Rates may have not yet bottomed??

**Longsnowsm** · 10-19-2009 12:05 AM

No_Worries,

I think I explained why I used the Q4 numbers, but let's look at the most current Total Credit Risk numbers 2Q09 since I know that will make you happy:

JP Morgan 283%
GOLDMAN 921%
BANK OF AMERICA 137%
CITIBANK 209%
WELLS 71%

Those are still acceptable levels of risk? And it is interesting you pointed out the marked improvement... Why are these banks suddenly hoarding their cash? Could it be the tidal wave of bad debts, bad bets, and deteriorating numbers? How anyone can lose money when they are getting free money to loan is really beyond explanation.

The smart money only has the funds they need to conduct business on a daily basis in the banks and has already sought out other investments in tangibles(commodities, real estate), overseas, and even in other currency markets. And of course there is the mattess, tin can in the backyard if that is your preference... but what dollars will be worth is the wild card.

As to the full reserve banks. Just because something hasn't been done system wide does not mean it shouldn't be done. Your right, in a self regulating gold standard full reserve banking will work just fine. So you don't think the "services industry" is profitable enough that banks should even bother serving customers with checking, savings, ATM cards, funds transfers, and a safe secure place for you to keep your money? That isn't value added enough for you to keep using a bank? Well then why do you use a bank now? If you think the fees will be too high in a full reserve bank then so be it. That is possible I suppose as the fees would be as high as the market will bear and there would be competition between the banks for your business. Banks would have two functions in full reserve. A warehousing function, and a lending function. That lending function could still exist, and people would choose to put money in those accounts for that purpose. At least at that juncture they(the customers) know that they are taking risks, and what those risks might be. The current one legged pony model puts everyone at risk.

Your right the banks haven't done it(full reserve) because the services and fees model doesn't permit the wildly profitable risky leverage schemes. The margins are thin, but some people find even in a thin margins environment that they can still earn a good living.... Sorta like trucking, you just gotta be willing to work for it. So if the banks aren't allowed to act like Mafia then it just isn't worth it?

I will agree with you on the issue of transparency, and a real marketplace for these contracts. It is just insane what is going on presently, and it is almost impossible to determine what any of these contracts are worth, or the real risks associated. So far the proposed regulation bouncing around from the Treasury is weak at best, and the bill working through Congress is already being watered down to the point that I don't know why anyone would bother passing the bill. So I guess we will see what happens. So far I am not impressed with anything I heard yet in either the derivatives or banking reform.

Then there is the whole off balance sheet transactions risk. I worked for one of these guys who thought they were the brightest guys on Wall Street playing the "structured finance" game. Our CEO and CFO were out on the street telling the world that we weren't Enron... BS, it was creative finance from A-Z with capitalization of maintenance costs, off balance sheet investments that were leveraged 7 ways from Sunday. It was those off balance sheet bets that had grown so large that they literally wiped out the company and sent both the CEO and CFO to a "country club". There was no way for Wall Street or the average investor to know about these other companies and other investment vehicles or what the real risk was to the company. Nothing has changed today, Wall Street convinced everyone that we don't want to go there as far as regulation.

Status quo works for you. That is great. So far I have heard you say that leverage is too high. The the Fed and the Treasury are asleep at the wheel. So what are you proposing to do about it? Your fractional reserve one legged pony has a broken leg and it laying out in the road. What is the solution to this inherently unstable system?

I am a transparency guy, and I want to know what I am dealing with in the banking and monetary situation. I guess I am the last guy to the party that slowly had the rind peeled back over the last few years to reveal the level of risk and fraud in the system. I am happy you are satisfied with what your getting and seem all to willing to play along with the "system". I however am not. I can only hope that by taking the time to at least post here and spill out a few of the numbers that someone will at least ask and start digging. Our banking system is unsafe, and just because we have creative finance programs to write off those bad bets doesn't change the fact that the system is rigged, profits are private, but loses are public. Sounds like quite a sweetheart deal if you can get it.

For example the numbers we have been talking about here in general terms so far are just the derivatives positions. What about the consumer and wholesale debt that is on their books. For example JP Morgan in the latest numbers they just posted.

