Tag Archives: ponzi

The Victims List: Why Bernie Madoff Is The Only Crook Who Went To Gaol

13 Sep

In case you didn’t know, today is not only Friday the 13th, an “unlucky” day in Western superstition.

It is also Yom Kippur. Otherwise known as the “Day of Atonement”.

A day of “love and forgiveness”, and “The day on which G-d forgives for the less desirable actions of His nation”, according to the Jerusalem Post.

Which is both an ironic, and an apropos theme to carefully consider, in the light of today’s post.

Ever wonder why Bernie Madoff so famously and publicly went to gaol for his ponzi crimes, when no other banker or “investment adviser” did?

Take a slow, careful, thoughtful look at the list of his victims below.

See anything in those names that strikes you?

From the Wall Street Journal, March 6 2009:

Fairfield Greenwich Advisors
An investment management firm
Tremont Group Holdings
Asset management firm
Banco Santander
Spanish bank
Bank Medici
Austrian bank
Ascot Partners
A hedge fund founded by billionaire investor, philanthropist and GMAC chief J. Ezra Merkin
Access International Advisors
A New York-based investment firm
Dutch bank
Union Bancaire Privee
Swiss bank
British bank
Natixis SA
A French investment bank
Carl Shapiro
The founder and former chairman of apparel company Kay Windsor Inc., and his wife
Royal Bank of Scotland Group PLC
British bank
BNP Paribas
French bank
Spanish bank
Man Group PLC
A U.K. hedge fund
Reichmuth & Co.
A Swiss private bank
Nomura Holdings
Japanese brokerage firm
Maxam Capital Management
A fund of funds based in Darien, Connecticut
A European investment manager with about $11 billion in assets
French insurance giant
UniCredit SpA
Italian Bank
Nordea Bank AB
Swedish Bank
A Swiss private bank owned by St. Galler Kantonalbank
Banque Benedict Hentsch & Cie. SA
A Swiss-based private bank
Fairfield, Conn.
town pension fund
Bramdean Alternatives
An asset manager
Jewish Community Foundation of Los Angeles
The largest manager of charitable gift assets for Los Angeles Jewish philanthropists
Harel Insurance Investments & Financial Services Ltd.
Israel-based insurance firm
Baloise Holding AG
Swiss insurer
Societe Generale
French Bank
Groupama SA
French insurer
Credit Agricole SA
French bank
Richard Spring
individual investor
RAB Capital
hedge fund
Banco Popolare
Italian bank
Korea Teachers Pension
A 10 trillion won Korean pension fund
Swiss Life Holding
Swiss insurer
North Shore-Long Island Jewish Health System
health system
Neue Privat Bank
Swiss bank
Clal Insurance Enterprise Holdings
An Israel-based financial services company
Ira Roth
individual investor
Mediobanca SpA
via its subsidiary Compagnie Monegasque de Banque.
Fred Wilpon
owner of New York Mets
Steven Spielberg
The Spielberg charity — the Wunderkinder Foundation
JEHT Foundation
A New York foundation focused on electoral and criminal justice reform
Mortimer B. Zuckerman Charitable Remainder Trust
The charitable trust of real-estate magnate, who owns the Daily News and U.S. News & World Report
Robert I. Lappin Charitable Foundation
A Massachusetts-based Jewish charity
Chais Family Foundation
A charity that gave to Jewish causes
KBC Group NV
Belgian banking and insurance group
Barclays PLC
British bank
French bank
Allianz Global Investors
The asset management unit of German insurer Allianz SE
Banco Espanol de Credito SA (Banesto)
A Spanish bank contolled by Banco Santander
CNP Assurances
French insurer
Swiss bank
Yeshiva University
A New York-based private university
The Elie Wiesel Foundation for Humanity
The charitable foundation of Nobel laureate
Leonard Feinstein
The co-founder of retailer Bed Bath & Beyond
Sen. Frank Lautenberg
The charitable foundation of the New Jersey Senator’s family
Norman Braman
former owner of Philadelphia Eagles
Jeffrey Katzenberg
The chief executive of DreamWorks Animation SKG Inc.
Gerald Breslauer
The Hollywood financial advisor to Steven Spielberg and Jeffrey Katzenberg
Kingate Management
hedge fund
Julian J. Levitt Foundation
Texas-based charity
Loeb family
Lawrence Velvel
individual investor
Fix Asset Management.
hedge fund
Genevalor, Benbassat & Cie.
money manager in Geneva
Banco Espirito Santo
Portugese bank
Great Eastern Holding
Singapore insurer
M&B Capital Advisers
Spanish brokerage
Oddo et Cie
French financial services firm
Royal Dutch Shell pension fund
Global energy and petrochemical company
Phoenix Holdings
Israeli financial services company
Peruvian financial services company
Fukoku Mutual Life Co.
Japanese insurer
New York Law School
law school in New York City
Nipponkoa Insurance
Japanese insurer
Sumitomo Life Insurance Co.
Japanese insurer
Swiss Reinsurance Co.
Swiss insurer
Aozora Bank Ltd
Japanese lender
UBI Banca
Italian bank
Taiyo Life Insurance Co.
Japanese insurer
Caisse d’Epargne
French bank
J. Gurwin Foundation
EFG International
Swiss private bank
Fire and Police Pension Association of Colorado
Pension fund
International Olympic Committee
Olympic organizer
Support Organization for the Madison Cultural Arts District
Wisconsin cultural organization
Credit Industrial et Commercial
French financial-services group
U.S. women’s zionist organization
United Association Plumbers & Steamfitters Local 267 in Syracuse
Local union pension and health care funds
Ramaz School
A Jewish school in New York
Congregation Kehilath Jeshurun
A synagogue in New York
The Maimonides School
A Jewish day school in Brookline, Mass.
Yad Sarah
An Israeli nonprofit
Kevin Bacon and wife Kyra Sedgwick
Hollywood actors
Eric Roth
Hollywood screenwriter
Henry Kaufman
Individual investor, former Salomon Brothers chief economist
New York University
Aioi Insurance Co.
Japanese insurer
Meiji Yasuda Life Insurance Co.
Japanese insurer
Mitsui Sumitomo Insurance Co.
Japanese insurer
Burt Ross
former mayor of a town in New Jersey
Genium Advisors
Swiss money manager
Sterling Stamos Capital Management LP
Investment firm with offices in New York City and Menlo Park, Calif.
Gabriel Partners
Money-management firm run by GMAC Chairman Ezra Merkin.
The Diocese of St. Thomas
Catholic church in the U.S. Virgin Islands
Phyllis Molchatsky
individual investor
Members of the Hillcrest Golf Club of St. Paul, Minn. and Oak Ridge Country Club in Hopkins, Minn.
country clubs
Bard College
University in New York
Martin Rosenman
New York City-based heating oil distributor
Marc Rich
Fugitive financier
Zsa Zsa Gabor
Hadleigh Holdings LLC
Miami firm owned by businessman Stanley Kriegler
Argus Group Holdings
Bermuda insurance and financial services company
Auriga International Advisors Ltd.
British Virgin Islands hedge fund
Repex Ventures SA
British Virgin Islands firm
SAR Academy
A Yeshiva school in New York
Picower Foundation
Florida-based philanthropy
John Malkovich
Sandy Koufax
Former Los Angeles Dodger pitcher
Tim Teufel
Former baseball player
Larry King
Talk-show host
Phyllis George
Former Miss America
Mark Green
Former NYC public advocate
Larry Silverstein
New York developer who is currently working with partners to rebuild the World Trade Center
Scott Rechler
CEO of RXR Corp.; Former CEO of Reckson Associates
Sources: WSJ reporting; Associated Press; the companies and charities

