"All other creditors -- bond holders -- risk losing some of
their money in a bankruptcy. So they have a reason to want to avoid bankruptcy
of a trading partner. Not so the repo and derivatives partners. They would now
be best served by looting the company -- perfectly legally -- as soon as trouble
seemed likely. In fact the repo and derivatives traders could push a bank that
owed them money over into bankruptcy when it most suited them as creditors. When,
for example, they might be in need of a bit of cash themselves to meet a few
pressing creditors of their own.
"The collapse of . . . Bear Stearns, Lehman
Brothers and AIG were all directly because repo and derivatives partners of
those institutions suddenly stopped trading and "looted' them instead."
The global credit collapse was triggered, it seems, not
by wild subprime lending but by the rush to grab collateral by players with
congressionally-approved safe harbor status for their repos and derivatives.
Bear Stearns and Lehman Brothers were strictly investment
banks, but now we have giant depository banks gambling in derivatives as well;
and with the repeal of the Glass-Steagall Act that separated depository and
investment banking, they are allowed to commingle their deposits and
investments. The risk to the depositors was made glaringly obvious when MF Global
went bankrupt in October 2011. Malone wrote:
"When MF Global went down it did so because its
repo, derivative and hypothecation partners essentially foreclosed on it. And
when they did so they then "looted' the company. And because of the co-mingling
of clients money in the hypothecation deals the "looters' also seized clients
money as well. . . JPMorgan allegedly has MF Global money while other people's
lawyers can only argue about it."
MF Global was followed
by the Cyprus "bail-in" -- the confiscation of depositor funds to recapitalize
the country's failed banks. This was followed by the coordinated appearance of bail-in
templates worldwide, mandated by the Financial Stability Board, the global
banking regulator in Switzerland.
The Auto-Destruct Trip
Wire on the Banking System
Bail-in policies are
being necessitated by the fact that governments are balking at further bank
bailouts. In the US, the Dodd-Frank Act (Section 716) now bans taxpayer bailouts of most
speculative derivative activities. That means
the next time we have a Lehman-style event, the banking system could simply collapse into a
black hole of derivative looting. Malone writes:
". . . The
bankruptcy laws allow a mechanism for banks to disembowel each other. The
strongest lend to the weaker and loot them when the moment of crisis
approaches. The plan allows the biggest banks, those who happen to be burdened
with massive holdings of dodgy euro area bonds, to leap out of the
bond crisis and instead profit from a bankruptcy which might otherwise
have killed them. All that is required is to know the import of the bankruptcy
law and do as much repo, hypothecation and derivative trading with the weaker
banks as you can.
". . . I think this means that some of the
biggest banks, themselves, have already constructed and greatly enlarged a now
truly massive trip wired auto-destruct on the banking system."
The weaker banks may be
the victims, but it is we the people who will wind up holding the bag. Malone
observes:
"For the last four years who has been putting
money in to the banks? And who has become a massive bond holder in all the
banks? We have. First via our national banks and now via the Fed, ECB and
various tax payer funded bail out funds. We are the bond holders who would be
shafted by the Plan B looting. We would be the people waiting in line for the
money the banks would have already made off with. . . .
". . . [T]he banks have created a financial
Armageddon looting machine. Their Plan B is a mechanism to loot not just
the more vulnerable banks in weaker nations, but those nations themselves.
And the looting will not take months, not even days. It could happen in hours
if not minutes."
Crisis
and Opportunity: Building a Better Mousetrap
There is no way to regulate away this sort of risk.
If both the conventional banking system and the shadow banking system are being
maintained by government guarantees, then we the people are bearing the risk. We
should be directing where the credit goes and collecting the interest. Banking
and the creation of money-as-credit need to be made public utilities, owned by
the public and having a mandate to serve the public. Public banks do not engage
in derivatives.
Today, virtually the entire
circulating money supply (M1, M2 and M3) consists of privately-created "bank
credit" -- money created on the books of banks in the form of loans. If this
private credit system implodes, we will be without a money supply. One option
would be to return to the system of government-issued money that was devised by
the American colonists, revived by Abraham Lincoln during the Civil War, and
used by other countries at various times and places around the world. Another option
would be a system of publicly-owned
state banks on the model of the Bank of North Dakota, leveraging the
capital of the state backed by the revenues of the state into public bank credit for
the use of the local economy.
Change happens historically in times of crisis, and
we may be there again today.
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