[Occupymendocino] [Fwd: The Leveraged Buyout of America, Ellen Brown, CD, 20130826]

[agnes at mcn.org]

For you who want to understand what the banks are doing hoarding deposits
instead of making loans  read the Ellen Brown article below.Find out what
is a leveraged buyout. Ellen Brown has done the homework.Thank Dan
Hamburg, our Public Banking champion.
Agnes


---------------------------- Original Message ----------------------------
Subject: The Leveraged Buyout of America, Ellen Brown, CD, 20130826
From:    "Dan Hamburg" <vote at pacific.net>
Date:    Sat, August 31, 2013 10:41 am
To:      "Dan Hamburg" <vote at pacific.net>
--------------------------------------------------------------------------

"[I]t is no coincidence that stocks have rallied as the Fed has pumped money
into the coffers of the primary dealers while ICI data shows retail
investors have pulled nearly a half trillion from U.S. equity funds over the
same period. It is the banks that are propping stocks."

"Small and medium-sized businesses are responsible for creating most of the
jobs in the economy, and they are struggling today to get the credit they
need to operate. That is one of many reasons that banking needs to be a
public utility."



August 26, 2013



Common Dreams <http://www.commondreams.org>


The Leveraged Buyout of America


Giant bank holding companies now own airports, toll roads, and ports;
control power plants; and store and hoard vast quantities of commodities of
all sorts. They are systematically buying up or gaining control of the
essential lifelines of the economy. How have they pulled this off, and where
have they gotten the money?


by Ellen Brown <http://www.commondreams.org/author/ellen-brown>

In a letter
<http://big.assets.huffingtonpost.com/LetterToFedGoldmanUranium.pdf>  to
Federal Reserve Chairman Ben Bernanke dated June 27, 2013, US Representative
Alan Grayson and three co-signers expressed concern about the expansion of
large banks into what have traditionally been non-financial commercial
spheres. Specifically:

[W]e are concerned about how large banks have recently expanded their
businesses into such fields as electric power production, oil refining and
distribution, owning and operating of public assets such as ports and
airports, and even uranium mining.

After listing some disturbing examples, they observed:

According to legal scholar Saule Omarova, over the past five years, there
has been a "quiet transformation of U.S. financial holding companies." These
financial services companies have become global merchants that seek to
extract rent from any commercial or financial business activity within their
reach.  They have used legal authority in Graham-Leach-Bliley to subvert the
"foundational principle of separation of banking from commerce". . . .

It seems like there is a significant macro-economic risk in having a massive
entity like, say JP Morgan, both issuing credit cards and mortgages,
managing municipal bond offerings, selling gasoline and electric power,
running large oil tankers, trading derivatives, and owning and operating
airports, in multiple countries.

A "macro" risk indeed - not just to our economy but to our democracy and our
individual and national sovereignty. Giant banks are buying up our country's
infrastructure - the power and supply chains that are vital to the economy.
Aren't there rules against that? And where are the banks getting the money?

How Banks Launder Money Through the Repo Market

In an illuminating series of articles on Seeking Alpha titled "Repoed!
<http://seekingalpha.com/article/1109701-repoed-how-the-fed-and-depositors-f
und-banks-big-bets> ", Colin Lokey argues that  the investment arms of large
Wall Street banks are using their "excess" deposits - the excess of deposits
over loans - as collateral for borrowing in the repo market. Repos, or
"repurchase agreements," are used to raise short-term capital. Securities
are sold to investors overnight and repurchased the next day, usually day
after day.

The deposit-to-loan gap for all US banks is now about $2 trillion, and
nearly half of this gap is in Bank of America, JP Morgan Chase, and Wells
Fargo alone. It seems that the largest banks are using the majority of their
deposits (along with the Federal Reserve's quantitative easing dollars) not
to back loans to individuals and businesses but to borrow for their own
trading. Buying assets with borrowed money is called a "leveraged buyout."
The banks are leveraging our money to buy up ports, airports, toll roads,
power, and massive stores of commodities.

Using these excess deposits directly for their own speculative trading would
be blatantly illegal, but the banks have been able to avoid the appearance
of impropriety by borrowing from the repo market. (See my earlier article
here <http://webofdebt.wordpress.com/2013/07/22/5835/> .) The banks' excess
deposits are first used to purchase Treasury bonds, agency securities, and
other highly liquid, "safe" securities. These liquid assets are then pledged
as collateral in repo transactions, allowing the banks to get "clean" cash
to invest as they please. They can channel this laundered money into risky
assets such as derivatives, corporate bonds, and equities (stock).

That means they can buy up companies. Lokey writes, "It is common knowledge
that prop [proprietary] trading desks at banks can and do invest in a
variety of assets, including stocks." Prop trading desks invest for the
banks' own accounts. This was something that depository banks were forbidden
to do by the New Deal-era Glass-Steagall Act but that was allowed in 1999 by
the Gramm-Leach-Bliley Act, which repealed those portions of Glass-Steagall.

The result has been a massively risky $700-plus trillion speculative
derivatives bubble. Lokey quotes from an article by Bill Frezza in the
January 2013 Huffington Post titled "Too-Big-To-Fail Banks Gamble With
Bernanke Bucks
<http://www.huffingtonpost.com/bill-frezza/toobigtofail-banks-gamble_b_24241
56.html> ":

If you think [the cash cushion from excess deposits] makes the banks less
vulnerable to shock, think again. Much of this balance sheet cash has been
hypothecated in the repo market, laundered through the off-the-books shadow
banking system. This allows the proprietary trading desks at these "banks"
to use that cash as collateral to take out loans to gamble with. In a
process called hyper-hypothecation this pledged collateral gets pyramided,
creating a ticking time bomb ready to go kablooey when the next panic comes
around.