Total Assets per the SEC filing is: (all numbers reflected in millions)
$2,041,009
Consumer loans:
$434,191
Wholesale loans:
$218,953

Now add the credit derivatives play into the picture:
$6,817,788

The talking heads are throwing out some pretty horrific loss percentages(20-30% loses right now) on these credit positions. So just how solvent is JP Morgan? You cannot answer because nobody knows, but even at a casual glance at the numbers here and the reported portfolio charge offs and losses it isn't far from the truth to say they are insolvent. Without the public backing and assurance that they "are too big to fail", and keep on doing business as usual. Otherwise they would probably have been shuttered already. Now think about that for a moment if Lehman is credited for setting off the current fireworks what would happen if a JP Morgan or Goldman were shutdown? So please if you have looked at the numbers and think this is perfectly sane and acceptable then so be it. I just hope that others reading this thread have taken the time to go and look for themselves. We are talking about banks and what is going on with our money, but please don't try to play down the risks. If it wasn't for FDIC I assure you that you wouldn't have the "casual" attitude about the financial state of our banks.

I am currently following the one full reserve bank that I know of called the Free Lakota Bank. I don't bank with them because I have a concern with the accepted mint that they will accept silver and gold from. The premium the mint is charging over the spot price of the metal is just too high. They should accept and recognize all forms of silver and gold that is out there in the market place and/or reduce the premium per ounce to a level that is in line with the market place. Otherwise the banks fees are reasonable. They perform as I have described here where you have deposits, and then you can also decide how much you want to put into the general investment fund and put those funds at risk. Again the customers choice if they want to put money at risk and not some scheme like with your one legged pony fractional ponzi scheme. So I can only hope that Free Lakota grows and expands to other locations and gets their mint premium sorted out or that other banks pop up to address that need. So it isn't that banks cannot make money, and that customers don't get value with full reserve banking. Otherwise Free Lakota wouldn't have been in business long.

Maybe it is time for people to start asking about the road that hasn't been traveled. There are many currencies and governments that no longer exist today because of the one legged pony and the expert direction of the arsonists. What are the risks to the system and to people with the method I have described compared to the ponzi scheme we have today? There is safety and security in the method I describe. It isn't pie in the sky, it is just hard for the crack head banks to accept we are not going to allow them to risk the entire system by their lending practices and creative finance. That we are not going to accept the Fed allowing this unregulated, unrestrained growth of the money supply in the form of debt and leverage that puts us all at risk. Until we demand better we will never get out of this boom and bust cycle that these crooks have created. Why your so opposed to safety, security, and transparency I don't know. I don't know how anyone can think the current system provides any of that.

I am a realist. I know what I am suggesting will not get done until the current system collapses and people demand safe and sound monetary policy. I know full well that a full reserve system will work. Just as I know your current status quo system always fails and ends up in utter ruin. I also know that it means enough people have to wake up to the the fraud being perpetrated upon them to ensure that the current band of crooks are run out of town. I personally don't think that they can save the dollar at this point unless someone grows a spine and attempts to defend the dollar. Until there are pitch forks and torches running through the streets to hang the crooks who bought us to this place nothing is going to change. As the dollar goes so does our nation.

So disregard the questions I asked. Your for the ponzi scheme, and I am against it. You trust it to work out and I think history is replete with stories showing that it won't unless of course your a banker. We can pour over the numbers until we are blue in the face and it won't change anything. I think that the state of our government spending and financial system is mind bogglingly insane. You seem to think that our financial system has always worked this way and it just needs a little tweak. It hasn't always been this way, and it will take a lot more than some minor tuning to save the existing economy and monetary system. So I am voting with my money and taking the appropriate actions on my part, tin can, mattress, lotto tickets, cabbage patch collection, and an autographed picture of Mr Green Jeans and heading for the hills. I wish you the best of luck with the one legged pony, and I truly hope that it's leg heals and we are OK. At this point I think that if one can look at these numbers and not think we are in desperate straights it is pointless to continue posting in this thread. We can go over SEC filings and financial statements until blue in the face and you will tell me things are fine, and I will say they aren't or vis versa. So if we are both still kicking around in 5 years let's come back and see who was right... Obviously reality might change perspective.

