Jim Grant: "Why No Outrage?"

Jim Grant, who writes and publishes Grant’s Interest Rate Observer, is a rare figure on Wall Street: extraordinarily well versed in financial history, literate, possessed with a Victorian sensibility, which is very much on display here.

His essay today in the Wall Street Journal is very much worth reading (and appears to be accessible without a subscription). I hope this selection provokes thought and discussion.

I have a different line of thought than Grant’s. Are we outraged about anything? Are there any protests of meaningful size that one can think of? No. And yet there would seem to be plenty to be upset about, not just matters financial. Frustrated resignation is the norm.

From the Wall Street Journal:

The doctrine of activist central banking owes much to its progenitor, the Victorian genius Walter Bagehot. But Bagehot might not recognize his own idea in practice today. Late in the spring of 2007, American banks paid an average of 4.35% on three-month certificates of deposit. Then came the mortgage mess, and the Fed’s crash program of interest-rate therapy. Today, a three-month CD yields just 2.65%, or little more than half the measured rate of inflation. It wasn’t the nation’s small savers who brought down Bear Stearns, or tried to fob off subprime mortgages as “triple-A.” Yet it’s the savers who took a pay cut — and the savers who, today, in the heat of a presidential election year, are holding their tongues.

Possibly, there aren’t enough thrifty voters in the 50 states to constitute a respectable quorum. But what about the rest of us, the uncounted improvident? Have we, too, not suffered at the hands of what used to be called The Interests? Have the stewards of other people’s money not made a hash of high finance? Did they not enrich themselves in boom times, only to pass the cup to us, the taxpayers, in the bust? Where is the people’s wrath?

The American people are famously slow to anger, but they are outdoing themselves in long suffering today. In the wake of the “greatest failure of ratings and risk management ever,” to quote the considered judgment of the mortgage-research department of UBS, Wall Street wears a political bullseye. Yet the politicians take no pot shots…

The most blistering attack on the ancient target of American populism was served up last October by the then president of the Federal Reserve Bank of St. Louis, William Poole. “We are going to take it out of the hides of Wall Street,” muttered Mr. Poole into an open microphone, apparently much to his own chagrin.

If by “we,” Mr. Poole meant his employer, he was off the mark, for the Fed has burnished Wall Street’s hide more than skinned it…. To facilitate the rescue of that system, the Fed has sacrificed the quality of its own balance sheet. In June 2007, Treasury securities constituted 92% of the Fed’s earning assets. Nowadays, they amount to just 54%. In their place are, among other things, loans to the nation’s banks and brokerage firms, the very institutions whose share prices have been in a tailspin. Such lending has risen from no part of the Fed’s assets on the eve of the crisis to 22% today. Once upon a time, economists taught that a currency draws its strength from the balance sheet of the central bank that issues it. I expect that this doctrine, which went out with the gold standard, will have its day again.

Wall Street is off the political agenda in 2008 for reasons we may only guess about. Possibly, in this time of widespread public participation in the stock market, “Wall Street” is really “Main Street.” Or maybe Wall Street, its old self, owns both major political parties and their candidates. Or, possibly, the $4.50 gasoline price has absorbed every available erg of populist anger, or — yet another possibility — today’s financial failures are too complex to stick in everyman’s craw.

I have another theory, and that is that the old populists actually won. This is their financial system. They had demanded paper money, federally insured bank deposits and a heavy governmental hand in the distribution of credit, and now they have them. The Populist Party might have lost the elections in the hard times of the 1890s. But it won the future.

Before the Great Depression of the 1930s, there was the Great Depression of the 1880s and 1890s. Then the price level sagged and the value of the gold-backed dollar increased. Debts denominated in dollars likewise appreciated….

The winners and losers conducted a spirited debate about the character of the dollar and the nature of the monetary system. “We want the abolition of the national banks, and we want the power to make loans direct from the government,” Mary Lease — “Mary Yellin” to her fans — said. “We want the accursed foreclosure system wiped out…. We will stand by our homes and stay by our firesides by force if necessary, and we will not pay our debts to the loan-shark companies until the government pays its debts to us.”

By and by, the lefties carried the day. They got their government-controlled money (the Federal Reserve opened for business in 1914), and their government-directed credit (Fannie Mae and the Federal Home Loan Banks were creatures of Great Depression No. 2; Freddie Mac came along in 1970). In 1971, they got their pure paper dollar. So today, the Fed can print all the dollars it deems expedient and the unwell federal mortgage giants, Fannie Mae and Freddie Mac, combine for $1.5 trillion in on-balance sheet mortgage assets and dominate the business of mortgage origination (in the fourth quarter of last year, private lenders garnered all of a 19% market share).