Massive Fraud In Australian Listed Investment Company (LIC) Sector

18 Apr


Serendipitously discovered this during my cyber surfing this morning; a presentation “outlining massive fraud in the Australian listed investment company (LIC) sector”:

The Great Australian Investment Ponzi

The A$16 billion Australian listed investment company (LIC) sector has become one of the largest Ponzi schemes in history, surpassed only by Bernie Madoff and MMM.

For years, the dividends from the LICs have been financed by the LICs issuing shares, with the LICs thus paying their returns by seeking new investor funds.

The LIC’s manipulate their share prices by buying each other and themselves, in the process creating inflated reported net tangible assets (NTA).

The companies named include:

Washington H Soul Pattinson & Company Limited (SOL)
Brickworks Limited (BKW)
Argo Investments Limited (ARG)
Australian Foundation Investment Company Limited (AFI)
Milton Corporation Limited (MLT)
Australian United Investment Company Limited (AUI)
Diversified United Investment Limited (DUI)
BKI Investment Company Limited (BKI)
Djerriwarrh Investments Limited (DJW)
Mirrabooka Investments Limited (MIR)

Screen shot 2013-04-18 at 1.24.05 PM

Your humble blogger is not a shares guy, and so cannot comment on the veracity of this impressively comprehensive (85 page) presentation.

Perhaps readers with more knowledge of the subject would care to analyse and comment?


Some excerpted highlights, for those unwilling to wade through such comprehensive details –

“LIC share manipulation is not performed for vanity alone, it allows the managers to perpetuate premium fraud. Premium fraud is committed by inflating the LIC share price beyond NTA and then issuing shares… Over the years premium fraud has netted the LICs hundreds of millions of dollars, at the expense of small investors, and ASIC has done nothing. Of the $1.6 billion in LIC shares issued between 2006 and 2012 a significant proportion has been lost due to this form of securities fraud. All the major LICs currently engage in flagrant securities fraud of this kind.”

“SOL (Washington H Soul Pattinson & Co Limited) is one of the most manipulated shares on the ASX, and has been for years. SOL and its accomplice bankers have set up a fake share price, with the most common trade size being one single share. The manipulators can then ramp the price as they see fit…

Screen shot 2013-04-18 at 2.51.17 PM

This is a multibillion dollar company. On the 29/6 at 15:58, SOL was ramped 3% by HFT algos trading 5 shares.

Regulators, bankers, research analysts and financial journalists do not ask any questions, even after years of blatant fraud. In most cases they are incompetent, in many cases they are corrupt, and in some cases they have been silenced. The LICs can either buy off editors or sool lawyers on them.”

“The LIC managers have a cartel of crossbuying, with three beneficial effects for the criminals:

* The crossbuying ramps LIC share prices from true market values
* The crossbuying distorts reported NTAs from real asset values
* The crossbuying increases manager fee income and distorts reported fee income

The crossholdings allow the managers to charge multiple fees and hide it.”

“A cartel owns most BKW (Brickworks Limited) shares and controls the share price. The cartel openly ramps the share price after employee share plan issues, so insiders can cash out at a higher price. This is of course the very definition of insider trading. On the 3rd October, BKW issued a quarter of a million shares to employees at a consideration of $10.07. The cartel then ramped the share price 12%, to close at $11.25 on 5th October. It is clear they have given up any pretense and are now not even bothering to cover their tracks.

Screen shot 2013-04-18 at 2.10.17 PM

The bankers and analysts associated with these criminals are fully aware of what is going on, with the BKW scheme alluded to in internal communications, thus leaving proof of collusion in share manipulation and insider trading. These criminals are 100% confident in ASIC’s complete incompetence and impotence.

Granny investors buying BKW shares at the inflated price, perhaps under the misapprehension that ASIC does its job, can consider themselves screwed. If you think ASIC is doing nothing, you are wrong. Much worse, ASIC is endorsing BKW as non-manipulated to granny investors and is abetting criminals.”

“Some of the richest and most well-connected people in Australia are directly involved in the scam. The LIC managers openly refer to their industry as ‘The Gentlemen’s Club’, where goodfellas back each other up rather than honouring their fiduciary duty to investors. This cooperation is crucial for coordinating ramps, as defectors taking profits would crash a ramp before it even started. But the protozoan parasites have evolved an entire ecosystem:

1) Managers form cartels to buy each other and chosen manipulable shares
2) Lawyers cover up any mention of fraud using legal threats
3) Auditors sign off that inflated asset valuations are fair
4) bankers provide leverage for share price ramps
5) Brokers churn shares to create the illusion of liquidity
6) Stock exchange personnel advertise the scam and provide misleading statistics
7) Analysts are directly and explicitly bribed to shill the LICs
8) Journalists tout individual ramped stocks and the entire fraudulent industry
9) Regulators legitimize the scam and rubberstamp its abuses

In every single link of the chain, the LIC managers have close friends and accomplices, and these receive their rewards in the form of cash, insider tips and future appointments. The entire knot could be unwound with an Alexandrian solution: Ban LICs from ever again issuing a single share to granny investors. The goodfellas would of course apoplectically protest, as this would starve the ponzi of new cash inflows, and thus sound its death knell. But if they are such great managers and all outperform the market, why do they need to constantly beg for more cash?”

