Tuesday, November 25, 2008

Bank Collapse Watch: CitiGroup 4

Citigroup collapses! Banking Shutdown Possible
It pains me deeply to announce that, despite the massive government rescue, yesterday’s collapse of Citigroup could ultimately lead to a shutdown of the global banking system.

For many years, I hoped this would never happen, and I thought we might be able to avoid it.

Emphasis added by me.

More:
More recently, in the wake of the biggest financial failures in history — Bear Stearns, Lehman Brothers, Washington Mutual, Wachovia and others — rather than liquidate the failed firms’ bad assets, the authorities have been engineering shotgun mergers. The end result is that they have been sweeping most of the bad assets under the carpet of larger banks like Bank of America, Citigroup, and JPMorgan Chase, each of which already had abundant bad assets of its own. Adding insult to injury, Treasury Secretary Paulson’s decision this month — not to buy up the bad assets from many of these banks — has only heightened this concern. Rather than dispose of the toxic waste, the regulators have been rolling up the garbage to the larger banks.

And now, here we are, nearing the end of the road with the largest banks of all endangered and with no larger bank that can swallow them up. It’s a day of reckoning that leaves me no choice but to issue this three-part warning:

* Despite the U.S. government’s massive Citigroup bailout, it is going to be difficult for the global banking system to survive the shock to confidence for very long.

* Even if insured depositors do not pull out their funds, uninsured institutional investors are likely to run with their money, threatening to bring the system down.

* And alas, even if you have your money in a safe bank with full FDIC coverage, you could be adversely impacted.

Emphasis added by me.

So far, he's saying what I've been screaming here for months!

And if you thought that one quadrillion dollars figure I've been referencing was insane, open your eyes with this:
Derivatives are bets made mostly with borrowed money. They are bets on interest rates, bets on foreign currencies, bets on stocks, bets on corporate failures, even bets on bets. The bets are placed by banks with each other, banks with brokerage firms, brokers with hedge funds, hedge funds with banks, and more.

They are often high risk. And they are huge. According to the U.S. Comptroller of the Currency (OCC), on June 30, 2008, U.S. commercial banks held $182.1 trillion in notional value (face value) derivatives. And, according to the Bank of International Settlements (BIS), which produced a tally six months earlier for the entire world, the global pile-up of derivatives, including institutions in the U.S., Europe and Asia, was more than three times larger — $596 trillion.

That was ten times the gross domestic product of the entire planet … more than 40 times the total amount of mortgages outstanding in the United States … nearly 60 times greater than the already-huge U.S. national debt.

Emphasis added by me.

That's a little over 400 trillion short of one quadrillion dollars. That other 400+ trillion is out there. They just haven't found it and factored it in. Do they need to? Isn't that amount staggering in and of itself? It dwarfs the income of the entire fucking world!

What happens when the music stops? A metaphor:
The Mafia knows all about systemic meltdowns of gambling networks. In the numbers racket, for example, players place their bets through a bookie, who, in turn is part of an intricate network of bookies. Most of the time, the system works. But if just one big player fails to pay bookie A, that bookie might be forced to renege on bookie B, who, in turn stiffs bookie C, causing a chain reaction of payment failures.

The bookies go bankrupt. The losers lose. And even the winners get nothing. Worst of all, players counting on winnings from one side of their bets to cover losses in offsetting bets are also wiped out. The whole network crumbles — a systemic meltdown.

Emphasis added by me.

This is precisely what we are facing. This is what I saw face to face on January 1st!

What have I been saying? Exactly this:
As I warned at the outset, at some point in the not-too-distant future, governments around the world may have no other choice but to declare a global banking holiday — a shutdown of nearly every bank in the world, regardless of size, country, or financial condition.

What could happen in the banking holiday? In the past, we’ve seen some financial shutdowns that eventually helped resolve the crisis. And we’ve seen others that only made it worse. Often, savers are forced to leave their money on deposit, giving up a substantial portion of their interest income for many years. And, in other cases, the only way they can get their money back sooner is by accepting an immediate loss of principal. But no matter how it’s resolved, when banks have made big blunders and suffered large losses, it’s the multitude of savers that are invariably asked to make the biggest sacrifices and pay the biggest price. No one else has the money.

Emphasis added by me.

Have any of you stopped to wonder what happened to people who had more than the FDIC-insured $100,000 (now $250,000) on deposit in one of the banks that have failed? It's easy to not care about them at a distance because we don't have that kind of money. But I'm not blind to the fact that money could have been made honestly and through hard work and even a few smart (but not greedy!) investments. Those people took a hit and who cried for them? Where's their bailout? Do you think the FDIC came back to them later on, after raising their limit, and said, "Oh, here's another $150,000?"

This is where he and I sharply part company. This is his advice:
Question #4. “Throughout history, many governments have defaulted on their debts in a more subtle way — by devaluing their currency. Why are you recommending Treasury bills, which are denominated purely in dollars, if one of the consequences of this disaster could be a decline in the dollar?”

The trend today is toward deflation, which means a stronger dollar. But even if that changes, the solution will not be to abandon the safety and liquidity of Treasury bills. It will be to separately set some money aside and buy hedges against inflation, like gold or strong foreign currencies that tend to go up in value when the dollar falls.

Emphasis added by me.

That's an illusion. It will look like deflation for a while. But when that hyperinflation kicks in, we're the United States of Zimbabwe. There is absolutely no escaping the vengeance of hyperinflation. Economic orthodoxy demands that, just as economic orthodoxy (rightly) demands 1 + 1 = 2.

There is no safe place.

And there is only one way out.

The only question that remains is, How long before they recognize that?

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