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As I reported in my previous two articles, the Federal Deposit Insurance Corp. determines bank solvency. These are the guidelines:
"To receive this benefit (Fed Deposit Insurance), member banks must follow certain liquidity and reserve requirements. Banks are classified into five groups according to their risk-based capital ratio:
Well capitalized: 10% or higher
Adequately capitalized: 8% or higher
Undercapitalized: less than 8%
Significantly undercapitalized: less than 6%
Critically undercapitalized: less than 2%
When a bank becomes undercapitalized the FDIC issues a warning to the bank. When the number drops below 6% the FDIC can change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized the FDIC declares the bank insolvent and can take over management of the bank." (Source)
I will focus on those banks that have the highest potential for default in the next few articles. You will see that they are quite revealing, and totally discredit the recent "Stress Test" released by the Federal Reserve.
M&T Bank Corporation: 6.86% current capitalization ratio. Undercapitalized.
M&T Bank is one of the companies that makes up the S&P 500. It also still owes $381.5 million to the US government Troubled Asset Relief Program. With assets est. at 68 billion, and liabilities at close to 77 billion (Source), it doesn't take a rocket scientist to see that this bank is in trouble.
The bank's stock is a high flyer, trading at $86 per share. Here are some interesting comments from the M&T Chairman, Robert G. Wilmers from the 2011 Annual Report: (Source)
M&T Chairman Explains
"As U.S. interest rates and the value of the dollar climbed during the early 1980s, Citibank’s Chairman took the view that “countries don’t go bankrupt” – a hypothesis that was proven erroneous when 27 countries initiated actions to restructure their existing bank debt, leading to devastating implications for their bank creditors. In 1987, these banks began a delayed acknowledgement and recognition of the losses accruing from loans to developing countries. So great was the reckless foray that a 1993 study conducted by the Federal Reserve Bank of Boston found that had the money center banks truly recognized all the losses inherent in their books in 1984, one major bank would have been insolvent and seven others dangerously close." (Ibid)
This is a huge admission. Basically stating that banks will fail to disclose their full liabilities in order to remain solvent.
Repeal of Glass Steagall
"So it was that the underpinnings of recurring crises were introduced as the money center banks searched for new opportunities and Wall Street investment banks became more and more creative in the development of financial products. One’s cash from deposits and the other’s creativity led to a symbiotic relationship, enhanced by the closeness of geography.
The decision to live together culminated in a marriage, made possible by the repeal, in 1999, of the Glass-Steagall Act, which had, at least notionally, kept investment and commercial banking separate. One can argue whether the architects of these new Wall Street institutions themselves created a new culture of greed or whether they merely capitalized on the new arrangements. In either case, this departure from banking as we knew it helped to sow the seeds of crisis and embodied a broader change that, in important and unfortunate ways, continues today." (Ibid)
Glass Steagall was designed to keep banks out of speculative investments, or from making loans against their stock holdings:
"Several provisions of the 1933 Banking Act sought to restrict “speculative” uses of bank credit. Section 3(a) required each Federal Reserve Bank to monitor local member bank lending and investment to ensure there was not “undue use” of bank credit for “speculative trading or carrying” of securities, commodities or real estate. Section 7 limited the total amount of loans a member bank could make secured by stocks or bonds and permitted the Federal Reserve Board to impose tighter restrictions and to limit the total amount of such loans that could be made by member banks in any Federal Reserve district. Section 11(a) prohibited Federal Reserve member banks from acting as agents for nonbanks in placing loans to brokers or dealers." (Source)
Six Largest Banks At Greatest Risk
"These trends all came together in 2008 with the sub-prime crisis, characterized by Wall Street banks betting on and borrowing against increasingly opaque financial instruments, built on algorithms rather than underwriting. Like the institutions of the ’80s, the major banks created investments they did not understand – and, indeed it seems nobody really understood. In the process, they contorted the overall American economy.
