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Bad Banks Behaving Badly

bad banks

Bad banks are bailing bad banks. Below, we take a quick look at a long problem.

Ford’s Warning

Many of us are familiar with the famous observation made by Henry Ford as to banking practices, namely:

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

-Henry Ford

It’s an admittedly sensational quote, but for some reason, it comes to my mind as I look at past, current and future headlines.

The Headlines

As the grotesque misuse of overleverage, un-regulated duplicity and the sins of mis-used client funds at FTX continue to make headlines, none of us have likely dropped by the New York Fed’s website to notice a carefully hidden confession and a $48T skunk in the financial woodpile.

By this, I am referring to the media-ignored repo crisis of September 2019 which represented one of the first and most obvious signs (dominoes) of a derivative-toxic financial system already on the road to internal implosion and subsequent inflationary purgatory.

Recently, the New York Federal Reserve confessed (quietly) that a total of $47T in term-adjusted loans was given to the banks in 2019-2020 of which many of us were not made aware.

In short, long before the COVID Crisis or war in the Ukraine became the convenient scapegoats for the staggering debt, derivative, counterparty, currency and inflationary sins of our global banking system, that rigged system was already broken.

We Warned You So

All modesty aside, we openly called this crisis (and its deeper ripple effects going forward) in real-time in 2019, despite the fact that the financial media and markets made a concerted effort to downplay the same.

Specifically, we wrote an immediate warning in September 2019, here, and later a video warning, here, of what we called a second “big bailout” for the very actors (banks) who caused the greatest liquidity market crisis in the sordid history of the repo markets.

To remind, the repo markets are where banks go to get instant (often overnight) liquidity to keep the wheels of their 1) fractional reserve banking (i.e., leveraged depositor assets) and 2) derivative-based trading desks (i.e., levered gambling) going.

Banks Helping Banks—The NY Federal Reserve

The provider of these overnight loans (which can also include term loans of 14 days, 28 days or even 42 days) is the New York Federal Reserve.

BTW: This was the same bank which funded the bailout of the TBTF banks in 2008.

As this story unwinds, it’s also important to note the other cast of characters, namely the five largest shareholders at the NY Fed, namely:

JP Morgan

Goldman Sachs

Citi Bank

Morgan Stanley

BNY Mellon

What happened next is worth deep consideration, a few laughs and perhaps even a few more tears…

The Plot Thickens

On September 16, 2019, a UK based trader named Thomas Cook got caught in what is now (think FTX, Archegos, Credit Suisse etc.) an all-too familiar trap of over-levered derivative swaps marked by extreme counter-party risk (i.e., no money to cover his gamble).

Net result—nearly $3B of losses in seconds.

The next day, in a panic reminiscent of the sins of Long Term Capital Management, the Fed began to act (i.e., toss bad money after bad) to keep the bankers flush with cash.

This involved a stream of staggering levels of liquidity that began in Q4 of 2019 and stretched well into Q1 of 2020, just in time for the Covid Crisis to justify even more (frankly unlimited) money to bail out the banks.

This pre-Covid bailout has two chapters.

Chapter 1

The first chapter began with a $19T infusion to 25 major trading desks, 60% ($12T) of which went straight to:

Goldman Sachs

JP Morgan

Citi Bank



Deutsche Bank

Chapter 2

Chapter 2 involved an additional $28T to those same trading desks, of which greater than 60% ($17.5T) went to those same big banks, only now they added BNP Parisbas (big lemon) to the recipient list.

The sins of these banks have been explained elsewhere, and as for Deutsche Bank, which at the time had lost 90% of its share value over the preceding 12 years, we had already warned months before that this was a zombie bank for all the derivative reasons one can imagine.

No wonder such a D- credit could get an easy Fed loan, but frankly, Nomura and BNP were no better at all…

Do The Math, Read the Names

But folks, take another quick gander at the names (above) of 1) those who control the money and 2) the names of those who received the money.

See a pattern?

Also take another look at the term-adjusted amounts (bailouts) listed above, for when added up, they total $47T in less than a year…

See a rigged game?

To the extent the media covered this at all, the numbers they reported were closer to around $9T…

Do you smell a skunk?

Or take the animal metaphor one step further:

Do you see how the foxes guard their own financial henhouse on taxpayer (i.e., your) dollars/” loans”?

Don’t Read the Media?

Meanwhile, then and now, this minor little repo disaster of astounding ramifications (as to credit market health, banking practices and global economic consequence) was largely ignored by the media as the emergency narrative in the 2019 repo markets was replaced by the new narrative of “blame it on Covid” as stock and bond markets tanked into March of 2020.

But folks, the real cause of this repo poison and backdoor bank bailout 2.0 was nothing more than 1) grotesque over-leverage at a derivative-based bank near you, and 2) a “rich uncle” Federal Reserve system that rewards rather than punishes its wayward spoiled nephews at banks X, Y and Z.

Sadly, these bad actions and bad actors continue with the same behavior day after day, until something breaks.

Moral Hazzard

It’s events like the foregoing repo bailout, coupled with recent headlines at FTX or Credit Suisse, which point toward the real virus ruining our financial systems.

In short, we and our markets are all at the mercy of massive leverage by banks, the unacceptable counterparty risk in the derivative markets, and the Fed’s moral hazard of rewarding the sinners for their sins, all of which involve trillions in funds which flow with inflationary force despite every effort by the Fed in the interim to pretend the inflation wasn’t there

As for market direction, market volatility and market risk, all will hinge upon gauging the behavior, actions and policies of the centralized banking system described above, as natural capitalism has now been replaced by central-bank policy.

We track that policy daily, as well as its impact on interest rates, which impact market forces and market sectors with consistent implications.

Our portfolios are designed with realism not cynicism, and track markets free of emotion, though when discovering practices like those above, it’s admittedly hard not to get a little emotional…

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10 thoughts on “Bad Banks Behaving Badly”

  1. Thanks Michael always a learning experience reading your work. U may want to check out Solari Report by Catherine Austin Fitts. She is like u a rebel showing what’s really going on in the financial system She ran HUD in the Busch Sr administration. She just put out a documentary part 1-2-3 of a part four series on the same issues going back to post WW2 until now along with the bills that have been passed to secure Central Bank control of our money supply.
    Worth a look

  2. Keep up the good work Matt and Tom.
    Great report and very informative

    Them “thar” foxes probably don’t like you, but us hens love your informative advocacy for the rest of us serfs!

    BTW – when is the SM Auto-Portfolio program expected to go live?

    Richie B

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