The New Crisis Bank Bailouts Begat

September 19, 2012

  • The looming “fiscal cliff”… and the story that’s not being told about big bank bailouts… the next crisis to land at taxpayers’ door…
  • Growing trends? Contrasting UHNWIs… with those who hide bodies to collect Social Security…
  • Confusion over student loan debt… basic math… solutions posed by old-timers and engineers…
  • Amazement over a can opener… and other quirky insights about foreign policy… what you should do about it


  “Investors Now Fear Fiscal Cliff More Than Weak Economy,” reads a headline on USAToday this morning.

According to the article, even though stocks are getting pumped up to their highest level in nearly five years… surveys conducted by people who care about this kind of thing say investors fear the “potential growth-crimping one-two punch of rising taxes and government spending cuts set to kick in Jan. 1” will impact their portfolios more than the lack of new jobs being created in the economy.

Next week, they’ll probably be hyped up about Iran again or something.

The good thing about being a cynic is you don’t get caught up in these fuzzy-thinking debates. We even had to look up the term “fiscal cliff” to find out its DNA. It’s a term Democrats apparently wield to scare voters into thinking they’d be better off with higher taxes.

Today, The 5 opens with a look at a story that could have much more far-reaching implications for your wallet and your portfolio than the “fiscal cliff” might ever have.

 “You probably don’t realize this,” our Laissez Faire editor Doug French writes, “but your finances are standing behind more than a trillion dollars of the bank deposits of large corporations and municipalities housed at America’s largest banks.

“It all began in 2008,” Mr. French goes on, “as it usually does.

“During the crash, the FDIC instituted the TAG (Transaction Account Guarantee) program. TAG provides unlimited coverage for noninterest-bearing transaction accounts. These are typically checking and payroll accounts for corporations and government entities and possibly large personal accounts.

“Taxpayers are backing the equivalent of the federal deficit in TAG deposits alone,” Doug explains. “The vast majority of these deposits are held by the top five banks.”

  With the Fed stomping down interest rates to zero, banks are paying but a few basis points in interest-bearing accounts,” Mr. French writes. “Depositors are permitted to forgo that puny bit of interest in exchange for complete FDIC insurance protection. That’s a trade-off worth embracing.

“How has this changed the money market?” Doug asks, letting Jim Grant explain: “Zero-percent interest rates and blanket FDIC guarantees of bank deposits reconfigured what used to be a market in short-dated IOUs of the private sector,” writes Grant in his latest Grant’s Interest Rate Observer. “Today’s money market is increasingly a market of short-dated IOUs of the public sector.”

“Corporate cash, then,” Doug writes, “has been redirected from productive uses in the private economy toward lying fallow in large bank balance sheets.”

“When a given claim yields nothing,” Grant continues, “the prudent investor will roll Treasury bills or — functionally the same thing — lay up deposits at a too-big-to-fail bank.”

130  According to American Banker, the percentage of corporate cash in bank accounts in May stood at 51%. Comparing that to 42% last year, and 23% in 2006, we think something might be brewing here…

“According to the FDIC,” Doug continues, “noninterest-bearing deposits for the top five banks have swelled by over 100% since 2008, when the FDIC put TAG in place. You can get an idea of the shift by looking at the demand deposits at commercial banks generally.

“This is a direct result of Ben Bernanke’s policy of zero interest plus the FDIC/congressional policy of unlimited deposit guarantees,” Doug points out. “Corporations are trading interest for safety, or at least the illusion of safety.”

The big picture: The FDIC Deposit Insurance Fund (DIF) is now $22.7 billion, but it represents only a tiny fraction of the $7.1 trillion in total deposits it backstops. Heh. The Problem Bank List website sums it up thus. The DIF:

“is equivalent to trying to protect yourself with an umbrella in the middle of a Category 3 hurricane. The collapse of one of the ‘too big to fail’ banks would immediately require the FDIC to seek financial assistance from the U.S. Treasury. During the height of the financial crisis, the FDIC was granted a line of credit with the U.S. Treasury for up to $500 billion.”