Thus, the Wall Street of the Morgans and the Astors and the bloated bondholders is today an institution of the mixed economy. It is hand-in-glove with the government, while the government is, of course — in theory — by and for the people. But that does not quite explain the lack of popular anger at the well-paid people who seem not to be very good at their jobs.

Since the credit crisis burst out into the open in June 2007, inflation has risen and economic growth has faltered. The dollar exchange rate has weakened, the unemployment rate has increased and commodity prices have soared. The gold price, that running straw poll of the world’s confidence in paper money, has jumped. House prices have dropped, mortgage foreclosures spiked and share prices of America’s biggest financial institutions tumbled.

One might infer from the lack of popular anger that the credit crisis was God’s fault rather than the doing of the bankers and the rating agencies and the government’s snoozing watchdogs. And though greed and error bear much of the blame, so, once more, does human progress. At the turn of the 21st century, just as at the close of the 19th, the global supply curve prosperously shifted. Hundreds of millions of new hands and minds made the world a cornucopia again. And, once again, prices tended to weaken. This time around, however, the Fed intervened to prop them up. In 2002 and 2003, Ben S. Bernanke, then a Fed governor under Chairman Alan Greenspan, led a campaign to make dollars more plentiful. The object, he said, was to forestall any tendency toward what Wal-Mart shoppers call everyday low prices. Rather, the Fed would engineer a decent minimum of inflation.

In that vein, the central bank pushed the interest rate it controls, the so-called federal funds rate, all the way down to 1% and held it there for the 12 months ended June 2004. House prices levitated as mortgage underwriting standards collapsed. The credit markets went into speculative orbit, and an idea took hold. Risk, the bankers and brokers and professional investors decided, was yesteryear’s problem.

Now began one of the wildest chapters in the history of lending and borrowing. In flush times, our financiers seemingly compete to do the craziest deal. They borrow to the eyes and pay themselves lordly bonuses. Naturally — eventually — they drive themselves, and the economy, into a crisis. And to the scene of this inevitable accident rush the government’s first responders — the Fed, the Treasury or the government-sponsored enterprises — bearing the people’s money. One might suppose that such a recurrent chain of blunders would gall a politically potent segment of the population. That it has evidently failed to do so in 2008 may be the only important unreported fact of this otherwise compulsively documented election season.

Mary Yellin would spit blood at the catalogue of the misdeeds of 21st-century Wall Street: the willful pretended ignorance over the triple-A ratings lavished on the flimsy contraptions of structured mortgage finance; the subsequent foreclosure blight; the refusal of Wall Street to honor its implied obligations to the holders of hundreds of billions of dollars worth of auction-rate securities, the auctions of which have stopped in their tracks; the government’s attempt to prohibit short sales of the guilty institutions; and — not least — Wall Street’s reckless love affair with heavy borrowing.

For every dollar of equity capital, a well-financed regional bank holds perhaps $10 in loans or securities. Wall Street’s biggest broker-dealers could hardly bear to look themselves in the mirror if they didn’t extend themselves three times further… Managing balance sheets as highly leveraged as Wall Street’s requires a keen eye and superb judgment. The rub is that human beings err….The more immediate risk today is that Wall Street, sweating to fill out this year’s bonus pool, runs itself and the rest of the American financial system right over a cliff.

It’s just happened, in fact, under the studiously averted gaze of the Street’s risk managers. Today’s bear market in financial assets is as nothing compared to the preceding crash in human judgment. Never was a disaster better advertised than the one now washing over us. House prices stopped going up in 2005, and cracks in mortgage credit started appearing in 2006. Yet the big, ostensibly sophisticated banks only pushed harder.

Bear Stearns is kaput and Lehman Brothers is reeling, but Morgan Stanley perhaps best illustrates the gluttonous ways of Wall Street….under Chief Executive John Mack, [it] set out to catch up to the rest of the pack. In the spring of 2006, it unveiled a trillion-dollar balance sheet, Wall Street’s first. It expanded in every faddish business line, not excluding, in August 2006, subprime-mortgage origination (the transaction, intoned a Morgan Stanley press release, “provides us with new origination capabilities in the non-prime market, which we can build upon to provide access to high-quality product flows across all market cycles”). Nor did it pull in its horns as the boom wore on but rather protruded them all the more, raising its ratio of assets to equity to the aforementioned 33 times at year-end 2007 from 26.5 times at the close of 2004. Naturally, it did not forget the help. Last year, Morgan Stanley paid out 59% of its revenues in employee compensation, up from 46% in 2004.

Huey Long, who rhetorically picked up where Lease left off, once compared John D. Rockefeller to the fat guy who ruins a good barbecue by taking too much. Wall Street habitually takes too much. It would not be so bad if the inevitable bout of indigestion were its alone to bear. The trouble is that, in a world so heavily leveraged as this one, we all get a stomach ache. Not that anyone seems to be complaining this election season.