Just wake me up when the economy starts to improve... I hate it when I miss that part! LOL

Longsnowsm

**no_worries** · 10-19-2009 03:22 PM

Yes, and if you look at that metric for risk exposure from Q2 1998 the top five banks look like this:

728%
373%
334%
194%
172%

Gee, that actually looks worse than the most current numbers. Does that mean banks are more stable today than they were 11 years ago? No. What it means is that this isn't a reliable risk metric. I tried to point out to you why most of these numbers aren't reliable risk indicators. Maybe hearing it from the OCC itself will help:

"Notional amounts are helpful in measuring the level and trends of derivatives activity. However, these amounts are a misleading indicator of risk exposure."

You talk about off-balance sheet activity as if it was something completely different. You do realize that most of those derivatives numbers you "analyzed" from the OCC's report are in fact off-balance sheet. Derivatives that do not involve booking assets or liabilities are, by definition, off-balance sheet since a balance sheet is simply a listing of the two. Swaps, futures, options...in other words most derivatives, fall into that category.

Banks are not "hoarding" money. They are lending. I've been house shopping all summer and I can get a mortgage from multiple sources. I just stopped by a trailer dealer the other day. If I wanted to finance through them, I could. But I'll probably just go through my local bank...they'll loan me money too. Is credit harder to come by these days? Damn straight! Businesses are going under left and right as spending has crashed. People are losing their jobs and therefore their homes and cars. Even if the banks got their money for free (which they don't) they still have to pay it back AND cover their operating costs. Pretty tough to do if the borrower isn't paying you anymore. Better hope the asset is worth enough to cover the liability. If it's early in the contract and/or you didn't require enough down, you're going to lose money. THAT'S what got the banks in the predicament they're in and that's why they're more careful about who they loan to these days.

You say there was no way for people to know what was going on leading up to the credit crisis. Baloney! There were plenty of people who knew what was going on. They may not have known the specifics, but that was irrelevant. They knew something wasn't right and trouble was brewing and they talked about it. People, for the most part, just didn't listen. Times were good, everybody was making money, nothing could go wrong. But the signs were there. I pulled out of the stock market in early '07, not because I thought a recession was inevitable, but because I knew the banks were going to have trouble. All you had to do was look at what was going on in the mortgage market. Those that didn't see something seriously wrong weren't being objective. I sat through over a year watching the market continue to go up as people poo-pooed the naysayers. But we were eventually proven right. I have a suspicion the same thing is going on today and yet the market continues to climb. The point is, none of this was ever a big secret...the signs were there.

You're right, the bank bailout was a sweetheart deal for those banks. However, the government has made money on several of those deals and has yet to lose a dime. I doubt that streak continues because I don't think AIG makes it and Citi and B of A are still questionable. But as of today, the taxpayer hasn't been taken to the cleaners. JP and Goldman are making money hand over fist again.

Your reaction in the name of safety is the same as the mom who reads a story about kidnapping and never lets here kid outside again...it's overreaction; throwing the baby out with the bathwater. The system you advocate certainly wouldn't need much regulation. Of course, it wouldn't serve much of a purpose either. A bank as nothing more than a depository institution; who needs it? You ask why I use a bank now. I give them my depository business so that I have a relationship with them when it comes time to borrow money and to make a little return on my liquid assets. If they didn't lend or pay interest, there are other options available. You claim the fees will be dictated by demand for service. Of course, but that doesn't mean that anybody has to fill that role. If the demand for basic banking services doesn't equate to high enough fees, nobody will open a bank.

Which bring us to you Lakota Bank. Are you serious? It took me less than three minutes to start having serious questions about those guys, starting with their lack of information. They hardly give you any concrete information on their operation. Try clicking on their "Management" tab...coming soon. Where are they located? They imply that they're affiliated with the Lacotah Nation, though the tribe disagrees. You're right to be wary of the AOCS. Their exchange right now is $50 per ounce when silver is trading under $18 per? And once silver hits $41.50 on the spot market, their one ounce coin jumps to $100. Are you kidding me? That's not just a "high premium" it's a scam. And back to the bank. They will do you a favor and accept your dollars as deposit "on a temporary basis." Of course, when you want to withdraw you can only get AOCS coins which are accepted at "over 23,000 merchants." I looked at the list. It does look like a great savings program because you'll have a hard time finding somewhere to spend you money. After you've deposited your "fiat currency" and they disappear without at least giving you their overvalued coins, who are you going to complain to? They aren't governed by any regulator since they aren't a real bank. In fact, if they ARE in fact some sort of Native American business, you probably wouldn't even have much in the way of legal recourse.