“TAG,” Doug explains, “the umbrella in the metaphor, is scheduled to expire at the end of this year. Like so many other government intrusions, it was a temporary fix.

“Two years later and bankers are addicted and don’t want to give it up.”

  The Fed’s zero interest rate policy already has banks under margin pressure,” Doug continues. “A flood of funding encouraged by the FDIC’s emergency TAG insurance for noninterest-bearing deposits causes bank managements to take on even more risk for more yield. That turns into something all-too-familiar: zombie banks doing stupid things.

“Are the politicians worried? Nope. TAG has plenty of supporters on Capitol Hill.

“Far from supporting economic growth, as supporters of TAG suggest, the FDIC insurance for TAG-eligible deposits actually spurs unsafe and unsound banking practices. In the case of JPM, the result of the nearly 10% increase in total assets caused by the ‘flight to quality’ encouraged by TAG was a significant increase in risk taking.

“Banking lobbyists may cry for an extension of the TAG program to stimulate economic growth or jobs. In reality, TAG is simply another act of government intervention to benefit the big banks at the expense of small banks and customers.”

On Jan. 1, 1934, deposit insurance went nationwide with deposits up to $2,500 covered (roughly $41,000 today). “Now,” Mr. French writes, “not quite 80 years later, U.S. deposit insurance coverage has gone from an inflation-adjusted $41,000 to unlimited.

“What backs up this whole system? Not capital. Not wealth. It’s just paper, paper printed by government. With unlimited deposit insurance, that financial nuclear explosion can happen any minute,” Doug concludes. “And you will be left to pick up the pieces.”

Ah, yes. At least the bailouts were successful.

Get the full scoop on what this means here.

  Here’s an item for the “eat the rich” file: “Many millionaires got poorer in the last year, but billionaires did just fine. Using their heavyweight money management teams” the uber rich were able “to ride out market and economic turmoil that hit the lesser rich,” according to a new report from research firm Wealth-X Monday.

Those with $30 million or more climbed to 187,380, but their overall wealth fell to $25.8 trillion, a 1.8% drop. This sum is bigger than the U.S. and Chinese economies combined, Wealth-X claims.

Year’s growth of “Ultra High Net Worth Individuals” (UHNWIs).

Those in the $200-499 million bracket were hit hardest, as their numbers dropped nearly 10% and their fortunes shrank almost 12%. Bummer.

The uber rich got even more so. The number of billionaires globally rose over 9%, to 2,160. Collectively, their wealth grew 14%, to $6.2 trillion… nearly half of annual U.S. GDP.

What they are buying? In light of Europe’s problems and U.S. economic “recovery” (sic), the rich are moving “away from speculative investments [derivatives] into private companies, commodities and property.” Might be good trends to follow.

 “The scale of wealth in this building is just unheard-of,” property appraiser Jonathan J. Miller tells The New York Times, regarding one of the pieces of property billionaires seem keenly interested in. “Despite all the problems economically, you are seeing these people invest in real estate unlike in any period that has ever happened.

“One57,” NYT reports, “a 1,004-foot tower under construction in Midtown Manhattan, will soon hold the title of New York’s tallest building with residences. But without fanfare from its ultraprivate future residents, it is cementing a new title: the global billionaires’ club…

One57: The easiest place to look down your nose on New York.

“The billionaires’ club includes several Americans, at least two buyers from China, a Canadian, a Nigerian and a Briton, according to [developer Gary] Barnett and brokers who have sold apartments in the building, at 157 W. 57th Street. Mr. Barnett said that at least a few buyers were ‘significant Forbes billionaires’…

“As New York has emerged from the downturn,” the NYT continues, “high-end real estate has become a magnet for the world’s superrich, who are looking for better investment returns and a safe haven from thornier economic conditions in their home countries.”

“A lot of what is happening at One57 is about wealth preservation,” Nikki Field, a Sotheby’s International Realty broker said. We’re confident that’s not all that’s happening in that building.

