I've always been a red pill type of guy. I always feel compelled to have to know how things really work. Sometimes I wish I could just take the blue pill and be oblivious to it all.
Over the past year or so I've been dabbling in learning more about how our financial system really works. The more I learn, the more I wish I had taken the blue pill.
If you want to learn a lot about the financial system, you need to spend some time reading Karl Denniger's blog. At first it's a little difficult understanding the terms and the details, but he's good at making it understandable.
In the past few months I learned about "naked short selling" of stocks. I'll do a post about this next week. There's crazy stuff that you wouldn't believe going on with that. Mob connections to hedge funds who are manipulating stocks to drive them to bankruptcy while the authorities are bought off to look the other way. In a nut shell, you sell a stock that you just created with your imagination for real money to a real person who thinks the stock certificate is actually sitting in his brokerage account. If you manipulate the market enough, you make the stock go down to zero and never have to worry about making good on the actual stock certificate that you created with your imagination. It's fraud on a massive scale that the regulators are afraid to reveal because they fear what would happen if everyone knew what the real deal was.
What shocked me today was learning that there's short selling of Treasury Bills going on. There's a huge flight to Treasury Bills lately because people just want to keep their cash in a safe place. What happens when the broker or money fund can't find enough Treasury Bills to meet the demand? They take your money anyway and make believe that they are holding the actual Treasury bills in your account. Then they hope they can find some as quickly as possible.
The following is from Karl Denninger's recent post that goes into detail about this. I'm almost to the point where I actually am grasping what's actually going on and it's making me sicker and sicker. It's a little long but stick with it. I think it's important to understand.
Now, one tiny little inconvenient question - Treasury Money Market Funds - you know, the ones we all think are quite safe because they hold ONLY short-term Treasury paper?
Do all those T-bills they allegedly hold really exist? And if not, uh, exactly what is my "money market" fund holding? You doknow that a lot of those funds use repos, right? That's those "private contract" things they're talking about. You know, the kind where they lie and then rip you off behind your back?
Now let's talk banks. You know, those things that are supposed to hold reserves against deposits when they make loans? Well guess what - there are no reserves. The non-borrowed reserves have been negative for months - since the turn of the year, in fact, and now total over $300 billion dollars.
What does this mean? Simple - the banks lost (blew, speculated with and got caught on the wrong side of, issued or purchased crap securities with, paid bonuses with, paid the light bill with, etc) the reserves they are supposed to hold against deposits. This would usually result in them being declared insolvent and the FDIC would seize them, but that would be inconvenient. So instead they went to The Fed which loaned them reserves so it appears they have some. It appears they have subsequently lost some of that money as well, because the "non-borrowed" reserve number continues to increase in the negative direction (that is, its a negative number - a very large negative number.)
But wait - where did that money they borrowed come from? Why Treasury issued debt against which was issued money, cranking The Fed's balance sheet up. So in effect, what were bank reserves held back from your deposits are gone (kaput, vaporized, in some banker's yacht at The Hamptons, etc) and have been replaced by debt issued by Treasury against FUTURE tax collections to be levied against you!
That's right - your reserved deposits were lost, and replaced by an IOU from Treasury against YOUR FUTURE EARNINGS.
You not only gave your money to a bank which lost it, they then (by the magic of the Treasury and Fed) then turned around and enslaved you going forward to get it back from your tax payments.
Circle, meet jerk. Isn't life grand when you can lose your customer's deposit money speculating and then recover it by taxing them?
I guess that's supposed to be ok, since its the same thing that Congress did with the EESA/TARP right? The banks don't have enough capital so instead of forcing them to sell assets and/or go out and get it on their own (possible on Guido terms if they can get it at all) Treasury forcibly enslaved all of America to provide that capital via a "call" on future tax revenues, and give it to the bankers so they could pay bonuses and play "corporate raider" with one another.
And how did the banks that are "benefiting" from the TARP lose the capital in the first place? The same way they lost the reserves - by speculating in property markets, by making imprudent loans to people who couldn't pay them back, and by getting wound up in fraudulent transactions like Credit Default Swaps that were in fact a fancy game of "pick pocket" - a game gone horribly wrong. Oh, yeah, and by bonusing out $70 billion dollars - half of their revenues - to their staff.
For all of this YOU THE TAXPAYER is expected to pay.
Still trust banks and our government?
I keep hoping that this guy and many others who write about similar things are all wrong. I keep hoping that things can't be that messed up and there has to be enough good guys to clean things up.
Damn that red pill.
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