drinks.

  21. Brad M says:

    These bankers are not stupid. They are simply aware that in the end, win or loss, they will get money regardless through bailouts, fed monetary creation, etc. There is a reason why there are now essentially five mega banks who are into everything. Welcome to the new form of capitalism, a greater privatization of profits, and the socialization of losses. Our government is owned by them. It would be ridiculous to ask Washington to solve the problem. We could all simultaneously pull all of our money out of everything these banks do from basic banking accounts, to investments, etc. This would sure as heck change them, but are we willing to deal with the consequences that would produce in order to create change? What would fill the void? Stay the course and hope like hell, or seriously fight em’, either way we probably end up in very much the same place. Ain’t it grand?

  22. RUSS SMITH says:

    Hi!, Patrons Of Wall Street Indictments & Insights Et Al:

    My deceased mentor, whose family relocated stateside from Holland, once visited his uncle in Holland where his uncle referred to the US as The United Snakes. Why? Because, he told his visiting nephew, that the US was inflating its’ money supply making it impossible for the US to honor its’ Bretton Woods agreement, to redeem the US $ for gold @ $35/troy oz. and thereby lying to the world about its’ ability to redeem $’s for gold. Remember how following his uncle’s announcement to his visiting nephew how then President Nixon August 15th i971 repudiated paying out gold for $’s when he closed the US Gold Window?: If foreigners designing to replace their holdings of US $’s for gold @ $35/troy oz. had of done so, who now would be holding OUR National gold hoard and at what price for them?
    Later my mentor had me begin receiving economic research reports from the American Institute For Economic Research out of Great Barrington, Mass; (888)528-1216. Once they sent me as an added bonus their Chart Book depicting the purchasing power of the US $ as their first chart. From viewing their chart it appears that at one time the US $ had a purchasing power when tied to gold of around 140 pennies while today that chart shows the US $ as a fiat currency backed only by the good faith of the US government and not gold at around 2 pennies. Now my question is for both taxpayers and US and or foreign investors using the US $ in their calculations: which political party can we vote into office that will raise the purchasing power level of the US $ back to at least 100 pennies and, if that could be accomplished, what would then be the prices for foods and fuels accordingly etc.? What will be the outcome also for the worlds’ economies, should the US $ cease to be the worlds’ reserve currency for economic trading of both goods and services worldwide?

    RUSS SMITH, CA. (One Of Our Broke, Fiat Money States)

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