I was doing some research when I came a cross a document put out by Robert Morris Associates, a banking industry Association founded in 1914 (to coordinate the yippeeeyaiyay that would follow after the 1913 Federal Reserve Act). They named it after Robert Morris, a signer of the Declaration of Independence and counter-revolutionary who with Alexander Hamilton betrayed the revolution by arrange to finance the violence. The Revolutionary War debt was passed on to those who fought it, while the benefits went to bankers. See Shay's Rebellion on all of that. Freedom was strangled in the crib. That should give you some indication as to the probity of the people who put out this document: Lending Our Credit Instead of Our Money. The document is a copy of a seminar workbook and text explaining the use of standby letters of credit, and casting the instrument as a way to earn more banking fees. Fair enough, until you read what bankers knew, and when they knew it. In this case back in 1983. As I read through the document, essentially on standby letters of credit, I was astonished to see the genesis of our current economic troubles.
Now normally letters of credit are paid out if an event occurs, a standby letter of credit pays out for non-performance. For example, Arabs order a million dollar oil pump from me and arrange payment by letter of credit. I get paid when I ship the oil pump. But to guarantee the oil pump works, I open a standby letter of credit at the same time the Arabs open their payment letter of credit to me. If the oil pump, once installed, does not work and a designated 3rd party assesses that the oil pump does not work, then the Arabs get their million back by means of my stand-by letter of credit, guaranteed by a bank. This is one of several uses of the standby letter of credit, which pays out on non-performance.
Any letter of credit, including a standby letter of credit, represents a guarantee by the bank, independent of the two parties involved, the issuer and the beneficiary (the buyer and seller in a deal, both in essence bank customers). The buyer and seller are chary enough of each other to require a letter of credit, and the bank knows each party well enough to issue a letter of credit, for a fee. By letters of credit, banks loan their credit, not their money.
Now here is the rub, from the bankers and regulators point of view, as laid out in the seminar booklet: standby letters of credit exposure are treated in financial statements as footnotes, not balance sheet items.The nice thing about standby letters of credit, there is no reserve requirement to match exposure. Since the letter of credit is backed by an abundance of caution (a primary and secondary payment source) it is unlikely to cost a bank money. By these facts, banks could lend out their "credit" way beyond reason, and as cited in stats in the seminar booklet, banks were doing just that. Hence this cautionary seminar. The caution was banks could get caught if the economy went south.
Some will recall the introduction of CDs, money market funds and junk bonds. One reason banks turned to standby letters of credit was banks were losing, circa 1982, fantastic amounts of deposits and lending action to smaller banks operating CDs and money market funds, which paid interest, at a time when regulation Q forbid banks from doing so on demand deposit (checking) accounts. Plus, corporations were selling debt rather than borrowing money from banks, so standby letters of credit were a fee opportunity when the normal business was drying up.
As an aside, where was the heavy action in standby letters of credit? Oil deals, real estate development and sale/leaseback of gold assets. If gold price suppression conspirators want a new vein to mine, here it is.
What is delightful is to read, yet again, how the regulators are all passive as warnings are clearly expressed at industry functions. The FDIC, comptroller of the currency, the Fed and the NY banking authorities are all "concerned" about what is going on. But as usual, they just do as they are told.
Moody's, Fitch and S&P are not bothering to rate the stuff, or where they do, it is admittedly on no rational basis.
This seminar is held for bankers all over the USA in 1983, and the seminar reminds people of what happened in 1970 in similar exposure, and that was the Penn Central bankruptcy, and how some banks got caught. Bankers had to be reminded a mere 13 years later. Or maybe not. Maybe, bankers recall how the USGovt bailed out the banks who got in trouble in 1970, foolishly lending.
The seminar does take the time, and this is important I think, to note when a crisis does strike, people (their money) flee to quality and safety - understood by bankers to mean smaller regional banks. keep this in mind, that big banks view small banks as better and competitors.
So what we have so far is off balance sheet risk, no oversight, fee seeking, and.. wait for it... mismatched maturities! It even gets better, the seminar recommends banks run self stress tests!
The unstated point is one that likely did not need be stated: the taxpayer always bailed out the banks.
Now, with all of this risk out there, well known and understood, what happened next, after 1983? In 1985 the S&L crisis began. Small banks were wiped out. In the wake of the crisis, we now get deeds of trust, not mortgages and no bank will write an assumable mortgage. Big banks got bigger, small banks got hammered. Remember the big bank competition from small banks? The S&L crisis was accompanied by a giant squishing sound.
The S&L crisis, for all of its news, was a mere $50 billion bailout. But as a trial run, it worked flawlessly. We had another crisis in 1998. Again, bailouts. And so in 2008. Again bailouts. And every time, the risk is well known, the "regulators" sit on their hands, the mismatched maturities, and the bailouts paid for by taxpayers.