“The Australian government Future Fund recently revealed it had underreported fees, with investment fees actually totalling $1bn instead of $500m last year. The reason for this slight miscalculation of 100% was ‘non-consolidated investment vehicles’. If two investment vehicles own part of each other, and the Future Fund invests in them, part of the holdings will be charged fees twice. Sound familiar?

The geniuses at the Future Fund have discovered fee distortion from crossholdings… Of course this.. applies to the entire Australian superannuation and managed funds industry. Of $1.9 trillion unconsolidated assets in managed funds, crossholdings constitute $382bn or 20%.”

“Most of the LICs are now manipulating their share price with algo share trading. The reason for this is simple; the cost is low, the risk of apprehension zero, and the rewards considerable. The top chart shows DJW share trades on the 29/6/12, when the price was ramped from $3.60 to $3.75. The bottom chart shows the volume distribution of trades, illustrating how two thirds of the trades were for ten shares or less.

Screen shot 2013-04-18 at 2.28.08 PM

The share prices of the LICs are fraudulent, mere empty quotes put up by the managers themselves. In reality the LIC sector is insolvent and has nowhere near enough money to cash out investors.

The LIC sector has devolved into fraud along the lines of Stratton Oakmont. The only difference is that Jordan Belfort required hundreds of boiler room traders, whereas today with HFT trading the costs are much lower.”

“EQT (Equity Trustees Limited) has ramped LIC shares with its superannuation and managed funds, including EquitySuper products and the EQT Flagship Fund. The LIC crossholdings allow the same assets to be counted on several balance sheets, in a form of rehypothecation, and fraudulently inflates NTAs…

ASIC is well aware the the EquitySuper and EQT Flagship products are fraudulent with overstated NTAs and unit prices, yet helps cover up the fact the millions in super money has been stolen by a criminal crossramping cartel.”

Managers of several Australian fund management companies have started using pension funds entrusted to them by granny investors to ramp their own share prices. This can either be done directly, by using funds under management to buy shares in the fund management company, or indirectly by using FUM to crossbuy with one or more other fund management companies. The managers then reap the direct benefit from own shareholdings and performance metrics related to their fund management company share price.”

“Executive share plans can be used for ramping, as ESPs are allowed to buy the shares to be awarded to executives on-market. For thinly-traded shares or for shares with concentrated ownership, this allows the executives to ramp their own shares before they are awarded. The net effect is that insiders can off-load their shares to granny investors at a temporarily inflated price.

Between 28/08 and 20/09, the Mortgage Choice executive plan issued 2,500,000 shares to executives using options with a $0.76 exercise price. MOC was then ramped 30%.”

Screen shot 2013-04-18 at 2.47.02 PM

And much, much more.

Australia’s AAA Ponzi Rating: What Wayne Forgot To Mention

24 Dec

Everything’s fine.

Nothing to see here folks.

Move along now.

Back to your consumer spending.

Here, have another credit debt card:

Acting Prime Minister Wayne Swan says the reaffirmation of Australia’s triple-A credit rating by ratings agency Moody’s proves the economy is strong and the federal opposition is wrong to talk it down.

The treasurer on Thursday also labelled as “complete rubbish” media reports suggesting the country was on the brink of an unemployment catastrophe.

Moody’s said overnight that Australia’s AAA credit rating was “supported by the very low level of public debt and the country’s strong financial system”…

Uh … Wayne.

What else did Moody’s say?

The government’s debt rating of Aaa takes into account the aim of maintaining a balanced budget, on average, over the business cycle.


As shadow treasurer Joe Hockey rightly (for a change) points out:

Without further detail, the government’s projection to reduce net debt to zero by 2020-21 is hardly believable, coming from a Treasurer who this year will chalk up his fourth huge deficit out of four budgets. It would require six consecutive annual reductions in net debt of $22bn. That is six consecutive surpluses larger in dollar terms than has been achieved previously (the largest underlying surplus was the $19.7bn achieved by the Coalition in 2007-08) or very solid growth in financial assets, which seems problematic given the likely continued financial and market volatility across the medium term.

Not. Gonna. Happen.

Even if the Green-Labor government succumb to Joe’s empty threat … which they won’t:

Default threat as Liberals issue debt warning

The Coalition has threatened to block any effort by the government to raise the $250 billion limit on public sector borrowing, potentially forcing the government to run out of money.

“Whilst the Coalition has supported this in the past, the government should not expect a rubber stamp this time,” Mr Hockey says in his article.

The Coalition demands could include scrapping the carbon tax and the mining tax, along with the benefits they are intended to finance, such as personal tax cuts and increased superannuation.

Does anyone seriously believe that the Opposition would force a government shutdown, and default on our public debt obligations, rather than increase the debt ceiling?

Not. Gonna. Happen.

What else did Moody’s say, that Wayne conveniently forgot to mention:

The stable ratings outlook is premised on the expectations that the government will maintain its low debt levels and macroeconomic conditions will continue to support fiscal consolidation.

Any trend or event that caused a long-term shift in budget balances to significant deficits and an increasing public debt burden might put downward pressure on the rating.

In other words, hope like hell that global macroeconomic conditions don’t continue over the cliff, and get back to annual budget surpluses pronto so that you can actually start paying down that “low” (but ever-rising) public debt level … or you can kiss your AAA rating goodbye.

Not. Gonna. Happen.

Mr Swan on Thursday also slammed a newspaper report that suggested the country was on the verge of a jobs crisis.

Sydney’s Daily Telegraph reported Australia was set to lose 100,000 jobs in the months after Christmas.

Not so, according to the treasurer.

“Our economy has strong fundamentals, we have low unemployment, we have strong public finances, we have trend economic growth and we have a huge investment pipeline.

We have “trend economic growth”, do we Wayne?

You’d better hope not.

Because if we do, then your budget surplus soothsaying is in very deep doo doo.

“The Liberals have been talking our economy down. But we have also got the Daily Telegraph today running a story which is simply exaggerated nonsense.”

Mr Swan said neither advertisers or their customers would appreciate the economy being talked down just before Christmas.