 Existing home sales jumped 7.8% in August to the highest level in more than two years,” the National Association of Realtors (NAR) reports today. Presumably, they’re referring to homes other than those located in One57.

“U.S. homebuilding increased in August as single-family construction reached the highest level in more than two years, providing evidence that the sector is helping the tepid economic recovery,” The Wall Street Journal reports.

“Home Resales at 2-year High, Housing Recovery Advances,” reads one Reuters headline.

The news will no doubt inspire fresh fodder for the Mayer-French debate we’ve been on the sidelines for. If you side with Mr. Mayer, stay tuned. We’re hard at work on a report that shows you how to take advantage of “a once-in-a-lifetime opportunity” in housing, as he calls it.

As you’ll soon see, you can grab a seat at the real estate game without having a lot of money to get started, without having to worry about deadbeat rental tenants and without ever having to fix a single leaky toilet. It’s all coming your way next week. In the meantime…

  Let’s see what the markets are up to…

The Dow is up 40 points, to 13,605. The Nasdaq is up 5, to 3,183.

Gold is up another dollar, to $1,769. Silver nickel-and-dimed down to $34.57.

While the pundits still debate Monday’s erratic oil move, the black sludge continues its slump. It dropped four more dollars today, putting oil at $91.52.

  “I was driving home on Sunday, listening to the radio,” software engineer Adam Nash blogs, “and it occurred to me how different the financial news would be if Apple was in the Dow Jones industrial average.

“Of course, being who I am, I went home and built a spreadsheet to recalculate what would have happened if Dow Jones had decided to add Apple to the index instead of Cisco back in 2009. Imagine my surprise to see that the Dow [would] be over 2,000 points higher.”

As you know, Apple has just hit new highs, and as I write, it stands tall at a drip below $702.

Last week, we mentioned JPMorgan’s chief economist’s note to his clients: iPhone 5 sales could add 0.33% to GDP.

The latest in ‘Apple Fever’? “By 2015, I see Apple going to $1,650,” Ironfire Capital founder Eric Jackson pronounced. “This train is just getting out of the station.”


  “We all go through life and think some things are stranger than fiction,” Sheriff Jack Strain Jr. of St. Tammany Parish in Louisiana spake philosophically on Wednesday. “This fits that description.” Indeed, it does… and might serve as a warning to the squeamish.

Apparently, a woman kept her father’s severed body in an ice chest at her apartment for at least two years as she collected his Social Security check. The story caught our eye on The Huffington Post.

“At some point,” the police reported, “she cut off his hands so that identifying him would be difficult, authorities said, but she never dumped his body as she had planned.”

Had to be an isolated incident, right? Umnn… no. Curiosity piqued, and we found this stunning list:

* “Police in Jackson, Mich., are investigating why a 72-year-old woman kept the body of a friend in her house for more than a year and a half after he died, reportedly cleaning him and watching TV with him,” NBC News reports.

After the police found a mummified body of her 67-year-old friend under blankets on the recliner in the living room, the woman “admitted to police that she cashed Zigler’s Social Security checks and kept his body,” told NBC.

* And another, “When two women went to clean out the house of Allan Dunn last week, they were treated to a not-so-pleasant surprise: a human body in a freezer,” Esquire magazine writes.

“Police believe that the 86-year-old man, who recently committed suicide, had been keeping his deceased wife’s body on ice for the last 10 years.” Why? “Apparently, to collect government benefits,” Esquire concludes.

* “A man has been jailed after collecting his dead mother’s Social Security checks for 20 years, robbing the state of almost $160,000,” the Daily Mail broadcasts. A different man, the Daily Mail goes on, “Thomas Prusik-Parkin, 51, was found guilty of impersonating his dead mother and using her name to collect Social Security and reclaim her $2.2 million brownstone from foreclosure.”

Presumably none of these incidents have been reported in One57.

If you’re looking for, umnn… less gruesome/more legal ways to collect income, we recommend this report.

