Would this be what you guys are talking about when you say that the Fed won’t let a big bank go under?
http://news.yahoo.com/s/ap/20080314/ap_on_bi_ge/fed_credit_crisis
That’s about as far “under” as a big bank can go. The argument by the FED is that a big bank can not be allowed to fail because it would undermine the economy and confidence therein. However, that’s really just a big scam, perpetrated by the big banks that actually run the country. What really happens is that the big banks and the families behind them are in a no-lose business. They follow reckless business practices (making huge profits) and then are bailed out by the taxpayer (primarily through inflation) when their wreckless practices catch up with them. If you or I acted as recklessly as the bankers, we’d be out of business and in jail!!!
Mike
Not exactly but it is an extension of that theme. Originally the concept of “too big to fail” applied to commercial banks and the concern that a bank failure would result in a run on the entire banking system. This is what happened back during the great depression and collapsed the entire network because there is never enough cash on hand to pay off every single depositor. It is also the origin of federal deposit insurance which presumably makes us all feel better. Bear Stearns is not a commercial bank but an investment bank which are the backbone of our modern market system.
Bear Stearns is defunct. It could not open for business today. Because it is an “investment” bank and does not have the monetary stoppage - like a lender of last resort - that a commercial bank has, it could not continue to operate. JP Morgan is just putting it’s hand on the gushing wound until someone can put a bucket under it to catch the blood. Who that bucket will be is probably a combination of other banks or private investors.
They’ll divy up Bear’s body parts by absorbing the viable business assets. Just because JP Morgan stepped in via the TSF from the Fed does not mean that Bear was bailed out. It is closing its doors and it will be no more. There’s no putting lipstick on this pig. It is a massive bank failure and the bigger they are the harder they fall.
P.S. JP Morgan is next.
These are some crazy topics you guys are discussing and it led me to do further studying as well. I’m in the process of watching the documentary on Money Masters, and I had an epiphany… can anyone answer this:
If i deposit $1,000 onto a bank, the bank will lend out $10,000 and collect interest on it. so that’s $9,000 imaginary money that they lend out. so if a person buys a home for $9,000, and then goes into foreclosure, where is the bank losing actual money? the $9,000 was never real money. instead, the bank takes the home and sells it and gets real money for it! where do they lose?
I’m not a banker, and don’t play one on tv. If they have $1000 and lend $10,000 they are upside down. If they have $10,000 on deposit, and lend $1,000 and interest, and reserve some of the orig deposit, then they are making money.
P.S. JP Morgan is next.
I have to respectfully disgree…JP Morgan is extremely solvent and has suffered far less than other banks in this credit crisis…Hindsight is 20/20…I see others saying I told you so etc but I would bet no one was short the banks…
The pros know their way around town…If you remember about 2 weeks ago Hedge fund wiz Eddie Lampert bailed out of his long position in Citigroup…Since then the stock has fallen 6 more points…Is there more blood to come?,I assume so…But collapse of our financial institutions isn’t going to happen…I said this months ago and I will say it again…The markets are heavily manipulated…Keep that in mind…The Fed will turn up the speed on the printing presses,oil will go higher,the dollar will keep hitting lows UNTIL Bernanke (moron) realizes that he his out of ammo…Then the real pain will start when he is forced to raise rates to stem the rise oil and the devaluation of most important asset US Dollar…Thank Greenspan for this mess and no one else…Greenspan created this flood of credit and kept it well oiled until the mortgage industry and millions of underfunded,uncollateralized investors ruined it…
If they have $1000 and lend $10,000 they are upside down.
I would encourage you to get educated on this topic. It is important to understand how our money is created out of thin air and is based on absolutely nothing (other than the government’s promise to tax you into oblivion). It is even more important to understand what ALWAYS happens to the economy when a government creates fiat money (money not based on anything). That is what’s really important because we will soon be living the resulting collapse.