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  1. Anonymous

    Tell that Jim Grant fellow to get a life.

    Someone from the Wall Street Urinal should tell him spending tens of billions of taxpayer money to save dealers from themselves is no big deal.

    It isn’t like the President had consensual heterosexual sex or something.

  2. anon

    nothing new here … and not a single constructive suggestion as to how to change the system to suit even his own sensibilities

  3. Anonymous

    In the long view those placed on the list of ‘protected from naked shorts’ will turn out to be nothing but banks wearing bulls eyes. It is a dubious claim to fame to be among the last 19 to fail.

    Jamie Diamon recently mentioned that our ‘prime mortgages are a mess’. That should inspire confidence in stockholders.

    Jamie seems in a hurry to hang the bulls eye on his company. Or perhaps he was talking when he should have been listening?

    Of what use would a public outcry be at this juncture? The bend is in sight, the train is going too fast, the brakes have failed, and nothing will stop this wreck.


  4. Anonymous

    In the long view those placed on the list of ‘protected from naked shorts’ will turn out to be nothing but banks wearing bulls eyes. It is a dubious claim to fame to be among the last 19 to fail.

    Jamie Diamon recently mentioned that our ‘prime mortgages are a mess’. That should inspire confidence in stockholders.

    Jamie seems in a hurry to hang the bulls eye on his company. Or perhaps he was talking when he should have been listening?

    Of what use would a public outcry be at this juncture? The bend is in sight, the train is going too fast, the brakes have failed, and nothing will stop this wreck.


  5. Thomas

    I think Mr. Grant could have saved himself time and effort and simply written ” we have become Argentina”

  6. Clyde

    Anon, by definition “insolvency” cannot be fixed and denies solution. The medicine has to be taken, or the loss is socialized.

  7. Anonymous

    I usually find Jim Grant’s writings to be searing. This one started out great, but…

    He blames the creation of the Fed on ‘lefties’ rather than a gang of Banksters. Please.

    Then the article ends without any sort of recommendation as pointed out, above.

    Come on, Jim. Take off that Victorian wig and kick a bankster in the balls, will ya?

  8. Independent Accountant

    One issue in 1896’s presidential election was the gold standard. William Jennings Bryan opposed it and gave his famous “cross of gold speech”. While the “banksters” favored creating the Fed, so did the socialists. Read Plank 5 of Karl Marx’s “Communist Manifesto”. Marx favored creating a central bank and “flexible currency” in 1848.

  9. Anonymous

    I think Mr. Grant did suggest a remedy, that we MANIFEST our disgust and anger to the politicians! Until they see a significant portion of the population upset they will continue to heed the bankers and not US!

  10. david pearson

    Mr. Grant is right, but he leaves out one important reason for the populists’ silence.

    69% of Americans, up until recently, were homeowners. More important, a large chunk of that 69% sees their home value as a source of savings. No, THE source of savings. They will support anything that may prop up home prices; too bad if it also enriches fat cats.

    So Wall Street and Main Street walk arm in arm. Renters and Savers be damned!

    Perhaps this less-than-cozy alliance is temporary. Perhaps, it will last only as long as the hope of asset appreciation exists. Bear markets have a way of extinguishing that hope. If that happens, Main Street will turn on its erstwhile rescuers faster than you can say “punitive taxes”.

  11. Anonymous

    Anon @ 10:45

    You nailed it. He’s looking to raise our collective blood pressure(maybe we’d atually do something besides complain). However, ego seems to have caused him to veer off course just a bit with the high brow observations that it was the Victorian/populist/lefties who were the root cause of today’s problems.

  12. Anonymous

    While I agree with Grant, there is one issue he does not resolve for me.

    As the owner of a small business in completely outside of finance AND real estate AND commodities (our business and employees never participated in the recent boom), I keep several million dollars in a bank account to cover my monthly payroll.

    FDIC only insure $100,000 and I read they paid $0.50on the dollar to Indy mac customers with balances above $100,000.

    Were my bank to implode, the cost to my own company would be devastating– it would take over a year to earn the profits to recover the losses I would take from a confiscation of 1/2 my company’s payroll by a foreclosure.

    Again, this is payroll for lot’s of average americans.

    So show me a way my people can be protected without bailing out Wall Street, and I am all ears.

    But I have not heard any solutions, just grumblings.

  13. William Mitchell

    Based on my “Main Street” interviews, there is no outrage because securitization is too complex for laypeople to understand. As a result, they can’t figure out who to blame.

    It’s like asking people to become upset about the “cold fusion” academic scandal of the 1980s. Hard for them to muster outrage when they can’t figure out what the heck is going on.