Why so much concern about “talking it down”?

You see, dear reader, the simple truth is this.

The word “economy” … in the modern, bankster-debt-driven sense … is exactly synonymous with the word “Ponzi”.

Both need continuous growth.

Generated by lots of fools at the bottom … whose money flows to the scum at the top.

Running a Ponzi is all about con-fidence.

You always have to be “talking it up”.

You can’t have anyone “talking it down”.

Because the moment that participants in the system begin to lose con-fidence … growth slows, then stops.

Horror of horrors … it goes backwards. The Ponzi begins to implode.

And the parasitic scum at the top begin to lose their sole source of sustenance.


Likewise, a bankster-debt-driven “economy”.

Which is why the scum at the top are always so keen to … talk it up.

Australia has a AAA-rated economy Ponzi.

One of the last remaining AAA-rated Ponzi’s in the Western world.

More fool us.

Our Banking System Operates With Zero Reserves

24 Jun

At one stage, the Reserve Bank was forced to order another $4.6 billion in $100 notes. Picture: Luzio Grossi Source: The Australian

According to the US Federal Reserve’s Divisions of Research & Statistics and Monetary Affairs, Australia’s banking system has no monetary reserves.


In a Finance and Economic Discussion Series paper titled “Reserve Requirement Systems in OECD Countries”, researcher Yueh-Yun C. OBrien explains (emphasis added):

Abstract: This paper compares the reserve requirements of OECD countries. Reserve requirements are the minimum percentages or amounts of liabilities that depository institutions are required to keep in cash or as deposits with their central banks. To facilitate monetary policy implementation, twenty-four of the thirty OECD countries impose reserve requirements to influence their banking systems’ demand for liquidity.

Note that well. Only “twenty-four of the thirty OECD countries impose reserve requirements”.

Introduction: Central banks by definition are the sole issuers of “central bank money,” which consists of banknotes and deposit balances held by depository institutions at central banks. This feature provides them the power to implement monetary policy by influencing liquidity in their banking systems in order to achieve their policy (interest rate) targets and thus promote their long-term objectives.

That’s very important to note. Our central bank has ultimate power over the issuance of “central bank money” – the only “money” permitted – in our nation. Discussion of which is to open Pandora’s Box, so we’ll return to that topic another day.

Reserve requirements are the minimum percentages or amounts of liabilities that depository institutions are required to keep on hand in cash (vault cash) or as deposits with their central banks (required reserve balances).

Ok so far?

Twenty-four of the thirty countries that belong to the Organization for Economic Co- operation and Development (OECD) employ reserve requirement systems…

The remaining six OECD countries implement monetary policy without reserve requirements.4

Footnote 4 goes on to explain who those six countries are …

4 The six countries consist of Australia, Canada, Denmark, New Zealand, Norway, and Sweden.

… and then explains how our banking system operates, vis-a-vis the absence of any monetary reserves:

The central banks of these six countries make interbank payment settlement accounts available to depository institutions subject to certain rules. They provide standing facilities with interest charges and the lending interest rate sets an upper bound on the market interest rate. These central banks also pay interest on end-of-day account surpluses, and that interest rate forms a lower bound on the market rate Thus, lending and deposit rates form a corridor for the target overnight interest rate.

In addition to imposing rules for settlement accounts and providing standing facilities, most of these central banks influence the aggregated settlement balances in the banking systems mainly through open market operations.

Here’s a flow chart helpfully provided by the researcher. It shows (on the left) the monetary Reserve Requirement system used in 24 of 30 OECD countries.

Australia’s “no monetary reserves” banking system is circled on the right (click to enlarge):

Source: US Federal Reserve, FEDS, Reserve Requirement Systems in OECD Countries

Now, it’s very important to make a clear distinction here.  We need to remember that there are actually two basic concepts of what a banking “reserve” actually is.

One is “monetary reserves” … that’s what the US Fed’s paper we are discussing is all about.

The other is “capital reserves”.

Now, Australia’s banking system does have capital reserves.  It is a condition of Australia’s decision (January 2008) to adopt the Basel II Capital Adequacy framework. It is regulated in Australia by the Australian Prudential Regulation Authority (APRA), under Prudential Standard APS 110 Capital Adequacy.

So if our banks have capital reserves, does that mean everything is ok?

Not if you are a customer with a cash deposit in the bank.

The problem here is this.

Capital reserves relate to the question of the banks’ capacity to absorb investment losses.  It is a kind of reserve that is meant to protect shareholders in the bank, against the bank making losses on its investments. That is why the capital reserve requirement is essentially composed of a % of shareholder funds, that are held against the value of the banks’ “risk-weighted assets”.

Monetary reserves, on the other hand, relate more directly to the question of the banking system’s capacity to absorb a run on customer deposits.  That is, a good old fashioned bank run, where people lose confidence in the safety of the bank/s, and try to withdraw their cash … en masse.

In the twenty-four OECD countries that do have monetary Reserve Requirements, the banks are required to hold a certain amount of their customers’ cash deposits as reserves against customers’ withdrawals.

In the six countries – including Australia – that have zero monetary Reserve Requirements, essentially the central bank is the ultimate backstop.


If too many of us decide to go to the bank at the same time, and ask for our money on deposit – they don’t have it.

This helps to explain why, during the GFC’s Peak Fear period in late 2008, the Reserve Bank of Australia had to supply billions in extra cash to our banks.

The following quotation is slightly lengthy, but truly a must-read if you wish to gain a rare insight into what really went on behind the scenes during the GFC.

From Shitstorm, edited extract via The Australian (emphasis added):

Ian Harper, one of Australia’s leading financial economists, spent much of the weekend of October 11-12, 2008, reassuring journalists that Australian banks were safe.

Harper was an expert: he had been a member of the Stan Wallis financial inquiry in the mid-1990s, which had designed the system of banking regulation.

He explained that the Australian Prudential Regulation Authority already required banks to keep enough capital to cover any likely level of bad debts*. More importantly, the banking legislation provided that, if a bank failed, depositors would rank ahead of all other creditors. There was absolutely no reason for concern.

[*Note carefully what we observed above – the Basel II rules for “capital reserves” are to cover bad debts – investments gone bad. Not a bank run by customers wanting their cash deposits.]

But there was something about the calls Harper was getting from reporters over that weekend that worried him.