After the click, you’ll see that payouts run as high as three times the regular retirement income most Americans have come to accept. And the income you’ll receive through this plan is far less smelly than keeping a dead spouse in the freezer.

See it all right here.

  “I don’t understand the students complaining about their high student loans,” a reader comments on our student loan bubble commentary yesterday. “You have to have a certain amount of intelligence to get into college, right? How did they ever think it was sensible or a good investment to take on $65,000 or $120,000 in loans when most college grads earn $40-50,000 as a starting salary, and that’s if they have a good major and are lucky enough to find a job in their field?

“What are they protesting about — their own stupidity or naivete? Suppose they’re looking for a bailout just like everyone else these days… not going to get much sympathy from me.”

  “Having worked my way through college in the Great Depression,” writes another, “I find it hard to sympathize with college graduates who have sizable debt. It took me six years, but I ended up with a BS degree in civil engineering with zero debt. Intrusion of the government in the higher education system by offering so much financial aid to students has caused an explosion in tuition costs.”

  “Back in the day,” writes another sharing his own experience, “I worked my way through college, eventually getting an engineering degree. It was four years of pure hell. I worked nights, weekends and every school holiday as a draftsman at Boeing… all the while trying to keep up with my classmates, who were super-smart geeky pocket protector-wearing nerds who seemed to study day and night. I had to take a full-credit load and get at least OK grades not drop out… or… I would have been drafted into the army and on my way to Vietnam in a heartbeat.

“How I did it, I have no idea. But I do know that in today’s engineering college environment, I couldn’t have done it. With so many 4.0 students from foreign countries being let in because they pay the university more tuition than we local yokels, I never would have had the grade point needed to get in in the first place. With tuition going through the roof, even if I had been admitted, I couldn’t have earned enough money to pay the tuition.”

  “About that four-year booze fest,” writes our last reader, here’s how our son has handled it: “Built up a business through high school (mobile DJ for weddings, etc.) and reinvested all earnings into new equipment. By the time he was in university (straight from high school), it was a going concern and it has financed most of his expenses. He graduates in computer science and digital media next year, no debt at all and plans to franchise his business in other cities immediately on graduation.

“Even as a student, he always has one person on his payroll, and will provide employment to many others as he expands next year. Booze fest? No, just hard work.”


Addison Wiggin

The 5 Min. Forecast

P.S. “This thing is the bomb,” Jeffrey Tucker was raving this morning about a new can opener he just bought. How Mr. Tucker remains an eternal optimist amid all the sturm and drang of modern life is surprising. Further, his enthusiasm can be contagious…

“The old can opener opens the top, right? The new kind crawls along the side and cuts it open just under the lid, meaning that you lift the top off, rather than dig around in the center and cut yourself.

“This new opener requires no change in the can shape. It takes the existing reality as it has existed since our great grandparents’ time and generates a totally different solution to the problem.

“This thing is the bomb.”

“As soon as you see it in action, you think: Of course! Of course that’s how it should work! Why didn’t anyone think of this before? Can opening will never be the same. Our children will never know a jagged, dangerous can top. No dog digging through the garbage will ever again cut his or her tongue. Never again will a lid fall into the beans and have to be fished out with a fork.

“How did this stunning progress happen? The commercial marketplace made something new from the old. It called into existence a new reality. It’s a dent in the universe made possible only through the dynamic and creative hydraulics of enterprise in a man-made world made ever improved and orderly through the spontaneous cooperation of people, without central direction.

“And how much do we care? There is a video about this on YouTube: 34 views.

“More to the point: Why don’t we use this model of inventiveness for all of our public life? Apply it to foreign policy, prison policy, the judicial system, money and finance. We would see actual improvement in institutions that are only good at repeating failure decade after decade.”

Within a few weeks of Tucker joining us as executive editor of the Laissez Faire bookstore… we knew we had more on our hands than an academic with a penchant for free markets and individual liberty… so we did something radical. We shut the bookstore down and tried a much-bolder experiment… read more here.


Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More