  14. Plektrums-R-Us

    –So show me a way my people can be protected without bailing out Wall Street, and I am all ears–

    Okay, Mr. Brilliant Millionaire Ears. Break your payroll funds up into sub-$100K-accounts. Accept the associated record-keeping and other expenses as a cost of insuring your money.

    Something tells me an actual business-owner with “several million dollars in a bank account to cover my monthly payroll” might have thought of that.

  15. Anonymous

    I think Grant inadvertently answered his own question by his non-sensical veer into the red baiting.

    Lefty commies lurk behind every corner since wrongald rayguns was cannonized. This country has gone so far to the right that the best republican president in 50 years, Bill Clinton, is called a “liberal”.

    Jim Grant has a lot of good things to say but he always ruins it with his goofy politics.

  16. Independent Accountant

    Small Business Owner:
    Did you ever hear of Capital Preservation Fund, CPFXX, as a place to store money? It only holds T-bills. Why are you sitting with a mountain of cash anyway? With inflation roaring along, I think you should be looking at your total “portolio”, including assets held by you business. Get rid of the cash before it melts in your hand! Have you a cash manager? Can you borrow against your receivables?

  17. Anonymous

    Plek said- “Okay, Mr. Brilliant Millionaire Ears. Break your payroll funds up into sub-$100K-accounts. Accept the associated record-keeping and other expenses as a cost of insuring your money.”

    Not as simple as that. You’re talking about having to split the bank accounts between different banks to increase the FDIC protection. Logistics become more difficult- Are you suggesting that payroll gets paid from different banks? Cash flow can create problems- transfers may not always post for both outgoing and incoming banks on the same day (if done too late in the day). Logistics can be cumbersome and costly for most small businesses.

    Alternatively, are you suggesting setting up different accounts in the same bank titled in different names? This could create additional tax and liability exposures for the business if money gets transferred into accounts titled in a name other than the company’s.

    Sorry, Anon @ 11:36 was expressing valid concerns.

  18. Glass Steagall

    Oh, the populists lost. The cabal which owns the Fed member banks crashed their gold standard. With it, we would be much worse. They themselves proved gold standard doesn’t work. Now they are trying to channel the anger towards new gold standard at a much higher gold price – so they steal from Fort Knox is valued more. There is only one solution:


    Do that, and we will have peace and prosperity

  19. Anonymous

    Thanks for the support Anon @ 1:27PM

    Plettrums-R-Us, clearly you do not run a business. I only wish it were that simple. Cash management on a hundred people’s paychecks is a lot more complex than most people imagine, especially when you have to manage the collections from your clients who tend to pay irratically… their inconsistencies can easily swing cash balances up and down $1,000,000 within the matter of 2-3 days.

    And while our company might be able to break its accounts into (say) 3 cash accounts (at best), which would diversify risk our risk, it would cost us AT LEAST another $30,000/year to manage. And were all three banks to implode at once it would only save us $200,000 (though three runs seems an unlikely event).

    Yet if Mish is to believed:
    -There is $2.6 Trillion deposited in accounts above $100,000 (I would be willing to bet the majority of this money is like mine– small businesses using bank accounts for payroll).
    -Banks have approximately $260 billion in cash to cover depositor withdrawls.

    So were there just a 10% run on the run on non-FDIC deposits, every bank in the US would be underwater.

    So a string of runs would effect every small, mid-sized AND large company in America regardless of the bank they use.

    To give you an example, a friend of mine is one of 5 managing partner at a local law firm with almost 500 lawyers and well over 1000 employees. Their payroll can hit $13-15 million and occasionally $20 million PER MONTH (if bonuses are large). I think they keep their money with Citibank (we all know how safe Citibank is right now).

    Were a number of small and medium business to start pulling money from cash accounts trying to move them from riskier to ‘safer’ banks, or even worse , were these businesses to deposit future collections from clients in ‘safer’ banks, the ensuing ‘bank run’/cash crunch the weak bank is facing would again bring the whole financial system down, including Plettrums-R-Us’s own company’s payroll.

    Even Citibank cannot tolerate the loss of lots of mid sized businesses moving $20 million/month in cash collections to other banks for long.

    And were these insolvent banks to go into forclosure and companys lose 1/2 of their payroll (god only knows what would happen to my ongoing collections being deposited into these forclosed banks (since the checks should be good and therefore clear)) Would 1/2this money be confiscated as well until I could get all my clients to divert new payments?

    Further, if there were a bank run, it is also likely the insolvent banks would be unable to extend any line of credit to help small businesses cover payroll shortfalls(remember, the lines of credit were frozen at Indy Mac). I ask you, how much cash do you think most small businesses keep sitting around at any given moment? Certainly not months of payroll (at least in labor intensive businesses). And if we did keep lots of cash around, the cash would be at risk of loss were there a bank run (the old catch 22).

