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Most people think banks own all kinds of property, stocks,
bonds, and treasuries. The truth is
most don't own anything. Banks take our
money as depositors and claim it as equity.
They then lend out that money to businesses at say 6% interest. They see this is very good and profitable
and so they lend more money out. The
money the banks loan out comes back to them as deposits again by the employees
the business paid a wage to.
This type of circular loaning goes on until the bank thinks
it has loaned out enough and doesn't want to risk anymore. Banks used to loan out fifteen dollars for
every dollar in deposits they had.
Today banks loan out forty dollars for every dollar they take in.
When banks run low on
money they just borrow from other banks at a lower interest rate than we could
get. But what happens when banks refuse
to loan to one another? The whole
financial system grinds to a halt and the credit market dries up. Banks won't lend to the car dealership or
your employer. Nobody can get any
money. Since banks don't have any equity they have no collateral. If bank A loans to Bank B and bank B goes
bankrupt then Bank A will lose 100% of the money they loaned to bank B. Once people get scared they run to the bank
and pull their money out. The bank
can't borrow money and it uses what deposits it has on hand to give out
withdrawals to the customers. The bank
runs out of cash and has to seek protection from the FDIC.
The bank owes 15
billion in derivative losses, and must still make good on existing loans to
businesses. The bank is now between a
rock and a hard place. They need money
desperately! The FDIC will take them
over if they can't come up with money.
Frantically they run around seeking partners. Potential partners need months to go through their books and make
sure there are no unseen problems. The
bank knows they don't have months so they are ready to make any deal to stay
alive.
This is why the
United States Treasury blew their chance to make the taxpayers loads of money
and put confidence back into Main Street that their money was safe. Lets take Wachovia bank as an example. No other company was willing to lend
Wachovia any money or buy them out.
Wachovia put themselves up for sale and the he Treasury Department could
have bought them out for 7 billion.
Wachovia is worthless as a bank, but they own J.D. Edwards stock
brokerage valued at 5 billion. The
other parts are worth 5 billion so the Treasury is already turning a profit. Then
they do what Richard Gere did in Pretty Woman. Sell the parts off and keep the
banking portion for a national bank.
They would end up with 3 billion in profit and a bank for free. Plus depositors would be confident that their money was safe and return to making deposits instead of running to the banks and withdrawing money. When the federal government is your bank branch there is little chance you will lose your money. In time the banks could get back on their feet and the government could sell portions back to them at a huge profit. This brings up another point. Why did the government deregulate the banks. Human characteristics are to be greedy and we know power corrupts. We can see deregulating the banks was the worst thing we could do. I will cover this in nother article. Anyway back to why the government didn't just buy out the banks for half their value.
This is what the
FDIC did with Lehman. The FDIC let JP
Morgan buy Lehman for nothing. JP
Morgan got all the assets of Lehman for next to nothing. Lehman had no choice. It was either take what they could get for
their shareholders or file bankruptcy and get nothing. It reminds me of the movie Trading Places
where Dan wanted to buy clothes from the pawn shop and he had no money. So he told the dealer take my watch, it is a
$5,000 Rolex that tells time in 12 different time zones. The dealer told him that in Philadelphia it
is worth $50. So he had to take
$50. These banks did have assets but
the rest of the banks had problems to so they wouldn't lend out any money. Banks found out just how fragile they
were. The other plus is when the government
takes over a bank the derivatives become obsolete and the new owner doesn't
have to pay them out. So I don't see
why the government didn't take advantage of this and buy out these banks since
the bank had derivative trouble and any new owner would not. By bailing them out they make that bank pay
out all the billions in derivatives. I
think when people look back at this bailout it will make them sick at how
Paulson and Bush helped out Wall Street fat cats at taxpayer expense.
Look into it when
you have time. Check out the Lehman CEO
before Congress when they asked him why he paid out 17 million in bonuses after
the collapse. Fuld said they were under
contractual obligations. Are you
kidding? You are in liquidation. Any judge would cancel that obligation in a
second. The judge would look after the best interest of the shareholder. Anyways, didn't all the employees have
contracts also? What about them? You
didn't give them their bonuses. This Fuld guy has a lot more questions to
answer. By bailing these companies out we don't even get to replace the cronies
running them into the ground with new management! This is just an awful deal.
Article Source: United States Vice President
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