If you have deposits of $1,000 for which you’re paying 3%, but you are loaning out $10,000 for which you are getting paid 7%, what you have is a business model for making big profits. Of course, we’re not talking about $1,000 and $10,000 - we’re really talking about MUCH larger numbers.
Furthermore, if you’re family controls one of the huge national banks that the government will NOT ALLOW to fail, you’ve got a great business. You can be as reckless and aggressive as you like during the boom cycles and know that everything will end up great during the down cycles (THAT YOU CAUSED), with the taxpayer paying the tab (through inflation) when bad times arrive.
Mike
The scary part of this entire mess is the fact that the CEO’s of these banks OUT RIGHT LIE to the public and the media. 48 HOURS BEFORE the JP MORGAN announcement Bear Stearns CEO Alan Schwartz was on CNBC telling the world that the rumors were COMPLETELY FALSE regarding liquidity problems at his company.
HE OUT RIGHT LIED!!! What WE have to remember is this…HE HAS TO!!! If he came out and told the world that Bears was basically insolvent NO ONE would have done ANYTHING to step and rescue any part of that bank.
THINK ABOUT THAT!!! These guy’s are SCREWED either WAY!!!
So the next question becomes…What do you do when the heads of these banks CAN NOT provide honest information about their institutions???
The answer?..YOU GET VERY NERVOUS!!!
THINK HE’S the ONLY ONE LYING??? Seriously…this is THE most dangerous enviroment for investors I have ever seen.
What EVERYONE here better remember is this…
NO ONE…Not Rookie, NOT ME, not even the FED… FULLY know’s the true depth of this financial crisis. It’s like watching a guy trying to plug holes in a SINKING boat while more & more leaks appear.
Watch what’s going on in the markets, in the last few months the following has happened…
5 interest rate CUTS in the last 6 MONTHS!!! If these markets had ANY STRENGTH what-so-ever, they’d be in the stratosphere right now.
The Fed is now allowing BANKS to EXCHANGE their mortgage backed securities for TREASURIES!!! $200 BILLION worth coming MARCH 27th and Uncle BENNY has already said “BUT WAIT…THERE’S MORE!!!”
Bear Stearns had a RUN ON THE BANK, don’t let anyone BS you. That is EXACTLY what this was. As more and more people closed out accounts, they KNEW they DID NOT have the cash to cover those redemptions. THAT’S AN OLD FASHION RUN ON A BANK FOLKS!!!
Here’s a nice article on other VERY interesting finacial problems that NO ONE is talking about…check it out…
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccview103.xml
The scary part???
This is JUST STARTING to get BAD. FAR, FAR worse will follow…WATCH!!!
The SILVER LINING for us real estate investors???
2008 to 2010 will be THE BEST YEARS OF OUR LIVES as far as BARGAINS GO!!!
BE READY!!!
Banking 101: Banks do NOT lend imaginary money, they lend real money. Banks start with capital invested by their shareholders then take deposits from the public and lend out the mix hopefully for more interest than they pay on the deposits, this is called spread and is the bread and butter of most banks. Many people think that banking is hugely profitable, it’s not. Banks pay 3% lend at 7% but still have to pay salary, overhead and cover their defaulted loans. In the end they earn about a 1-2% return on assets. It’s a very thin business model and is reliant upon high leverage (low capital requirements) and an aversion to risk. Investment banking on the other hand is a different animal.
High leverage IS risky. Ask Donald Trump. But the Donald didn’t have Uncle Sap to bail him out. :biggrin
Well the banking industry was deregulated in 1989 and commercial banks can now securitize assets like investment banks do. This allowed them to create SIV’s just like investment banks and thereby expose themselves to the same risks. The commercial bank charter has the US government as a shareholder up to 19% whereas the government has not (yet) invested directly into an investment bank.
Just for clarification, the only “real” money that the banks handle are deposits from investors and customers and interest payments they collect on the money they lend. However, the bank discount rate facility is simply an accounting entry from the central banks onto the balance sheet of the commercial and investment banks. No real money is actually printed and shipped in bags to the vaults of the banks to lend out.