    Similarly our clients would have a harder time paying us on time in a generalized run, as there is a reasonable chance their own payrolls would be be trapped and partially confiscated, etc…

    So while all you people like to complain about saving ‘The Rich of Wall Street’, this issue is a whole lot more complicated than most people seem to realize.

    The greed and corruption of Wall Street sicken me, AND I have not heard a solution in which a gun is not put to my own company/my company’s employee’s head.

    I ask you, would your company’s payroll be safe if The Fed did not do what they did?

  20. Anonymous

    So get a sweep account with a broker that supplements SIPC protection with commercial coverage and allocate balances among a bunch of T-bill and money market funds. Nobody’s saying it’s not a pain in the ass, but you’re a chump if don’t look out for yourself. Are you really going to rely on this administration, THIS administration, to meet your payroll? Nobody’s that stupid.

  21. William Mitchell

    So much is happening right now that it can be hard to see the obvious. But if you think about it a moment, the prescription is manifest.

    1. Improve balance sheet transparency.
    2. Restore quality and public trust in debt ratings.

    Real Fed rates are negative, but everyone is still afraid to lend, because they cannot judge default risk without a functioning rating system and believable balance sheets. It’s that simple.

    This is the starting point for a true rescue. Till then, everything else is wheelspin.

  22. Anonymous

    Anon, we are considering just this, but need to look into the issues before we decide.

    And to be fair, I suspect my business is at the very leading edge by even considering these issues. Again, I ask most of you, how many of your employers changed their cash management IN ANTICIPATION of ongoing events? (I suspect very few if none). How about how many changed cash management IN RESPONSE to ongoing events? (I still suspect very few). How about: “our business has not really thought about this at all”.

    So had a major bank implosion occured before there was ANY significant warning to America’s non-financial business, EVERYONE would have been caught with their pants down. And I mean EVERYONE. Most people don’t follow this stuff at all (indeed the very talk of it puts most ‘good people’ to sleep).

    I for one, think Bernanke is looking out for the rest of us, and while I understand the criticism most have of his handeling of the events, I tend to be a little kinder. While I see he may not be able to hold off the flood waters with his thumb in the craks forever, still he has been giving us enough time to try to prepare for a possible flood.

    I for one say ‘thank you’ and think history will remember his similarly.

  23. Glass Steagall

    I agree with William Mitchell. Transparency is very important. The banks should fully open their books – end of story. Then the Treasury should proceed to buy out the insolvent banks. They become public property and pieces of them can be auctioned to rich Arab and Chinese governments. Then we can proceed with reinstatement of Glass-Steagall and strict banking regulations.
    There are solutions to this crisis and they are not that hard. But before we get there, the corrupt banko-government cabal will try to sell us even bigger scams. Be alert, be on watch.

  24. Anon 8:25

    “constructive suggestion as to how to change the system” means exactly that; not a rant about who caused the losses, or a wish that the losses might magically be undone.

    The most constructive thing about the article is that Grant does not mention his favourite destructive idea, which is abolition of the Fed. Of course, like that other wing nut quack Ron Paul, Grant wouldn’t be able to put forth a concrete design as to how the banking system might operate without it.

  25. Anonymous

    It is probable that Greenspan was not alone in brewing up the Fed monetary mess of destruction. As the heir apparent to Greenspan, it is probable that Ben Bernanke was and has beem the chief architect.

  26. Jeff

    Anon with payroll: Banking is a competitive business, and it’s not that hard to get into. If you can’t find a bank whose assets are safe enough for you, start your own. Make no loans, just accept deposits from businessmen like yourself, and buy nothing but short term Treasuries.

    The fact that you haven’t done this yet makes me wonder just how serious your problem is.

  27. Anonymous

    Fine, pat Bernanke on the head so he’s not too abashed when he’s scapegoated and sent back to Princeton. But the situation is a prisoner’s dilemma writ large. Your interests do not align with the Fed’s. In this administration his job is to allocate ruin among politically voiceless entities like yourself. Your job is to bail out soonest with your working capital in one piece. I would not think too long and hard about the state of the art before doing what you can. As soon as you pilot a redundant service supplier you can then lean on the incumbent for more. So, Why not?

  28. Glass Steagall

    Anon, there aren’t any problems with Bernanke, he is doing what is best for his private Fed. The problem is the Government which allows the looting of the public. The Treasure should take title in exchange for funds. Because these money are taxpayer’s money, not Fed’s.

    I just read that SEC has banned short-selling of 19 financial corporations. WOW, the rest of the industry has been arguing for years against short-selling. These same banksterists were the ones who wanted complete deregulation of short-selling. Now they turn around and protect THEMSELVES from their own Frankenstein but leaving everyone else exposed. WOW. Why are the people asleep.