It doesn't strike you as odd that they take two concepts, full-reserve banking and commodity based currency, that are wildly popular among certain groups right now, sprinkle in some Ayn Rand quotes and Voila! the "perfect" bank. Oh, and they HAVEN'T been in business long. They "opened" at the end of last year. When times are darkest, that's when con artists make their killing. If that is safety, I'll take the "Ponzi scheme" every time.

**Longsnowsm** · 10-19-2009 07:46 PM

No, What it means is the banks have been out of control for decades... This kind of leverage is dangerous... And now we all get to see just how dangerous. When these same banks are forced into either raising huge cash or into wholesale liquidation of their holdings due to the layer upon layer of leverage will you still be casual about how bad this is? Are we really going to qualify this as "normal"? You may be partially right that the banks have unwound some of their risk due to the pull back in people looking for loans. I agree if your in the market and have decent credit you can get a loan. But I also have heard some of the banking brass on the talking head circuit admitting they have pulled back their horns. Don't get me wrong I think it is a good thing for them to try to get this under wraps, but we are far from them having this under control, and I don't think they have learned a darned thing. I take that back, they learned we are stupid enough to bail them out no matter how badly they should be put out of their misery and ours.

How have the banks drawn down so much risk so quickly? This explains some of it:
http://www.moneyandmarkets.com/berna...xplode-4-36033

I think this comic sums it up nicely:
washingtonpost.com

Two thumbs up on your assessment of the markets, I couldn't agree with you more. They are way ahead of themselves. I think we are setup for a significant correction while the economy tries to figure out where they new economic base is. Buy the rumor, sell the news. Until some of the dead weight companies are weeded out and some of the bad debt is finally dealt with there is no way this economy will get back to healthy footing. I don't don't see this recovery they are talking about yet. Until we see the government pull in some of this stimulus there is no way to know just what kind of economy we are actually dealing with.

I don't agree with your assessment the banks aren't getting free money. With the rates they are getting the money is free. If you cannot make money with zero interest rate money then maybe they shouldn't be doing this "banking" thing. The downside is they now have to do this thing called qualify the borrower. It is an old school technique where the bank actually finds out how much the borrower makes, how much they owe, what kind of credit history they have etc. :-) I know it is really is going to be a drag that they cannot just keep sending out credit card offers with no qualification whatsoever, but you know sometimes this thing called work is a drag. This is that thing that gets said every once in a while called "responsible behavior". Not just on the borrowers part, but on the lenders most especially. So I will agree it is a lot harder to make loans, but then again it should have been always a fair amount of work to make sure that your loans were good. I discovered when I started doing a small investment on prosper.com just how loose the lending standards are and the fact that it is a numbers game. The name of the game at the time a few years ago was to write as many loans as you could. Statistically the percentage of bad loans was low even with those with shakier credit. You could blend your portfolio with loans with varying rates of interest to help compensate for those loses. It worked pretty well as long as the funny money continued to flow, but as soon as times became rough the defaults have skyrocketed. It is still true it is a numbers game even today, but the numbers that fall into the range of default are high enough that you better have a good stomach for risk if you want to play right now. Same is true for the banks I assume. I can tell you that the information that the lender has on hand many times is not factual, or complete. So it is really hard to decide if you really want to stick your neck out on a loan. It is good that people and banks are pulling back, and I know I have drawn down my lending through Prosper until I see a stabilization of the economy. So I can sympathize with the struggles of the banks to continue to make money, but I cannot endorse the outrageous behavior they have exhibited to bring us to this point. I think for the most part it has been so long since we have seen a rip roaring correction due to the extraordinary effort that has been put forth by the fed to move from bubble to bubble over the last couple decades that people don't realize just what we are in for. This is especially true if they do not know the history of how this has played out in the past. What else could explain peoples willingness to borrow so much and save so little... You only do such a thing if your fearless, and/or stupid.

