The Bankster Rally

Leveraging The Buyout of America

Ellen Hodgson Brown, a West Coast writer with a law degree, or perhaps more accurately, an attorney who likes to write in order to right, is one of the few people around who talks sense about banksters in general, central banking in particular, and the international excuse for both that prevails these days.

Ms Brown talks about the leveraged buyout of America, how giant “bancorps,” as they like to style themselves, perhaps because it sounds so new-worldy cool, have gluttonized to the point where they own just about everything private and public: airports and other ports, acres of green plants and even larger power plants, mammoth inventories of financial “products” including derivatives, and commodities, from plutonium to sowbellies. In a word, they are systematically picking up all the chips, and with them total control of the economy itself.

What ever happened to those relative innocents, the Fuggers, the Rothschilds, the Barings and the Warburgs who, limiting their operations to usury, oligopoly and robust spread-lending, sought only to control the financial universe? How did the Morgans, the Lehmans, the Barclays, the Goldmans and the Sachses pull off this infinitely larger caper?

Where, Ms Brown asks, along with other students of Central Banking 101, did they get the dough?

One of my favorite guys these days is fellow Floridian Alan Grayson, a relatively new – and therefore honestly aggressive – Congressman, who is actually journeyman enough to think he can do some good by addressing a letter to Chairman Ben Bernanke of the Fed, which he did, with a couple of equally optimistic colleagues, as follows:

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… 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.

See what I mean about Alan having but recently unpacked his bag inside the Beltline? But, having pointed out that there are supposedly rules against this crap, Ms Brown seeks to explain the shell game the banksters are using to make money out of mole hills; i.e. in order to buy up the nation’s infrastructure, and then parlay that power grab around the world. It’s a fast shuffle, so you have to listen closely:

Ever wonder why, with all that Tarp that Paulson, Bush and Obama contrived to release to get rid of the toxic assets on bank balance sheets and to expand consumer lending, how the word is that things are still too uncertain for banks to back small business, but at the same time Jamie Dimon’s outfit can afford to drop $6 billion betting on Libor rates as casually as kids tossing pennies against a wall?

Speaking of walls, there’s a neat way around the glass wall (once known as the Glass-Steagall wall) that is supposed to separate depositors’ stash from the banks’ proprietary playing of the market. Brown quotes Colin Lokey to the effect that an end-run around these pesky regs is used by the banksters, by using repos (the excess of deposits over loans) not as investment capital, which is supposed to be a no-no, but as collateral for borrowing in the repo market. Sort of trading on the depositors’ equity once removed. Repurchase agreements are merely short-term paper.

“The banks’ excess deposits,” says Ms Brown, “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.”

This potential repo collateral – the bulge between total deposits and loan portfolios – for all American banks – runs around $2 trillion, according to Brown, about half of which is in your friendly neighborhood Bank of America, JPMorgan Chase and Wells-Fargo, backstopping their adventures in worldly but unbankly assets, which are anything but toxic, as outlined above.

This fancy bit of deck shuffling uses a maneuver made popular back in the conglomerate heyday. Remember guys like Boone Pickens and Sam Belzberg and their leveraged buyouts? You simply buy the farm by selling off – and paying for it with – its own cows and chickens, post-dated, of course. In the same fashion, a bank, while it can’t use deposits to play the market, can instead use excess deposits to acquire collateral in the repo market, which in turn they can employ for their proprietary trading, including the leveraging of the buyout of any enterprise their heartless little hearts desire.

The same technique can be applied to the total of Ben Bernanke’s Qualitative Easing program, which was designed to buy up bank securities inventories and inject more liquidity into the economy by enabling further bank lending.

Dang! Ain’t it a shame that instead, the banks used all that expanded money supply to buy up more of the good stuff we all hold dear. So, instead of looking like his former Princeton colleague Paul Krugman, Bernanke comes up smelling like the last rose of Summers, who incidentally is his likely successor.

The Glass-Steagall Act back in the rickety Thirties forbade banks (that is the few that were left) from confusing deposits with play money, as in Monopoly. But in 1999, the Gramm-Leach-Bliley Act allowed as how that was old-fashioned in a de-reg world, and repealed the legacy of Carter Glass and Stephen Seagall. The bottom line is that it makes scant difference in today’s laissez-faire Street whether the banks play with the deposits or hire them out as respectable collateral for legit high-grades that can hypothecate hanky-panky.

All of which has generated new and exciting playthings on the Street of Dreams, such as the enormous $700 trillion speculative derivatives bubble, hovering like a fatuous genie over Wall and Broad. I’m quoting Brown, who quotes Lokey, who quotes Bill Frezza in Huffington Post (so who’s to argue?):

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.

The commonly held notion that bank deposits can be invested only in Treasury bonds, agencies or derivatives is about like saying that Don Corleone is interested only in the olive oil business. And the recent rally in stocks has reflectd the Fed’s pumping money into the banking system while Mom and Pop investors have been pulling half a trillion dollars out of equity funds. So the banksters, self-evidently, are propping up this seasonal market.

There’s little doubt that the largest Wall Street banks have constrained their lending to the local economy precisely when it is most needed. Loan-to-deposit ratios are lower than they should be, not because of a lack of credit-worthy small and medium business borrowers, but because the leverage artists in the topless towers of The Street see better deals elsewhere. Small and medium-sized businesses create most of the jobs, but with scrawny prime lending interest rates they simply can’t compete.

So two thumbs up for Congressman Grayson and the co-signers he rode in on, with the case that the banking system has become a haven for “global merchants that seek to extract rent from any commercial or financial business activity within their reach,” which, Ellen Brown emphasizes, is “a return to a feudal landlord economy.”

Our banking system should be concerned with promoting the needs of the economy and our society, not casino profiteering or feudal rent-seeking. An argument, Ellen Hodgson Brown maintains, for more public banks.

But with Bernanke heading back to Princeton, and Larry Summers likely to be Obama’s choice for the Fed’s Chair next January, I wouldn’t bet my food stamps on that happening. Unlike Jamie Dimon, who has been alternating in and out of the confessional lately, Larry is the Street’s best friend.

Bill Annett writes four newsletters: The Canadian Shield, American Logo, Beating the Street, and The Oyster World. He can be reached at: Read other articles by Bill.