  29. Anonymous

    “Are we outraged about anything? Are there any protests of meaningful size that one can think of? No”

    You’re showing your age by such a comment. There are mass protests every day, all across America. There exist assemblies on chat rooms and e-mails hurled like hand-grenades. People spend enormous amounts of time crafting web pages with commentary to draw eyeballs to the ever-present social ills.

    This has the effect of “steam control” to quote a favorite novel.
    You can instantly complain to ten friends and your congressman with the press of a button.

    In the end your bowl is still empty, the congressman (who is likely a millionaire), presses delete. You have the illusion something has been accomplished.

    Rome will burn and the barbarians storm the gates in the next ten years. And every congressman and senator will escape on a first class flight to Europe or a vacation destination.

  30. Anonymous

    Jeff said… “Anon with payroll: Banking is a competitive business, and it’s not that hard to get into. If you can’t find a bank whose assets are safe enough for you, start your own. Make no loans, just accept deposits from businessmen like yourself, and buy nothing but short term Treasuries.

    The fact that you haven’t done this yet makes me wonder just how serious your problem is.”

    One thing about posting on blogs, is the annoyance of having to deal with comments like this.

    ‘making my own bank’, are you serious?

    But if you can show me how to get information on the safety of my deposits at Chevy Chase Bank, I would very much appreciate it. I do not know where to go to find out about their capitalization rations, asset composition, etc… (they are privately owned). We would love anything anyone has as we have have been trying to get information on them for a while now without much success.

  31. Anonymous

    I was struck by the fact that virtually all of the above commentators failed to appreciate Jim Grant’s subtle insights.

  32. jest

    anon 2:15-

    “So get a sweep account with a broker that supplements SIPC protection”

    SIPC is a joke. It has the same amount of funds, but its potential liabilities are FAAAAAAAAAAR greater than FDIC. (look up their annual report)

    on top of that, SIPC doesn’t have a federal charter, meaning the gov’t has no obligation to step in if they go under, ala FSLIC.

    anon 2:38-

    i agree with you about bernanke. i don’t agree with what most of he has done, but i can’t criticize him either. he’s got one of the worst jobs i can think of, and i’m amazed he hasn’t quit yet.

  33. Anonymous

    I really am actually looking for info on how much risk we have with Chevy Chase Bank (how I came across these blogs in the firstplace).

    Any suggestions on where I can learn whether my payroll cash is at risk?

  34. Yves Smith

    Anon of 3:16 PM,

    I must say I do not understand your point. I see plenty of what is probably best called kvetching here and elsewhere on the ‘Net. It’s more than a tad condescending to think that I don’t. Talk is cheap.

    As Tony Benn said, government should be afraid of the people. But in the US, people are afraid of the government. Pecking at keyboards won’t change that.

  35. Anonymous

    A comment: “Of what use would a public outcry be at this juncture? The bend is in sight, the train is going too fast, the brakes have failed, and nothing will stop this wreck.”

    Bravo, Grant!! And to the above commenter, there is a sign in San Francisco area: “One in five children in San Francisco is going hungry today.” Where is the line across which your own sense of outrage will kick in…if at all. The human cost of this train wreck ain’t gonna be pretty – millions of baby boomers just lost their retirements, sub-prime babies sleeping in tent cities, use your imagination.-

    Again, BRAVO GRANT!!!!

    I plan to make every penny I can trading from this mess and siphon it off to the most progressive candidates.

    and to Grant and also the WSJ and Yves Smith I say thanks for putting out these words.

  36. Glass-Steagall

    Yves, the people are not happy but the government is not afraid of them. No one is afraid of disorganized people. Keyboards can work either way – to keep us busy venting or to help us find solutions and push the congress. Yes, we have to do their job and push them to rubber-stamp it. Otherwise they will ruin the country under the spell of corruption.
    There are some ideas on this thread, we can form a small group for discussion and reaching others. This approach is quite civil and innocent. I don’t’ thing the government scares us away from it. More likely, it’s something in ourselves?

  37. Anonymous

    I would say that the keyboard has done some good things for Mr. Obama in terms of politics and money. And the outrage is there. Look around.

  38. Glass Steagall

    Obama or Ron Paul or anybody else have to be pushed! Never trust a politician, none of them, ever and ever. They have to be controlled non-stop by their constituents.

    Obama for example said that he doesn’t support the reinstatement of Glass-Steagall – no intelligible reason was provided. Ron Paul is known as Dr. No – no solutions either.

    The only way to change something is by organized educational activism. Can be a wonderful pastime too.

