Wednesday, December 7, 2011

What do we really know?

Some of you may have read the recent story from Bloomberg, which has revealed the massive loans that were made by the federal reserve to some of the world's major banks, or rather the 'too big to fail' banks:

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.
The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.
Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.
A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.
Interestingly, in a letter to a US senator, the Federal Reserve is claiming that the Bloomberg story is filled with errors.  The reason why I am posting on this story is that there was a fascinating snippet that came from the C-Span service, which shone a little light on what was taking place in 2008, as the economic crisis became apparent:

Now the interesting thing is that it is not clear where this information comes from. A senate hearing has the senator discussing the issue with Bernanke and Paulson (go to 1 hour and 50 minutes). In the discussion, Kanjorski suggests a similar scenario to the clip above, and asks for comment from Bernanke and and Paulson. They do not directly agree that the event took place, but they also do not refute it. When presenting the discussion of the bank run in the hearing, Kanjorski starts by saying that he had heard about a money market run from a friend in Wall Street, and that some newspapers were anonymously reporting this. He then goes on to say that 'he has evidence of this in some of our conversations' (presumably with Bernanke and/or Paulson), before saying 'with you and other experts'. He dates the event to 11-11:30 last Thursday, which is generally given as September 18, 2008.

I conducted a Google news search for the terms 'money market' and bank run for the 17th through to the date of the hearing, and could not find these 'anonymous stories' that Kanjorski discusses. This may be because I simply did not pick them up from the results, but I thought I would at least check to see if I could find them. However, I do find it distinctly odd that this is such a huge, if not momentous story, but all of the details are vague, and the sources are undefined. Why is it that we get no confirmation or denial from Bernanke and/or Paulson? Was it to avoid a fall in confidence? This might be seen as a justifiable reason, but I cannot help but think that this kind of information should be available (I have never supported the bailouts in the first place, so disagree with these arguments).

The other interesting point is that the date given by Blooomberg for 'neediest' day is December the 5th, a Friday. A good summary of the position of the world at the time of this stress can be found in this piece, dated 10 December:

Nations in Europe’s single-currency zone agreed Sunday to temporarily guarantee bank refinancing and pledged to prevent banks failing as part of a raft of emergency measures designed to get credit flowing again.
It was Europe’s most unified response so far to the global financial crisis and addresses a key part of the problem: banks’ reluctance to lend to each other. That has helped fuel the crisis that has pulled down some of Wall Street’s most storied names and is threatening the core of the U.S. and European economies.
After the Dow Jones industrial average ended its worst week in history, plummeting more than 18 percent last week, world leaders scrambled all weekend for a way to unblock money markets before they open Monday.

The ripples of the crisis were spreading with, for example, December 12th seeing the merger of Halifax and Lloyds TSB in the UK:

Halifax Bank of Scotland's bad debts and other charges have risen by two-thirds in two months as corporate and consumer loans buckle under economic pressure.

The banking giant, whose shareholders yesterday approved its takeover by Lloyds TSB, said its charges for bad debts and asset devaluations were £8bn for the year to 30 November, up from £4.8bn at the end of September. It also warned that more pain lay ahead, sending its shares down 23 per cent and hurting those of other British lenders. Shares in Lloyds fell by 18 per cent, RBS was down 15 per cent and Barclays lost 8 per cent.

My question here is as follows; was the December 5th bailout due to another bank run, or was it preventative? Again, this needs to be made public. What were the drivers of this huge bailout, and how were the bailouts decided upon, such as the reason why bank x got amount y?  Bloomberg have done us all a great service in providing some of the information surrounding the bailouts, but I cannot help but be concerned that there still remains so much opacity. The questions are endless....

The point in this post is really to say that there seems to be two worlds. One world is that of the politicians, the central bankers, the too big to fail banks - and the other world is the rest of us. I think of Kanjorski's comments about his hearing the news of the bank run from a friend in Wall Street, and the conversations that he has had with Bernanke and Paulson, and the opacity of explanations, and wonder at what is now taking place in this 'other world'.