The unnatural growth in the industry led the portion of GDP dedicated to insurance, finance and real estate to rise from 11.5 percent in 1950 to 20.6 percent during the decade that began in 2000. In their quest for growth, the Wall Street banks appeared to seek dominance at the expense of leadership and, through acquisition or aggressiveness, sacrificed the latter in order to attain the former. As a result, today the largest six banks own or service roughly 56% of all mortgages and nearly two-thirds of those in foreclosure proceedings.Indeed, we have reached the point where one bank services almost $2 trillion and close to 30% of all mortgages in foreclosure." (Source)
No Public Trust of Banks
Undoubtedly, the crisis with whose aftermath we are still dealing has had wide-ranging effects – for taxpayers, homeowners, small business borrowers and more. But the list of the deeply damaged must also include the good name of banking itself. Since 2002, the six largest banks have been hit by at least 207 separate fines, sanctions or legal awards totaling $47.8 billion. None of these banks had fewer than 22 infractions; in fact one had 39 across seven countries, on three different continents.
The public, moreover, has been made well aware of such wrongdoing. According to a study done by M&T, over the past two years, the top six banks have been cited 1,150 times by The Wall Street Journal and The New York Times in articles about their improper activities. It is not unreasonable to presume that these findings must represent a proxy for the national, if not international, press as a whole. (Ibid)
Bank Officials/Employees Over-compensated
Public cynicism about the major banks has been further reinforced by the salaries of their top executives, in large part fueled not by lending but by trading. At a time when the American economy is stuck in the doldrums and so many are unemployed or under-employed, the average compensation for the chief executives of four of the six largest banks in 2010 was $17.3 million – more than 262 times that of the average American worker.
One bank with 33,000 employees earned a 3.7% return on common equity in 2011, yet its employees received an average compensation of $367,000 – more than five times that of the average U.S. worker. Thus, it is hardly surprising that the public would judge the banking industry harshly – and view Wall Street’s executives and their intentions with skepticism.
Nor can one say with any confidence that we have seen a fundamental change in the big bank business approach which helped lead us into crisis and scandal. The Wall Street banks continue to fight against regulation that would limit their capacity to trade for their own accounts – while enjoying the backing of deposit insurance – and thus seek to keep in place a system which puts taxpayers at high risk." (Ibid)
Bank Lobbyists Own Washington
"In 2011, the six largest banks spent $31.5 million on lobbying activities. All told, the six firms employed 234 registered lobbyists. Because the Wall Street juggernaut has tarnished the reputation of banking as a whole, it is difficult if not impossible for bankers – who once were viewed as thoughtful stewards of the overall economy – to plausibly play a leadership role today. Inevitably, their ideas and proposals to help right our financial system will be viewed as self-interested, not high-minded." (Ibid)
Fannie Mae and Freddie Mac
"While the role of the Wall Street banks in the proliferation of complex investment securities and sub-prime lending has been well publicized, the participation of Government Sponsored Enterprises (GSEs) including Fannie Mae and Freddie Mac in precipitating the financial crisis was just as significant. In the years leading to the housing crisis, between 2005 and 2007, nearly one-third of all mortgage originations in the United States were guaranteed by these entities.
In September 2008, when control of Fannie and Freddie was assumed by the U.S. government, they had a combined portfolio of some $195 billion in sub-prime loans, Alt-A loans, and complex derivatives. In total they held or insured $5.3 trillion – roughly half the total mortgage debt in the United States. As of September 2011, of the 2.2 million mortgages undergoing foreclosure, about 730,000 or 33% were owned or guaranteed by these GSEs; of the estimated 850,000 repossessed homes, 182,212 or 21% were held by Fannie and Freddie. Their intimate relationships with elected representatives are legendary, and their lobbying abilities notorious, particularly as Wall Street became successful in infringing on their turf." (Ibid)
Hyper-Inflation is Coming:
Like the Weimar Republic, the Federal Reserve will start printing massive amounts of paper Federal Reserve Notes (dollar bills). Printing enough to cover 119 trillion dollars. The Federal Reserve states there are 1.1 trillion dollars currently in circulation. (Source) An additional printing of 70 trillion dollars to handle FDIC obligations would bury the dollar and trigger hyperinflation. Image a dollar cut in half 70 seperate times and you will get the picture.
It will happen. The only question is when.
Precious Metals the Answer:
Once again we are forced to conclude that it is time to convert those dollar-denominated assets, like stocks, bonds and CDs, into precious metals. I had the foresight to see this coming years ago, and established Drockton Bullion to meet the needs of my clients. Savings and Checking accounts will also be hyper-inflated away when these bank failures hit the system. It could happen after the November elections. By then, all precious metals reserves will be exhausted and prices will rise exponentially.
I don't exactly when, but the day of judgment for the dollar is close at hand.