  39. Abolish the FED RES

    Small buss guy see if you can secure a 1 million line of credit.If the bank crashes your still sitting pretty .That what we are setting up on Monday. Also the FDIC is talking about pay 10 cents on the dollar when losses get to big. Indymac took 15 to 20% percent of book .They will freeze your bank accounts to keep your withdraws from causing a run on the bank

    New FDIC Rules of Concern for Large Depositors
    by Chris Ciovacco

    Buried on page C3 of today’s Wall Street Journal (WSJ) is a story “FDIC Issues New Deposit Rules for Big Banks”. While little information is available, what I can find makes me a little nervous. So I am not skewing what was reported, here is a portion of the exact text from the Wall Street Journal article:

    WASHINGTON — The country’s largest banks, particularly those more likely to fail, will have to make changes to the way they treat deposits, as federal banking regulators prepare for more trouble in the struggling banking industry. The new rules for large banks will require them to standardize the information they provide to the FDIC on deposit accounts, and to put in systems to automatically post possible holds on very large deposit accounts. Regulators have predicted that more banks will fail, and the FDIC’s new rules seek to address those concerns.

    The vague “put in systems to automatically post possible holds on very large deposit accounts,” is what I am uncomfortable with. Does this mean to prevent a bank run; the FDIC can prevent some large depositors from accessing or transferring their funds?

    On http://www.communityinvestmentnetwork.org, I found these remarks (excerpts below) from FDIC Chairman Sheila Bair to the Exchequer Club of Washington D.C. on June 18, 2008:

    Yesterday, the FDIC’s Board adopted a final rule to modernize the claims process. The rule reflects the comments we’ve received on several proposed rulemakings on the claims process issued over the past few years. It also reflects extensive talks we held with industry representatives.

    The rule requires that large banks have the ability, in the event of failure, to do several things. They must be able to place holds on a fraction of large deposit accounts, produce depositor data for the FDIC in a standard format, and automatically debit uninsured deposit accounts so that they will share losses with the FDIC.

    This approach should give most depositors uninterrupted access to virtually all their funds, thus diminishing the likelihood that liquidity problems for individuals and businesses will lead to disruption in the financial system. To complement the industry’s efforts, we have been extensively modernizing our computer systems and expanding our ability to categorize large numbers of claims in a very short time — one to two days.

    According to a Bloomberg article posted today:

    The change will help pay off insured deposits as soon as possible and help “maintain public confidence in the banking industry,” the regulator said. It will also `”mitigate the spillover effects of a failure, such as risks to the payments system, problems stemming from depositor illiquidity and a substantial reduction in credit availability.”

  40. Anonymous

    Cash Management,

    Open a Goldman Sachs private account, hold near term expiring US T paper, setup a wire to your payroll disbursement account to transfer funds as needed (weekly/biweekly/monthly)

    Charles C also has a brokerage banking solution, a mix of both Banking and brokerage solutions which could do everything for you also, from US T’s to checks.

    You want brokerages holding US T paper with a ladder structure on the bills. This way you buy a new bill once a week with your roll cash, and you can always sell or hold to maturity while waiting for a use of the funds.

    You would want to wire funds to a second disbursement account, this way provides liquidity, insurance and diversification from individual bank risk.

    The actual time to manage this ladder is less then 20 min a week, once you have everything setup… Keep your maturity to 30 days, and buy 1 week at a time.

    You can always margin the T’s, to gain instant access to liquid capital if you need to. I know of a CEO who bought a controlling interest in a public company on his margin account. Tax write off no less…



  41. Francois

    “So much is happening right now that it can be hard to see the obvious. But if you think about it a moment, the prescription is manifest.

    1. Improve balance sheet transparency.
    2. Restore quality and public trust in debt ratings.”

    Let me add #3:

    Remove executive compensation packages that reward risk while protecting downside. Let shareholders have decisional power over amount and mode of payment of CEOs…*evil grin*

  42. Francois

    “And though greed and error bear much of the blame, so, once more, does human progress. At the turn of the 21st century, just as at the close of the 19th, the global supply curve prosperously shifted. Hundreds of millions of new hands and minds made the world a cornucopia again. And, once again, prices tended to weaken.”

    And during that time, (that bears eerie similarities with today) the wealthy owned pretty much every politician in existence, the laws were written by them, for them and against the ordinary people. We got a Great depression, two World Wars with its countless suffering.

    Will we need to go through something similar before the outrage finally translate into real action?

    Are we dense to the point that Professor Pain will need to teach us AGAIN, one of his proverbial lessons?

    Is it the only way we learn to evolve toward what we already did post-1945 to 1980, where we had much more fairness in this society?

    I guess we can’t learn form our mistakes can’t we?