At the moment, we have the European crisis in full swing but the official statements, the press releases and so forth, are not really telling us the story. We are, as when the economic crisis first broke, almost certainly being kept out of the full picture. Those holding the levers of power are having their private discussions, and the impact of those discussions, and the decisions that flow from them will impact upon all of us. I am not sure that this can, under any circumstances, be justified. The excuses that the underlying story is kept under wraps to 'maintain confidence' simply does not excuse this opacity.

The point here is that there are not really two worlds, as they are directly connected. However, it seems that the decisions taken and information being held in one world are being undertaken without any real reference to the second world. The disconnect is artificial, and it is wrong. Those in that first world perceive themselves as 'the wise', but do not reconise their ongoing failure. They pull policy levers here, they pull policy levers there, and they keep the levers, and the drivers of their actions, hidden from the second world.

If they had succeeded in stemming the economic crisis, I might be content. However, they promised resolution, but have only succeeded in making the scale of the crisis ever larger. They are not wise; their record tells us that they are fools. They have forfeited any excuse for being privileged insiders who exclude the second world from information, and proper scrutiny of their decisions. I guess my real question, the burning question is this; what are these fools now up to behind closed doors?


  1. I think they - the so called ‘elite’ you allude to - know the system is broken beyond repair and informing people of this will lead to widespread panic.

    So despite your justified claims of opacity, policy makers cannot simply announce reality as it is only confidence holding the system together.

    Like the captain of the Titanic reassuring passengers as it sank to allow for an orderly escape by some, I think their actions may only be buying time to ensure their interests are protected and they benefit as much as possible before the wheels inevitably come off.

  2. Yes, it seems impossible to find out what is going on. Frustrating and frightening.

    ZeroHedge gives hints of what it is going on behind the scnes (in their posts that I can understand).

    Anyone got advice/recommendations on buying gold?

  3. Having watched Inside Job on TV last night - I suspect the answer lies therein. Basically the vested interest of the few is at the expense of the many.

    I have long held a suspicion that the US was not regulating (since I read Liars Poker) but at least corruption charges followed the demise of Salomon Bros. What is abundantly clear is that no lessons have beeb learnt and that the ?US political and finacial systems are so intertwined and basically corrupt

  4. LordSidcup:

    Do not buy into the paper gold market, such as ETF's (Exchange Traded Funds). Buy physical bullion ONLY.

    Do not leave it in a bank's safe deposit box. My advice is hide it very very well and do not tell a soul that you have even bought any.

    Buy small denominations as then you do not have to sell all your holding if you need some cash. I recommend Full Sovereigns as they are (currently) exempt from UK capital gains tax. They contain 0.2354 of a Troy Oz (31.103g) of gold.

    I have bought some from ebay with no problem, but there are apparently fakes so you need to choose good sellers and know what you are looking for.

    I have also bought from these people and was happy:

    With bullion dealers you will pay a premium of 15% over the gold spot price on small denomination bars and sovereigns.

    They post them through Royal Mail with no problems.

  5. Lord Sidcup,

    You can buy gold via ETF's.

    There are two UK providers:

    Some call this fiat gold, fractionally reserved gold (paper gold).

    If you want physical you can find plenty of gold dealers on the net.


    This Kyle Bass video interview is worth a view - November 2011:

    He discusses sovereign defaults.

    All the best

    Death to Bubble Addicts

  6. Thanks for your replies Jonny and DtBA

    Looks like physical gold is the way I'll go.

    I am looking into buying allocated gold from BullionVault (which stores the gold, and does not fractionally reserve it). Anyone had experience with this company or with gold bailment in general?

    Best LS

  7. I have been using Bullionvault since May 2009. When interest rates went to rock bottom rates and after listening to Marc Faber, Peter Schiff and Jim Rogers I was convinced cash had more risks than precious metals. I price all the goods and services I buy in grams of gold and it feels better when I see prices in gold reduce. I also buy shares in commodities. Costs for storage amount to less than a gram of gold a year.


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