This is capitalism. Some want to distinguish between some imaginary good capitalism and crony capitalism, but the seeds of capitalism are in banking, currency, interest (usury) and credit. We do not need capitalism to have a modern economy, in fact it is clear that what good we have we get without the capitalistic process, but we will in any event be denied much until we let capitalism fail in the face of a free market.
,
Feel free to forward this by email to three of your friends.
Now normally letters of credit are paid out if an event occurs, a standby letter of credit pays out for non-performance. For example, Arabs order a million dollar oil pump from me and arrange payment by letter of credit. I get paid when I ship the oil pump. But to guarantee the oil pump works, I open a standby letter of credit at the same time the Arabs open their payment letter of credit to me. If the oil pump, once installed, does not work and a designated 3rd party assesses that the oil pump does not work, then the Arabs get their million back by means of my stand-by letter of credit, guaranteed by a bank. This is one of several uses of the standby letter of credit, which pays out on non-performance.
Any letter of credit, including a standby letter of credit, represents a guarantee by the bank, independent of the two parties involved, the issuer and the beneficiary (the buyer and seller in a deal, both in essence bank customers). The buyer and seller are chary enough of each other to require a letter of credit, and the bank knows each party well enough to issue a letter of credit, for a fee. By letters of credit, banks loan their credit, not their money.
Now here is the rub, from the bankers and regulators point of view, as laid out in the seminar booklet: standby letters of credit exposure are treated in financial statements as footnotes, not balance sheet items.The nice thing about standby letters of credit, there is no reserve requirement to match exposure. Since the letter of credit is backed by an abundance of caution (a primary and secondary payment source) it is unlikely to cost a bank money. By these facts, banks could lend out their "credit" way beyond reason, and as cited in stats in the seminar booklet, banks were doing just that. Hence this cautionary seminar. The caution was banks could get caught if the economy went south.
Some will recall the introduction of CDs, money market funds and junk bonds. One reason banks turned to standby letters of credit was banks were losing, circa 1982, fantastic amounts of deposits and lending action to smaller banks operating CDs and money market funds, which paid interest, at a time when regulation Q forbid banks from doing so on demand deposit (checking) accounts. Plus, corporations were selling debt rather than borrowing money from banks, so standby letters of credit were a fee opportunity when the normal business was drying up.
As an aside, where was the heavy action in standby letters of credit? Oil deals, real estate development and sale/leaseback of gold assets. If gold price suppression conspirators want a new vein to mine, here it is.
What is delightful is to read, yet again, how the regulators are all passive as warnings are clearly expressed at industry functions. The FDIC, comptroller of the currency, the Fed and the NY banking authorities are all "concerned" about what is going on. But as usual, they just do as they are told.
Moody's, Fitch and S&P are not bothering to rate the stuff, or where they do, it is admittedly on no rational basis.
This seminar is held for bankers all over the USA in 1983, and the seminar reminds people of what happened in 1970 in similar exposure, and that was the Penn Central bankruptcy, and how some banks got caught. Bankers had to be reminded a mere 13 years later. Or maybe not. Maybe, bankers recall how the USGovt bailed out the banks who got in trouble in 1970, foolishly lending.
The seminar does take the time, and this is important I think, to note when a crisis does strike, people (their money) flee to quality and safety - understood by bankers to mean smaller regional banks. keep this in mind, that big banks view small banks as better and competitors.
So what we have so far is off balance sheet risk, no oversight, fee seeking, and.. wait for it... mismatched maturities! It even gets better, the seminar recommends banks run self stress tests!
The unstated point is one that likely did not need be stated: the taxpayer always bailed out the banks.
Now, with all of this risk out there, well known and understood, what happened next, after 1983? In 1985 the S&L crisis began. Small banks were wiped out. In the wake of the crisis, we now get deeds of trust, not mortgages and no bank will write an assumable mortgage. Big banks got bigger, small banks got hammered. Remember the big bank competition from small banks? The S&L crisis was accompanied by a giant squishing sound.
The S&L crisis, for all of its news, was a mere $50 billion bailout. But as a trial run, it worked flawlessly. We had another crisis in 1998. Again, bailouts. And so in 2008. Again bailouts. And every time, the risk is well known, the "regulators" sit on their hands, the mismatched maturities, and the bailouts paid for by taxpayers.
This is capitalism. Some want to distinguish between some imaginary good capitalism and crony capitalism, but the seeds of capitalism are in banking, currency, interest (usury) and credit. We do not need capitalism to have a modern economy, in fact it is clear that what good we have we get without the capitalistic process, but we will in any event be denied much until we let capitalism fail in the face of a free market.
,
Feel free to forward this by email to three of your friends.
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