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

[agnes at mcn.org]

Be sure to read the last paragraph entitled "Another Argument for Public
Banking. by Ellen Brown


> "[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.
>
>
>
>
>
>
>
>