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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Banking Crisis, What Really Happened from 2001 to 2007

Companies / Credit Crisis Bailouts Mar 13, 2009 - 03:07 AM GMT

By: Submissions

Companies Best Financial Markets Analysis ArticleMJ writes: All magic tricks have at there core simple devices to perform the illusion; mirrors, sleight of hand and misdirection. Money is a store of wealth or its worthless paper. In an electronic world it's a byte. The wealth was spent and the money gone well before late 2007 and it was spent by bankers on themselves. The rest is misdirection. The idea that Bankers create wealth or can bring productivity to the economic cycle is an illusion.

If one little green bottle should accidentally fall….


It is important to remember that before 2001 absolutely no UK bank had any exposure to “wholesale lending markets” a euphemism for the collective of international banks”. These “new” borrowers were – Bradford and Bingley, Northern Rock and Halifax amongst many others. I shall call them “new banks”. The phenomenon of new borrowers entering the market was replicated all over the world i.e. Indy Mac, Countrywide and WAMU.

By 2007 these new banks in the UK had borrowed a staggering 600 billion from the “wholesale lending markets”. The new Banks simply paid interest overnight a “price” for borrowing - the price they paid for that money “interest” was a reflection of there credit risk not there underlying asset portfolio. So with a strong share price therefore came easy borrowing as there was sufficient collateral to pay the overnight rate (share price plus depositors cash) .If a fall in the share price would occur it would indicate increased counter party risk and therefore an increase in the interest “price” charged to borrow the money. A share price drop would lead to an increase in the insurance premium to be paid to cover the fall in share price and an additional premium for default by a lender of the loan. Insurers made big profits and created ever more exotic derivatives linking in foreign exchange movements – as the pound rose so did share prices.

A precarious game indeed begun based around share prices being the leading indicator of creditworthiness (not what they were actually doing with the money). The cost of money was low if the share price of the borrower was high. A New banking paradigm arose the more you borrowed led to more loans led to increased share price led to lower cost of borrowing led to higher pound. And so the great “housing bubble” “debt bubble” was orchestrated and conceived simply around overnight borrowing and the Yen carry trade. Did I mention who was buying those shares in the new banks? Yes you got it the very same “investment banks” who were lending it money. The money was on a merry go round! The investment banks were printing bytes and paying themselves for that with the wealth of savings in those new institutions (the pre demutualization savings) until all the savings were gone to pay interest on fabricated byte money.

As we know by 2007 there simply wasn't enough money coming in (being deposited even with high interest rates) to pay the overnight interest on the money they had borrowed - the borrowers stared to default. A set of interest hikes aimed at slowing the housing market and inflation simply burst the housing bubble everyone was spending money servicing debt and no one was saving. The banks had simply run out of wealth to steal.

All our collective savings in the main retail bank in the UK were essentially therefore pledged as security along with the share stock and being used to pay overnight interest. You will notice therefore that the 600 billion the banks lent and borrowed to each other NEVER EXISTED only the savings and interest did which was spent paying interest and insuring the loans. It is all hidden in one big paper mountain to hide the simple fact that all banks savings had been used to pay themselves bonuses and purchase insurance backed loans which are as we now know in freefall default. Loans made essentially against the share price and credit rating of the bank. There is simply no way any insurer no matter how large can cover those bets hence AIG failure, bailout and second failure. People ask me where did the money go – my reply where did the money come from. It came from the electronic banking system (leverage) not the real economy – it is therefore and was always fabricated obligations – any sensible person in Banking knew that insurance backed lending was at its heart a con ceit.

You are about to get very very angry

The Financial Times economics editor Martin Wolf warned in Friday's column of the dangers of our present course. He said:

"If large institutions are too big and interconnected to fail... then talk of maintaining them as “commercial” operations... is a sick joke. Such banks are not commercial operations; they are expensive wards of the state and must be treated as such. “

The government received in exchange for 600 billion of real assets (our future tax receivables) worthless paper created by investment banks through creative accounting and structured products. Those structured products were sold by and to the Banks but were essentially derived loans using our savings and leveraged through a carousel of interbank trading based on nothing more than credit ratings created by the S&P –which were of course supposedly insured to make those loans look real and the money actually exist. The UK Government has just borrowed 600 billion from the Bank of England which it has handed to the Banks which has allowed the banks to cover our deposits “savings” and stopped a run on the banks.

The banks have simply replaced the money they took from us and leveraged in “the wholesale money markets”– with our “future” tax money. The Bankers have then added insult to injury and charge us to borrow our own money via credit cards/loans/mortgages between 5% - 20%. The Bank receives 600 billion of “Real Goods” from us the people to repay the loans. If you add interest its another 600 billion (over 30 years - a working life ). The bank therefore received 1.2 Trillion and that's before quantative easing is put into the system.

Mr Wolf I have an answer for you. You simply have it all wrong it is the state that serves the bank not the other way around – the state can fail but the bank cant. The bankers have now what they always wanted an apparatus to tax the citizenary for the benefit of the banks.

Of that 600 billion borrowed from the “Investment Banks” a staggering 80% went to overseas borrowers only 20% went into the UK housing market. As the carousel turned ever so slowly between 2001-7 the international banks owners took, salary, commissions, bonuses, dividends in the billions and we built them there jets houses and yachts. This little ruse was so successful it was repeated all over the western banking system. Make a loan no matter how risky and insure and heh presto a profit and insurance backed lending was borne. Where did the money come from – “the wholesale money market”. There is no such thing but what there was is the ability to print bytes into the system by creating structured products.

And if you are American reading this and don't believe you are in the largest fraud in history. AIG just gave 50 billion USD from the USA tax payer to crony banks such as Deutch Bank , Goldman Sachs and HSBC. Enough money to give universal health care to every American. Who owns AIG the state does. Who owns the state the banks do. Look how high congress jumped….


Author details kept confidential as requested.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Clark Jenkins
14 Mar 09, 16:34
Money is debt

Money is not "just a game", it is a game that "bites back". Money has rules and players. If you had watched The Money Masters, or Money is Debt, you would have known all this. The Money Masters is at the bottom of this page:

Clark Jenkins

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