There are off balance sheet and then there is "off balance sheet". The company I worked for had dog piled like many companies into the dot.com bubble. They were buying up any company that had a web presence or was in tech in any way shape or form. What was happening and I am sure to a smaller degree even now, elephant investors were pouring in money into these small start-ups. These companies then IPO'd, and then the rolled the big bankroll from the elephants and the IPO money to springboard into some of the riskiest ventures possible. By the time it was all said and done the layers in at least one of these companies that we had bought through these lucrative off balance sheet arrangements was at least 7 layers deep that I heard about. And this was just one company that they had acquired. When it was all said and done it was revealed that these carefully crafted shill companies were so leveraged that it was many times the total assets and capitalization of the entire company(the elephant parent companies). There is no way that the Wall Street could possibly know just how deep the trouble ran due to the way this was all setup. It was very Enron like. This is what I was referring to when I said off balance sheet and I know for sure that nothing has changed with many of these companies. They may not be the IPO mill that it was, but this behavior still exists with structured acquisitions. They have created shill companies to do their bidding and make these transactions even more obscure to the street and the government. These aren't banks, but they are huge companies that definitely will send shock waves through the economy if they collapse. To what degree the banks are involved in this activity nobody will know until people start shifting through the ashes after the fact. As they say "there is more than one way to skin an investor... I mean cat".

I don't think average Joe on main street has had any idea just how bad these banks have gotten. Or just how risky this is. Like you pointed out most people don't understand most of this anyway. Most come to the conclusion something is going on when it is an emergency and all over the news. I seriously doubt most people have a clue. Not because they shouldn't know, or they shouldn't be told, but because most of this information just isn't out there for public consumption in a way that makes it easy for them to understand. Do a man on the street experiment and ask people you know what derivatives, CDO's, or swaps are... See how many can even give you a general hint/pointer what your talking about.

I would agree that a lot of people knew something was up with the mortgages. If you could fog a mirror and had a pulse you could get a loan. People saw the prices going crazy, and some realized it was a bubble. But as we have already discussed there are always those that are willing to dog pile on after the big move has already happened.

My reaction isn't an over reaction. I believe our banking system and our economy should not be allowed to be treated like a casino at the behest of the banking elite. These banks are taking high stakes gambles with our economy, our life savings, and our future. And of course our government just cannot spend the borrowed money fast enough. I will take safe sound money where commerce and the real economy exists, and not in a barrage of funny money and debt that has been implicated time and time again with the fantastic booms and busts. If sound judgment were exercised we should never have been in this situation in the first place and it is going to get much worse before it is over. Since we have seen time and time again that sound judgment does not exist then we will endlessly be in these cycles of boom and bust. Do you think they called it the "Great Depression" because it was great in a wonderful way? Do people remember these events if they are just minor inconveniences to them? Our money and our economy are not a game. Peoples lives and savings are not a game that you can just hit the redo button and they get their life savings back. You may be well enough off that if you lose some money in this scheme it won't kill you, but there are a lot of people out there that it will destroy.

There are examples right now on the globe of countries that are experiencing this and it is just a preview of what is coming here. Same global banks, same ponzi scheme. Fortunately I don't think I am the minority here when it comes to what is happening and considering this an unacceptable risk as more information is revealed about the depths of corruption. It looks like the sleeping giant of the general public is being awoken. Only if the barrage of funny money some how lures them back to sleep is this going to avoid getting ugly.