“There was a whiff of panic,” he recalls. It had been building all week. He had no doubt that the government and the Reserve Bank would be able to manage a run on cash, but it might take days to arrest. Panic has been an unpredictable force in the history of banking. And the instant world of electronic banking had never been tested with a full-scale crisis of confidence.

He talked about media calls with his wife. “Come Monday morning and they tell us one of the banks is in strife and internet banking is down, I can’t look you in the eye and say you can pay this week’s grocery bills.”

The man who had just been reassuring everyone there was nothing to worry about went down the street to the ATM and made a sizeable withdrawal to make sure his wife would have enough cash.

All around the country, banks were facing unusual demands for cash. Small businesses in Queensland and Western Australia were switching their deposits from regional banks to accounts with the big four banks.

An elderly woman turned up in the branch of one bank in Queensland with a suitcase and asked to withdraw her term deposits of $100,000 or more. Once filled, she took the suitcase down to the other end of the counter and asked that it be kept in the bank’s safe.

A story did the rounds of the regulators about a customer who wanted to withdraw his six-figure savings. The branch manager said he did not have that quantity of cash on hand, but offered a bank cheque, which the customer accepted, apparently unaware that the cheque was no safer than the bank writing it.

It was a silent run, unnoticed by the media. Across the country, at least tens and possibly hundreds of thousands of depositors were withdrawing their funds. Left unchecked, there would soon be queues in the street with police managing crowd control, as occurred in London at the Golders Green branch of Northern Rock a year earlier.

“With a bank run, or any rumour of a bank run, you can’t play games with that,” says Treasury Secretary Ken Henry.

“You can’t pussyfoot around that stuff. It’s a long time since Australia has had a serious run on a financial institution, but it’s all about confidence, and you cannot allow an impression to develop generally in the public that there is any risk.”

[In other words, when it comes to our savings, the notion of bank “safety” is a con-fidence trick. It is as simple, and as shocking, as that.]

The private banks keep reserves of cash distributed in 60 storerooms across the country with an average of about $35 million in each. They get topped up by the Reserve Bank before Christmas, when demand for cash typically rises by about 6 per cent, and at Easter, when there is a smaller increase.

But in early October, the Reserve Bank started getting calls from the cash centres for more, especially in denominations of $50 and $100.

The Reserve Bank has its own cash stash. It is coy about exactly how much it holds, but it is understood to be in the region of $4 billion to $5bn.

As the Armaguard vans worked overtime ferrying bundles of $10,000 out to the cash centres, the Reserve Bank’s strategic reserve holdings of $50 and $100 notes started to run low and the call went out to the printer for more. The Reserve Bank ordered another $4.6bn in $100s and another $6bn in $50s…

Households pulled about $5.5bn out of their banks in the 10 weeks between US financial house Lehman Brothers going broke – the onset of the global financial crisis – and the beginning of December. That is roughly 80 tonnes of cash salted away in people’s homes. Mattress Bank is doing well, was the view at the Reserve. A year later, only $1.5bn had been put back.

Think about those numbers for a moment.

Very carefully.

Households pulled “about $5.5bn out of their banks” in 10 weeks.

According to the ABS, at December 2008 there were 10.916 million employed persons in Australia.

So, our quiet run on the banks, a silent mass withdrawal demand amounting to a mere $504 cash per employed Aussie, was more than our banks actually had.

Forcing the Reserve Bank to print up an extra $10.6bn – that’s $971 per employed person – to keep our banks liquid and able to feed the ATM’s.

Really think about that for a moment.

Our banks did not have enough cash money to give every employed Australian a mere $504 in cash, on demand.

And yet, lemming-like, we accept their making multi-billion profits for executives and shareholders, every year.

If that’s not enough to crease your brow with concern, then consider this.

The fact that our banking system operates with zero monetary reserves may also help to explain why the RBA secretly borrowed US$53bn (around AU$88bn at the time) from the US Federal Reserve during the GFC panic (emphasis added):

National Australia Bank Ltd, Westpac Banking Corp Ltd and the Reserve Bank of Australia (RBA) were all recipients of emergency funds from the US Federal Reserve during the global financial crisis, according to media reports.

Data released by the Fed shows the RBA borrowed $US53 billion in 10 separate transactions during the financial crisis, which compares to the European Central Bank’s 271 transactions, according to a report in The Australian Financial Review.

NAB borrowed $US4.5 billion, and a New York-based entity owned by Westpac borrowed $US1 billion, according to The Age.

The RBA is all too aware of this critical danger to our financial system.

Consider this, from The Australian in July 2008, a couple of months before the GFC peaked (emphasis added):

The Reserve Bank of Australia has a dark worry about our banks: they get 90 per cent of their cash from each other. If one bank gets into trouble, the Australian financial system could be snap-frozen overnight.

This concern was laid out by the RBA’s assistant governor for the financial system, Philip Lowe, and the chief manager of domestic markets, Jonathan Kearns, to a private RBA gathering at Kirribilli House in Sydney last week.

Banking systems of other countries do not have the same level of mutual dependency, they claim, and it was not the case in Australia until about eight years ago…

Australia’s banks are, as the RBA governor Glenn Stevens tirelessly says, in great shape. Stockbrokers agree, even as they field the sell orders from overseas clients.

“The banks are trading at 12 or 13-year lows in terms of their price-to-earnings ratios,” UBS equities strategist David Cassidy says.

“Given what is happening in the US, they can always trade more cheaply. But since our economy still looks on track for a soft landing, it looks like they’ve been way oversold.”

But it does not look that way from abroad. At a recent conference held by one of the world’s largest banks, the Australian banking system was identified as one of the best investment opportunities, for going short.

The argument is that Australia’s banks hold more of their assets in mortgages than banks elsewhere and Australia’s housing is more overvalued relative to average earnings than the US housing market at its peak, or the British, Irish or Spanish markets.

This will ring alarm bells for regular readers.  All this was said – in a private RBA gathering – before the GFC really hit.  And yet, nothing has changed regarding our banking systemic risk.

We have seen previously that Australia’s banks (allegedly) hold some $2.66 Trillion in On-Balance Sheet “Assets” between them.

But, 66% of those “assets” are actually loans.  And the highest proportion of those loans are for mortgages.  In a property market where house prices “are the most overvalued in the world” – and where those prices have just had their biggest quarterly slump in 12 years. And where arrears on mortgages have recently exceeded their GFC highs.