This is true of all the Fed’s “Facilities.” Term Auction Facilty (TAF) where banks bid to pay the highest interest and shortest terms for a set amount of money being lent by the central banks. Term Securities Exhange Facility - the most recent one that JP Morgan borrowed against in exchange for subprime related assets of Bear Stearns.
“Banking 101: Banks do NOT lend imaginary money, they lend real money.”
Hello! Excuse Me!
Educate yourself before making statements that indicate you don’t know what you are talking about. Take a look at any bill, all the bills in your wallet What do they say, Gold Certificate? Silver Certificate? No! “Federal Reserve Note” is what they say, there is NOTHING behind our money, it is technically called “Fiat” money.
Read, “The Creature From Jekyl Island” Sounds scary? Not as scary as the true story of the birth of our Central Bank, the Federal Reserve Bank by on JP Morgan’s private island in 1910 by the super wealthy European bankers that OWN the shares of the Federal Reserve. (How could they issue shares of the Fed to themselves if the Fed were really part of the US Government? Aha!)
These bankers, through the Fed, makes “electronic credits” to member banks accounts, not real money. But of course they collect real interest on these electronic credits! These are the inter bank loans that the Fed fixes the interest rates on, controlling the amount of money in the system. These are the member bank’s reserves. They then make loans of about 10X the amount of their reserves to their customers. When a commercial bank makes a loan, it is creating money! Did you know that bank’s carry customer’s deposits on their books as Liabilities, not assets? Loans are assets to the banks.
Go ahead and Google Jekyl island and while you are at it, “Fractional Banking”
If more people knew the truth, maybe we would not all be debt slaves today! Also, look up Senator Louis T. McFadden. He tried to warn us, tried to have the Fed disbanded in 1934, saying in a Congressional Hearing, “Mr. Chairman, we have in this Country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks, hereinafter called the Fed.”
Shortly thereafter he was shot at, then poisoned, from which he recovered, but was finally successfully poisoned at a political banquet in 1936!
Guess the Fed did not like the secret of their imaginary money getting out to the public!
Bill
kemet,
Thanks for the advice but after working in the Federal Reserve System for nine years I think I have a basic understanding of the mechanics. I was not addressing the gold standard or lack thereof but simply the misconception that the money multiplier effect can be applied to a single financial institution. The creation of commercial bank deposits and hence more loans requires a multi-bank system and is impossible at the single institution level.
Contrary to your statements and the theme of your suggested reading the Fed is not owned or controlled by secretive European bankers. The only stock ownership associated with the Federal Reserve System is that of the twelve regional reserve banks. They issue stock which is purchased by their member banks. It is a requirement of membership and the member banks cannot sell, trade or encumber those shares.
71tr, the fact that you worked at or for the Fed explains why you believe what you believe, it does not prove it is right If you did not pay your taxes for 9 years and were never caught, what does that prove?
You alluded to but obviously did not read the documents I suggested. McFadden was head of the House banking committee in Congress for 10 years, he was also a Congrressman (I believe I said before he was a Senator, that is not correct) His testimony I alluded to is a matter of the Congressional record, see below.
It is not that I am a fan of McFadden. He was a notorious anti-Semite and pro-Hitler, a fairly common view in the mid to late 30’s, shared by, among others; Henry Ford, Charles Lindberg, Thomas Watson and Prescott Bush (Who’s company, the Union Bank was later seized by the US government for laundering Nazi loot!) Yup, W’s grandpa was also a fascist!
But that does not impune McFadden’s knowledge of the Fed.
You are correct in saying the stock of the Fed is owned by the 12 Fed regional banks. How do you then insist that this does not means, they own the Fed? When is a stockholder Not an owner of a company whose stock he owns? Who owns them? President Bush? The Congress? Could you please tell me or show me where it is authorized for the US government to issues stock? Bonds, yes; stocks, equity, no.