I know, we smug Americans say, it's only Argentina, it's only Iceland... It's only "fill in the blank", because most people don't realize the same circumstances and same institutions are involved. This experience isn't unique to us. The same fraud is unraveling all over the globe. If people knew that and understood this would it make a difference?

pl.net enoaro 13-8-2002

I agree with you on Free Lakota. No they are not affiliated with the Lakota nation. And for the very reasons you cited is why I don't bank with them. I do hope that they wise up and expand what they are doing and offering to include real market exchange. Right now I cannot say I would risk my money until they prove they are going to stick around and that they learn from the market place. But I do think it is promising which is why I continue to watch and hope that something good comes from it. At least then some of us who are not willing to risk everything for the profits of fractional reserve bankers will have a choice in the market place of banking if this catches on. People should have a choice, and the option to opt out of the ponzi scheme. Let people decide by giving them enough information and then lets see what they would do. Will they still choose to put their money at risk even if they understood the consequences and that there were other options available to them? Hopefully we will get the chance to see. Until then you will find me in the back yard digging holes for my tin cans.... :-)

Longsnowsm

**no_worries** · 10-20-2009 01:56 PM

I certainly don't have any issue with people who prefer to be ultraconservative with their money, especially these days. I know plenty of people that have taken their money out of traditional accounts and done various things with it. However, I see no reason to be so conservative as to earn zero or negative returns. I consider myself to be conservative with my money. Not because I bury it in the backyard but because the places I put my cash, whether investments or demand accounts, are subject to a high level of scrutiny. I certainly am not so well off that I don't mind losing money. I can't imagine there being a level of wealth where losing money wouldn't bother me. However, I haven't lost a dime so far and I don't plan on that changing. During the period that the market lost over 50%, my rate of return was almost 10%. I put my faith in my own ability to do due diligence. To me, that is conservative.

Like I said, I have absolutely no issues with people that want to be even more conservative. When people don't understand what is happening, that's probably the smart choice. We both agree that mistakes have been made. That mistakes and greed ruled in the banking industry is no surprise. Banks, or any business for that matter, are built in profits, at least in a capitalist society. Which is why I lump the bulk of the fault on the regulators. There were already many regulations in place that could have prevented much of what happened if they were simply enforced correctly. Some other things weren't addressed that should have been.

You see fault with the entire system and prefer to scrap it and its benefits entirely so as to prevent the negatives. I see the negatives as easily remedied by proper regulation and far outweighed by the beneficial aspects.

History has not looked particularly favorably on the solutions you champion. They've either been tried, sometimes multiple times, and abandoned or never even been tried. For your Armageddon scenario to occur, we would have had to follow the trend of a year ago for much longer. However, the data has shown that that trend stopped awhile ago and, in some instances, has retraced. I don't think we're going to have a recovery anytime soon, but neither do I think that things will get appreciably worse. And while there will certainly be more banks that fail, maybe even a big one, the banking system itself will remain intact. The problems now are institutional not systemic.

Now, show me some data proving that banks are borrowing at zero percent interest. The Fed Funds target rate is above zero, as is LIBOR 1-month, and the discount rate is .5%. As it so happens, banks ARE making money on their lending originated in the last year. It's the loss provisions to account for their older dated books that are still pulling them down. Even so, many of the banks are reporting significant profits. JP and Goldman last week, Mellon and M&T today. Of course, JP and especially Goldman are making the bulk of their money through trading rather than lending, but the fact remains that a large portion of the banks are making money these days.

**LightsChromeHorsepower** · 10-25-2009 05:31 PM

I see I have missed a great discussion while I've been away. Please keep the comments coming on this one.

No Worries- You talk about being able to get a mortgage from multiple sources. I'll wager that this is for a conforming mortgage that will end up in the hands of Frannie or Freddie, which means that actually the ONLY place you can get a mortgage is from the govt.

**no_worries** · 10-27-2009 02:57 PM

Originally Posted by LightsChromeHorsepower

I see I have missed a great discussion while I've been away. Please keep the comments coming on this one.

No Worries- You talk about being able to get a mortgage from multiple sources. I'll wager that this is for a conforming mortgage that will end up in the hands of Frannie or Freddie, which means that actually the ONLY place you can get a mortgage is from the govt.

It's true that roughly 90% of mortgages are extended or guaranteed by the Feds these days; but private investors have started to come back into the secondary market as originators have toughened their qualification standards and the quality of mortgages and related securities has improved. The bulk of mortgages are still made by private lenders, at various price points, and subject to a range of qualifying criteria. As a borrower, what happens on the secondary market makes little difference to me. My point was while credit has tightened substantially, it's still available to creditworthy individuals and businesses. And isn't that how it should be?

**Dejanh** · 10-27-2009 04:40 PM