A fall in the property market, or a rise in unemployment putting even more mortgage-holders into arrears, are real risks that could wipe out the value of the banks’ “assets” – our loans, and the “collateral” backing those loans (our houses).

In fact, that is just what happened – very briefly – during the GFC.  Mortgage arrears began to rise as the RBA kept increasing interest rates into the teeth of the storm.  Our property market began to fall.  Unemployment began to rise.  The banks’ usual lifeblood – borrowing money from overseas to lend to Australians at a profit – had already begun to freeze up due to the dark woes abroad.  And so, our banks had to borrow tens of billions from the RBA using what are called “repos” – short term cash loans from the RBA, secured against banks’ collateral.

Estimable blogger Houses and Holes documented this in a September 2010 post aptly titled “Invisopower!”. The following chart is his work. It graphs the value of repos borrowed by our banks from 2004 through 2010. You can clearly see that our banks were regularly borrowing over $15 Billion per month throughout 2008, with a peak of almost $50 Billion per month during the height of the GFC in late 2008.  Just to stay solvent. This massive liquidity support from the RBA only ended when the Government put taxpayers on the hook by introducing the government (taxpayer) guarantee to prop up our banking system:

Now, some may try to argue that Australia’s banks having “capital reserves” under the Basel II banking concord means that our banks have plenty of cash, and so retail customers with bank deposits – you and me – have nothing to worry about.

As we have seen, the real world events of late 2008 decry any such attempts at reassurance, as pure and utter nonsense.

A Big Lie.

More tellingly, there is evidence to show that the bankers themselves do not consider their APRA-regulated “capital reserves” as being available to provide retail customers with their own cash back, in the event of a bank run.

Following is a quote taken from a letter to the Australian Treasury, from the Australian Bankers Association in December 2006.  The letter relates to new “draft regulation 7.602AAA designed to reach a balance between consumer protection and the cost to businesses in relation to mandatory compensation arrangements under Chapter 7 of the Corporations Act 2001” (emphasis added):

Regulation for Compensation for loss in the Financial Services Sector

For related entities that are not APRA regulated entities it should be noted that APRA supervises the capital adequacy of a locally incorporated ADI on both a stand-alone and consolidated group basis (see AGN 110.1 – Consolidated Group, paragraph 1). It follows that account has been taken of the ADIs related entities for the purposes of the capitalisation of the ADI. Whilst these capital reserves are not available for use in a related entity’s compensating a retail customer for loss, their mere existence mitigates the risk that the related entity within the conglomerate would lack the capacity to meet that compensation claim. It is understood that these rules do not apply to all other APRA regulated bodies suggesting that a distinction should be made in the case of ADIs by removing the requirement for a guarantee in their case.

The context here is the issue of banks and their “related entities”.  A draft regulation proposed a requirement for banks to guarantee their related entities.  In lobbying to change this (!?!), the Bankers Association stated that “the requirement for the parent to provide its guarantee of the related entity’s obligations should be removed” or “clarified to confine the limit of the propose guarantee.”

In other words, we do not want to guarantee our “related entities” against losses.

And the basis for the Bankers Association argument was truly astonishing.  And very revealing.

In essence, their argument was that, even though capital reserves “are not available for use” in compensating retail customers for loss, “their mere existence mitigates the risk that the related entity… would lack the capacity to meet a claim”.

This is no different to saying, “We have money that can not be used to compensate retail customers, but you should just pretend that it can.”

Banking is a pea-and-thimble trick.  “Our” cash, that we are led to believe is really there under the banksters’ thimble, just isn’t.

The claim that Australia’s banks are “the safest in the world” is quite simply, a monstrous lie.

Like all government-approved banking systems, Australia’s banking system too is nothing more than a Ponzi scheme.

A huge con-fidence trick.

Backstopped by the so-called “independent” Reserve Bank of Australia.

And, by the taxpayers of Australia … thanks to the Labor government’s Guarantee Scheme for Large Deposits and Wholesale Funding.

Just as in the USA, UK, Ireland, Spain, and elsewhere in Europe, when our housing market collapses – taking our banks solvency with it – you already know what is going to happen.

The banks will be bailed out. By our government, who will borrow the “necessary” bailout billions against ours and our children’s children’s future taxes.

In the good times, banks profits are privatised – massive salaries, bonuses, perks and parties.

And when it all goes bad – as every Ponzi scheme must – their losses are socialised.

In my firm view, the concept of “banking” and “money” as practiced by government decree throughout the world, is arguably the greatest evil afflicting the entire human race, and impeding human progress.

Banking is a vile parasite on the human host. It must be abolished, and replaced with something better. A system whereby “money” is rendered a true servant of humanity … never again to be our master.

I know how this can be achieved. But that vision must wait for another day, and another post.

For now, just remember the Moral of the Story today.

Ignore all the “con-fidence” building reassurances spruiked to the public by our politicians, regulators, and so-called banking “experts”.

Instead, use your commonsense, and follow the advice that Australian banking system design “expert” Ian Harper gave to his own wife in the GFC:

“Come Monday morning and they tell us one of the banks is in strife and internet banking is down, I can’t look you in the eye and say you can pay this week’s grocery bills.”

The man who had just been reassuring everyone there was nothing to worry about went down the street to the ATM and made a sizeable withdrawal to make sure his wife would have enough cash.

Our “Squeeze Pop” Carbon Bank

17 May

Big bubbles, no troubles:

An independent carbon bank, similar to the Reserve Bank, should be set up to oversee a carbon price and investment in clean technology, the peak renewable energy lobby says.

The Clean Energy Council will today release a discussion paper proposing the carbon bank, which it says could be allowed to borrow money to invest in renewable energy projects against the future revenue of Labor’s proposed carbon tax and emissions trading scheme.


An “independent” carbon bank.

Trading in … what you breathe out.

Borrowing … and “investing” … against the future government tax revenue.

In other words, the government … meaning taxpayers … the guarantor for any losses on those “investments”.

In a bankster-designed, multi-trillion dollar, global air-trading derivatives market:

What could possibly go wrong?

National Australia Bank Ltd, Westpac Banking Corp Ltd and the Reserve Bank of Australia (RBA) were all recipients of emergency funds from the US Federal Reserve during the global financial crisis, according to media reports.