That Explains the Mountain of Excess Reserves

Historically, banks have attempted to maintain a loan-to-deposit ratio of
close to 100%, meaning they were "fully loaned up" and making money on their
deposits. Today, however, that ratio is only 72% on average; and for the big
derivative banks, it is much lower. For JPMorgan
<http://www.valueline.com/Tools/Educational_Articles/Stocks/Getting_To_Know_
A_Bank_With_Financial_Ratios.aspx> , it is only 31%. The unlent portion
represents the "excess deposits" available to be tapped as collateral for
the repo market.

The Fed's quantitative easing contributes to this collateral pool by
converting less-liquid mortgage-backed securities into cash in the banks'
reserve accounts. This cash is not something the banks can spend for their
own proprietary trading, but they can invest it in "safe" securities -
Treasuries and similar securities that are also the sort of collateral
acceptable in the repo market. Using this repo collateral, the banks can
then acquire the laundered cash with which they can invest or speculate for
their own accounts.

Lokey notes that US Treasuries are now being bought by banks in record
quantities. These bonds stay on the banks' books for Fed supervision
purposes, even as they are being pledged to other parties to get cash via
repo. The fact that such pledging is going on can be determined from the
banks' balance sheets, but it takes some detective work. Explaining the
intricacies of this process, the evidence that it is being done, and how it
is hidden in plain sight takes Lokey three articles, to which the reader is
referred. Suffice it to say here that he makes a compelling case.

Can They Do That?

Countering the argument that "banks can't really do anything with their
excess reserves" and that "there is no evidence that they are being
rehypothecated," Lokey points to data coming to light in conjunction with
JPMorgan's $6 billion "London Whale" fiasco. He calls it "clear-cut proof
that banks trade stocks (and virtually everything else) with excess
deposits." JPM's London-based Chief Investment Office [CIO] reported
<http://files.shareholder.com/downloads/ONE/2273239192x0x628656/4cb574a0-0bf
5-4728-9582-625e4519b5ab/Task_Force_Report.pdf> :

JPMorgan's businesses take in more in deposits that they make in loans and,
as a result, the Firm has excess cash that must be invested to meet future
liquidity needs and provide a reasonable return. The primary reponsibility
of CIO, working with JPMorgan's Treasury, is to manage this excess cash. CIO
invests the bulk of JPMorgan's excess cash in high credit quality, fixed
income securities, such as municipal bonds, whole loans, and asset-backed
securities, mortgage backed securities, corporate securities, sovereign
securities, and collateralized loan obligations.

Lokey comments:

"That passage is unequivocal - it is as unambiguous as it could possibly be.
JPMorgan invests excess deposits in a variety of assets for its own account
and as the above clearly indicates, there isn't much they won't invest those
deposits in. Sure, the first things mentioned are 'high quality fixed income
securities,' but by the end of the list, deposits are being invested in
corporate securities [stock] and CLOs [collateralized loan obligations]. . .
. [T]he idea that deposits are invested only in Treasury bonds, agencies, or
derivatives related to such 'risk free' securities is patently false."

He adds:

"[I]t is no coincidence that stocks have rallied as the Fed has pumped money
into the coffers of the primary dealers while ICI data shows retail
investors have pulled nearly a half trillion from U.S. equity funds over the
same period. It is the banks that are propping stocks."

Another Argument for Public Banking

All this helps explain why the largest Wall Street banks have radically
scaled back their lending to the local economy. It appears that JPMorgan's
loan-to-deposit ratio is only 31% not because the bank could find no
creditworthy borrowers for the other 69% but because it can profit more from
buying airports and commodities through its prop trading desk than from
making loans to small local businesses.

Small and medium-sized businesses are responsible for creating most of the
jobs in the economy, and they are struggling today to get the credit they
need to operate. That is one of many reasons that banking needs to be a
public utility. Publicly-owned banks can direct credit where it is needed in
the local economy; can protect public funds from confiscation through
<http://webofdebt.wordpress.com/2013/04/29/bail-out-is-out-bail-in-is-in-ano
ther-argument-for-publicly-owned-banks/> "bail-ins" resulting from bad
gambling in by big derivative banks; and can augment public coffers with
banking revenues, allowing local governments to cut taxes, add services, and
salvage public assets from fire-sale privatization. Publicly-owned banks
have a long and successful history
<http://www.amazon.com/Public-Bank-Solution-Austerity-Prosperity/dp/09833308
67/ref=sr_1_1?s=books&ie=UTF8&qid=1371913558&sr=1-1&keywords=public+bank+sol
ution> , and recent studies have found them to be the safest in the world.

As Representative Grayson and co-signers observed in their letter to
Chairman Bernanke, the banking system is now dominated by "global merchants
that seek to extract rent from any commercial or financial business activity
within their reach." They represent a return to a feudal landlord economy of
unearned profits from rent-seeking. We need a banking system that focuses
not on casino profiteering or feudal rent-seeking but on promoting economic
and social well-being; and that is the mandate of the public banking sector
globally.







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