Look, I am only a smuck trying to answer quesions on a real estate message board. Do yourself a favor, if you want the truth, get a free audio of the story of the creation of the Fed: http://www.spielbauer.com/JekyllDownload.htm
Read McFadden’s words directly: the Congressional Record, pages 12595-12603
If you want a more recent dissertation on the evils of "Imaginary money, created out of thin air), listen to Ron Paul: http://www.apfn.net/pogo/M001I060425193838-RON-PAUL-MONEY-4-25-06.MP3
Now, back to our regularly scheduled program, real estate!
Bill
You misquote me. What I said was the twelve regional banks issue stock that is owned by their member banks not that they own stock in the Fed. The Fed is a government agency and hence issues no stock. The closest thing it has to an owner would be the American taxpayer. However, the 12 regional banks are stock corporations and their stock is owned by their member banks as a requirement of membership.
71tr, if you do not have the intellectual curiosity to investigate my sources, we cannot continue this conversation. You keep making statements that are factually incorrect. The Fed is NOT a government agency, it is a private company owned by the 12 member banks. Its stock is owned by them and they are privately owned.
Here is a direct, if ambiguous quote from Donald J. Winn, Assistant to the Board of Governors of the Federal Reserve in response to a question from Congressman Shumway in 1983: “The Federal Reserve System was established by an act of Congress in 1913 and is not a ‘private corporation’.” On the next page, Mr. Winn continues, “The stock of the Federal Reserve Banks is held entirely by commercial banks that are members of the Federal Reserve System.”
Kind a hard to say the Fed is “not a private corporation” when he then says the “stock of the Fed is owned by commercial banks!” He just called himself a liar!
71 I know you won’t read it, but for anyone who is open and intellectually curious, here is a great site to get tons of info on the Fed and what it is and isn’t: http://www.apfn.org/apfn/reserve.htm
Bill
Well, I think the answer to this debate is whether or not 71tr considered himself a “civil servant” while working at the Fed?
Employees of government agencies are civil servants. Is Ben Bernanke or any of the Fed chiefs a civil servant? Do they understand that their paychecks are given to them by the tax payers? I think not. They are not answerable to the taxpayers or our elected representatives.
Kemet, with all due respect your statement above is incorrect. The only stock associated with the Federal Reserve System is that of the twelve regional banks. They are organized as stock corporations and that stock is owned by their commercial bank members, on this you and I agree. However, that is where the notion of stock owned private corporation ceases. The Federal Reserve Board of Governors in Washington is not owned by the twelve regional banks as you claim, they are appointed by the President and they run the system as a government agency. Obviously you do not believe my words so perhaps a third party reference would help. http://en.wikipedia.org/wiki/Federal_Reserve_System
As for your quote from Donald Winn below if you read it carefully it makes perfect sense. He clearly states that the “System” is not a private corporation but that the “Reserve Banks” (read regional banks) are stock corporations. There is a distinction here that seems to be lost on you. This is why the “Fed” is called a quasi-public organization, part of it is private (the regional banks) and part of it is government (the board of governors).
Deal Hunter, yes I will admit to having been a civil servant during my stint with the government. Unfortunately for us bureaucracy has a way of shielding the players from accountability.
Part of the confusion also lies in the perception that the Fed’s manipulation of interest rates does not constitute government intervention as in “fiscal” stimulus. It’s the classic contradiction of free market capitalists that continue to vehemently oppose government bail-outs and tax payer funded stimulus packages and yet welcome the constant manipulation of the dollar by the Feds.
George Soros has defended the (existence of) the Fed in the past by stating that it is not a government agency and therefore not a direct threat to free markets. Of course Soros has also said that there is no such thing as a free market and that markets are “reflexive”, subject to influence.
So if the Fed finally decides to just buy up subprime debt once and for all, that would not consitute a government bail out because the Fed did it without the prior approval or blessing of the President or the Congress???