Data released by the Fed shows the RBA borrowed $US53 billion in 10 separate transactions during the financial crisis…

The “independent” Reserve Bank is a great model to follow then.

Its track record certainly inspires con-fidence:

Why do we tolerate an “independent” Reserve Bank, whose first legal duty is to maintain a “stable” currency, when it is so clear that they have always utterly failed to do so.

And derivatives, well, they’re safe-as-houses too.

After all, the mortgage-backed derivatives market that blew up America is only a tiddling little market.

So there’s clearly no cause for concern about yet another bankster-driven scheme, to blow up a global, air-backed derivatives bubble:

To give an idea of the vast disconnect between our banks’ “Assets” (66% of which are loans), and their exposure to OTC derivatives, the following chart shows their total Assets – blue line – versus a red line of total Off-Balance Sheet “business” (click to enlarge):

$2.66 Trillion in "Assets" versus $15 Trillion in Off-Balance Sheet "Business"

They say that the main gimmick used to promote Hubba Bubba is that it is less sticky than other brands of bubble gum, and so burst bubbles are easier to peel from your skin.

No worries then.

Sure, we are going to get squeezed dry.

But there’ll be no needing to go shave our heads or rend our clothes when the biggest bubble ever goes POP!

I wonder which flavour we will get.



Squeeze Pop?

Or, will it be another new flavour …

Carbon Tax.

Emissions Trading.

“Independent” Carbon Bank.

Behave … debt slave.


Europe Faces Gravest Challenge Since WWII

17 May

From AAP (via The Australian):

Warnings that Europe faces its gravest challenge since World War II and that the “contagion” from troubled states such as Greece could quickly spread have heightened anxiety in global markets after a steep plunge on Friday reversed much of the week’s gains.

The optimism that followed last week’s E750 billion ($1.05 trillion) European bailout evaporated late on Friday, with markets across the continent plunging and Wall Street closing sharply lower.

The euro tripped to its lowest level against the US dollar in 18 months on Friday on fears of years of weak economic growth in the 16-nation European bloc. The euro is at a record low against the Australian dollar, buying just $1.3974, down from more than $2 early last year.

The euro was not helped by comments by US President Barack Obama’s top economic adviser Paul Volcker, who spoke on Friday of the potential “disintegration” of the 16 nations that share the euro currency. And Paris has had to deny reports that President Nicolas Sarkozy threatened to pull France out of the euro to force German Chancellor Angela Merkel to bail out Greece.

European Central Bank president Jean-Claude Trichet at the weekend called for more action by euro-zone governments to improve fiscal governance.

“We are now experiencing extreme tensions,” he said in an interview with Germany’s Der Spiegel magazine. “In the market, there is always a danger of contagion — like the contagion we saw among the private institutions in 2008.”

And from Business Spectator:

Yesterday, Angela Merkel, German chancellor, warned that the $1 trillion rescue package had only bought Europe time, and that further steps were needed to address the differences in competitiveness and budget deficits between the member countries.

In a speech to the annual German trade union conference, Merkel emphasised that speculation against the euro was only possible because of the huge differences in economic strength and the levels of debt between individual eurozone members.

Meanwhile, the head of the European Central Bank, Jean-Claude Trichet, emphasised that it was urgent that eurozone countries rectify their budget deficits.

In an interview with the German magazine, Der Spiegel, Trichet said that the world was now facing “the most difficult situation since the Second World War – perhaps even since the First World War. We have experienced – and are experiencing – truly dramatic times.”

He said that after the events of 2007-8, “private institutions and markets were about to collapse completely”. That triggered governments to step in with very bold and comprehensive financial support.

The problem was that markets were now questioning whether some governments could afford to repay their debts.

Click here for 9 simple charts that show why a collapse of the Eurozone is inevitable.

Aussie Banks In Market Crosshairs

11 May

The markets have begun lining up Australia’s banking system in the crosshairs.  How do we know?  Late last week, the spreads on credit default swaps (CDS) for Australia’s banks widened the most of all banks in the world.

By the close of trading on Friday, all 4 members of our “safe as houses” 4-pillar banking system, along with our own ‘Goldman Sachs’-style investment bank Macquarie, saw deteriorations in their CDS spreads by amounts that were the worst in the world.

What does that mean?  Simply, the cost of taking out “insurance” against the bank defaulting on its debts increased dramatically.

From CMA Market Data‘s “Sovereign Risk Monitor”:

Friday, 7 May 2010 — 23:30

Largest Widening Spreads (Greatest Credit Deterioration)
Entity Name 5 Yr Mid Change From Close
bps bps %
Westpac Banking Corporation (SUB) 165.09 +50.23 +43.74
Australia & New Zealand Banking Group Limited (SUB) 167.06 +50.23 +42.99
Commonwealth Bank of Australia (SUB) 165.10 +48.44 +41.52
National Australia Bank (SUB) 167.05 +48.14 +40.49
Macquarie Bank Limited 174.28 +49.45 +39.62

It seems the markets are a wake up to the ever-growing threat the Eurozone crisis poses to Australia’s financial system. Unfortunately, very few Australians realise (or will honestly admit) just how vulnerable our banking system is:

The chief executive of National Australia Bank, Cameron Clyne, referred last week to Australian banks’ dependence on wholesale funding markets as their Achilles heel…

On average, Australian banks are sourcing just under a third of their funding from overseas wholesale markets and still too much of their existing borrowings are short term.

Australian banks are among the more vulnerable plays in the world to another Lehman-style event because of their dependence on overseas wholesale markets, which have proven already they can freeze up for extended periods.

But overreliance on international wholesale capital funding is far from being the only risk to our banking system.  Australia’s banks also have a chronic overexposure to the domestic housing (mortgage) market. A fall in property values here – just as in the rest of the Western world – would be catastrophic for our banking system.

From Contrarian Investor’s Journal:

We must confess, we are getting more and more nervous about the potential for a Black Swan hitting the Australian economy. Particularly, we are looking at a vulnerability in the banking system. Here are some facts about Australian banks:

  1. As at December 2009, around 75% of the Australian mortgage market is held by the Big 4 banks. 50% are held by Commonwealth and Westpac while 25% are held by ANZ and NAB. (source: CoreData’s Australian Mortgage Report Q1 2010)
  2. 60% of Commonwealth’s lending books are residential mortgages.
  3. 50% of Westpac’s lending books are residential mortgages.

