2008 - Q2
Banks In Trouble

As we revisit May of 1933, if only in a nostalgic sense, we must remember the origin of the banking problems that surround us. We have been there, done that, in the modern parlance. The idea of banks gathering working depositors money and then using that money to engineer the prior equivalent of mergers and acquisitions and/or to engage in trading derivatives, bonds, commodities, foreign currencies, and stocks, were seen as major causes for the excess and crash of the Roaring Twenties. In response, Congress required banks to choose a side. Either engage in speculation as an investment bank, or restrict your business to traditional banking. That is, to gather deposits and make sound loans. The Glass-Steagall Act of 1933 codified these laws. Senator Carter Glass, commented as follows:

“Here (in section 21) we prohibit the large private banks whose chief business is investment business, from receiving deposits. We separate them from the deposit banking business.”

Until recently, this law prevented the mixing of these businesses. The Glass-Steagall Act of 1933 also established the Federal Deposit Insurance Corporation (FDIC). Its purpose was to provide additional protection against loss to ordinary depositors whose money was caught up in the debacle. Never again would a person’s money be lost to bank speculation that they had no knowledge of. However in 1999 the Gramm-Leach-Bliley Act, repealed the Glass-Steagall Act of 1933. Just as deregulation of the Savings and Loans in the late 1980s led to speculative excess and a taxpayer funded bailout of $600 billion, so has this deregulation led to the current banking crisis. Make no mistake, there is a bank crisis looming. Bear Stearns was merely an indicator. Bank losses from this Speculative activity may eventually top $1.5 trillion. It should be noted that the great clamor to repeal Glass-Steagall and reform bankruptcy laws came not from America’s voters, but at the prodding of the owners of the Federal Reserve Banks. Spending more than $200 million on lobbying efforts Since 1998, they succeeded in removing the last obstacle to total financial domination. About a week after the deal was done, Citigroup, one of the prime beneficiaries of the legislation and part owner of the Federal Reserve Bank of New York, announced that they had hired Former Treasury Secretary Robert Rubin as co-chairman of the firm. Thus the signal that the checks and balances put into place in the wake of the last Federal Reserve debacle in 1933 were effectively dismantled. Regulation Q, which was put in place by the Glass-Steagall Act 1933, allowing the Federal Reserve to regulate interest rates in savings accounts was repealed by the Monetary De-Control Act of 1980. Other restrictions which prohibited the cross ownership of other financial institutions were also repealed by Gramm-Leach-Bliley in 1999. Almost immediately we saw the merging of commercial and investment banks and the resulting influx of fresh money. As a result of this newly rediscovered access to the nation’s savings, investment banking net revenue increased for the next 6 years in a row, doubling every 2 years to nearly $90 billion in 2006. Complicated investment vehicles with higher margins are constantly invented in order to achieve these lofty returns. In most cases all of the attendant risk is being diverted to the depositors’ money instead of private capital. Losses among all U.S. banks will likely double this year. The top 10 banks have over 85% of deposits. Most owe more than $20 for every $1 in capital. While all banks are suspect to us, below is a list of those we are most suspicious of - in no particular order:

Wells Fargo (WFC) • SunTrust (STI) • KeyCorp (KEY) • JPM Chase (JPM) U.S. Bancorp (USB) • Bank of America (BAC) • Capital One (COF) PNC (PNC) • National City Corp (NCC) • Washington Mutual (WM) Countrywide (CFC) • Citigroup © • Wachovia Corp (WB)