Now, here’s an interesting news report from almost two years ago:

“The Reserve Bank of Australia has a dark worry about our banks: they get 90 per cent of their cash from each other. If one bank gets into trouble, the Australian financial system could be snap-frozen overnight.”

A final thought.

Our banks have over $13 Trillion in off-balance sheet business.

From Money Morning:

We dropped the line yesterday about the banks having $13 trillion of off-balance sheet business. We’ve mentioned this number several times over the last year, but if you’re a new reader to Money Morning, here’s a link to the Reserve Bank of Australia spreadsheet that contains the awful truth.

To be precise, it currently runs to $13,058,814,195,842.70.

Just to put that in perspective, the banks have a total of $2.59 trillion of on-balance sheet assets. We’re sure the banks and the RBA will claim that all the off-balance sheet business is completely offset, so that losses are contained.

Personally, we don’t think you should believe a word of it. The number one risk with the off-balance sheet business is counterparty risk. As long as each counterparty can keep the ponzi scheme going then sure, everything will be tickety-boo.

But as we all know, that can’t happen. We’ve seen counterparties collapse before (Lehman, Bear Sterns, etc…) and they’ll collapse or need bailing out again.

There’s only so long that banks can keep the ponzi going. They’ve scraped through by the skin of their teeth thanks to an unprecedented bail-out by the taxpayer.

The issue of counterparty risk is precisely why the Greek debt crisis is a threat to Australia – despite what Ken Henry and Glenn Stevens would have us believe.

It is clear that our Aussie banks are not so safe after all.

Eurozone Faces Bankruptcy, Disintegration

10 May

Could the Eurozone go bankrupt? One of Germany’s leading newspapers believes so.

From an excellent major article in Der Spiegel:

Huge National Debts Could Push Eurozone Into Bankruptcy

Greece is only the beginning. The world’s leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it.

The euro zone is pinning its hopes on (IMF negotiator) Thomsen and his team. His goal is to achieve what Europe’s politicians are not confident they can do on their own, namely to bring discipline to a country that, through manipulation and financial inefficiency, has plunged the European single currency into its worst-ever crisis.

If the emergency surgery isn’t successful, there will be much more at stake than the fate of the euro. Indeed, Europe could begin to erode politically as a result. The historic project of a united continent, promoted by an entire generation of politicians, could suffer irreparable damage, and European integration would suffer a serious setback — perhaps even permanently.

And the global financial world would be faced with a new Lehman Brothers, the American investment bank that collapsed in September 2008, taking the global economy to the brink of the abyss. It was only through massive government bailout packages that a collapse of the entire financial system was averted at the time.

A similar scenario could unfold once again, except that this time it would be happening at a higher level, on the meta-level of exorbitant government debt. This fear has had Europe’s politicians worried for weeks, but their crisis management efforts have failed. For months, they have been unable to contain the Greek crisis.

There are, in fact, striking similarities to the Lehman bankruptcy. This isn’t exactly surprising. The financial crisis isn’t over by a long shot, but has only entered a new phase. Today, the world is no longer threatened by the debts of banks but by the debts of governments, including debts which were run up rescuing banks just a year ago.

The banking crisis has turned into a crisis of entire nations, and the subprime mortgage bubble into a government debt bubble. This is why precisely the same questions are being asked today, now that entire countries are at risk of collapse, as were being asked in the fall of 2008 when the banks were on the brink: How can the calamity be prevented without laying the ground for an even bigger disaster? Can a crisis based on debt be solved with even more debt? And who will actually rescue the rescuers in the end, the ones who overreached?

So, the GFC is ‘over’, is it Ken?

Bubble Proof: Chinese Maids Buying Houses

3 May

Unsure about the conflicting arguments in the ‘expert’ commentariat about whether China is in a massive real estate bubble?  Consider real-world anecdotes like those following, related by former Morgan Stanley chief economist and now independent Hong Kong-based economist Andy Xie, who has predicted that an overwhelming “get rich quick” mentality has doomed the Chinese economy.

From a must-read article in BusinessWeek:

“My maid just asked for leave,” a friend in Beijing told me recently. “She’s rushing home to buy property. I suggested she borrow 70 percent, so she could cap the loss.”

It wasn’t the first time I had heard such a story in China. Some friends in Shanghai have told me similar ones. It seems all the housemaids are rushing into the market at the same time.

There are benefits to housekeeping for fund managers. China’s housemaids may be Asia’s answer to the shoeshine boy whose stock tips prompted Joseph Kennedy to sell his shares before the Wall Street Crash of 1929.

Another friend recently vacationed in the southern island- resort city of Sanya in Hainan province and felt compelled to visit a development sales office. Everyone she knew had bought there already. It’s either buy or be unsocial.

“You should buy two,” the sharp sales girl suggested. “In three years, the price will have doubled. You could sell one and get one free.”

How could anyone resist an offer like that?

The evidence in official-corruption cases no longer involves cash stashed in refrigerators or starlet mistresses in Versace clothing. The evidence is now apartments. One mid-level official in Shanghai was caught with 24 of them.

China is in the throes of a vast property mania. First, let me make it perfectly clear that calling China’s real-estate market a “bubble” isn’t denying China’s development success. As optimism is an essential ingredient in a bubble, economic success is a necessary condition. Nor am I saying that prices will drop tomorrow. A bubble evolves and bursts in its own time.

US Banks Understating Debt

11 Apr

From AFP:

Major US banks have been masking the size of their debt, and thereby their risk levels, by temporarily lowering it just before reporting it to the public, the Wall Street Journal reported Friday.

The newspaper, citing data from the Federal Reserve Bank of New York, said 18 banks have understated the debt used to fund securities trades by lowering them an average of 42 percent at the end of each of the past five quarterly periods.

The banks included Goldman Sachs Group Inc, Morgan Stanley, JP Morgan Chase and Co, Bank of America Corp and Citigroup Inc, the Journal said.

It said the practice was legal but gave investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.

It noted that overborrowing by banks was one of the causes of the financial crisis.

Barnaby Joyce has been warning about the dangers of rising US debt since October last year.

Now we see that not only is the US Government going deeper into debt by the month.  We also learn that the Wall Street banks are fiddling the books to mask their true debt and risk levels.

Barnaby is right.

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