  43. KeithK

    nothing new here … and not a single constructive suggestion as to how to change the system to suit even his own sensibilities

    Jim Grant has been making constructive suggestions for years, but his suggestions have been ignored. While he did get invited to various finance shows, he sometimes seemed to be more of a sideshow: “C’mon in and see the wild bear.” At best he was often presented as a curiosity.

    Now that things have transpired pretty much as he has predicted for the last several years, should we really expect him to unsh-t this bed. If he knew some easy solution to our current problems, there wouldn’t be any reason for him to be so vigorous in warning about them to begin with. He could have just let things happen, and then told us how to solve the problems.

    Eventually, you can reach a point where there are no good solutions – just some that are less bad than others. I think we’re there right now.

  44. Anonymous

    –So show me a way my people can be protected without bailing out Wall Street, and I am all ears–

    Collateral damage is exactly what will ignite the outrage.

  45. STS

    If you want to punish Wall Street, focus on bankers’ compensation. They have a major “heads we win, tails you lose” game running here.

    Bail out the institutions to protect our savings and small business payrolls, etc. But make the executives pay back their fat bonuses from the last few years when they were gambling with what turns out to have been “our” money.

    Longer term, we need new regulation to ensure that bankers only make the big bucks when their institutions run within reasonable margins of safety.

  46. Anonymous

    David W. (as worried!),

    Hi, this is my first post in this excellent blog. This comment is a direct reply to the gentleman whom posted that he had several million dollars of payroll money deposited in a single company bank account that FDIC only insured up to $100,000. My situation is different in that my funds belongs to my family so we were able to setup up multiple proper account types in IndyMac Bank as early as Jan 2008 (I knew the subprime defaults are peaking in March or April of 2008 and IndyMac might be in trouble very soon since Dec of 2007) that would be insured by FDIC when IndyMac was taken over by FDIC. (Our funds are still there in the “new IndyMac Federal Bank” because FDIC honored the higher interest rate and term of the old IndyMac). I had to move a couple of Mi’s that would not be covered in FDIC from IndyMac to two other banks under the FDIC multiple accounts insurance guide line at that time. Before and after IndyMac was taken over by the FDIC, I was trying to find a way to park these funds safely in a single bank against any FDIC take over, but was not successful. However, yesterday (July 18, 2008) I read a recent newspaper article in World Journal (a Chinese newspaper – who’s website (not the article) is http://www.worldjournal.com/ ) specifically dealing with this FDIC insurance limit issue after IndyMac take over incident. The article quoted a CEO of a Chinese Bank (Mr. Yu Li of Pao Fu Bank (literally means “Save Wealth Bank”) that there is (or are) Federal Institution (don’t know if it is FDIC) that will insure the bank deposits up to Fifty Millions dollars (50,000,000) – CDARS (Certificate of Deposit Accounts Register Service). The re-insurance fee is expansive (according to the afro mentioned bank CEO) but he also said that you could usually use your financial clout in your bank (means several millions to ten millions) to demand this service for free or you will move your funds to another bank that will be more accommodating. Please be advised that I have not yet doing any research on this CDARS stuff and is simply relating what I have read in this new article (in Chinese) to you. My translation of the name of this banker and the bank is as close as I can without researching more deeply.

  47. Juan

    Independent Accountant,

    actually the 5th point in the manifesto read as:

    5. Centralisation of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly.

    aside from fact the whole document was written during a moment of political tensions between different socialist organizations within a a revolutionary moment in europe, it is probably worth noting that all ten points were immediately preceeded by “…the State, i.e., of the proletariat organised as the ruling class…”, so obviously within a quite different social-political context than existed at the time and now.

    this from capital volume 3 has much more relation to the present:

    In a system of production, where the entire continuity of the reproduction process rests upon credit, a crisis must obviously occur — a tremendous rush for means of payment — when credit suddenly ceases and only cash payments have validity.
    At first glance, therefore, the whole crisis seems to be merely a credit and money crisis. And in fact it is only a question of the convertibility of bills of exchange into money. But the majority of these bills represent actual sales and purchases, whose extension far beyond the needs of society is, after all, the basis of the whole crisis.
    At the same time, an enormous quantity of these bills of exchange represents plain swindle, which now reaches the light of day and collapses; furthermore, unsuccessful speculation with the capital of other people; finally, commodity-capital which has depreciated or is completely unsaleable, or returns that can never more be realised again.
    The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values. Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in centres where the entire money business of the country is concentrated, like London, does this distortion become apparent; the entire process becomes incomprehensible; it is less so in centres of production…
    (my emphasis)

  48. jest

    i’m not sure i get the above comments about people being outraged. people are at best bewildered, but the anger is not there.

    now in pakistan, they’ve got people rioting in the streets. that’s outrage. people in europe are in the streets protesting about inflation.

    here, the most you get is a blog about it.

    the thing that scares me is the degree to which things will need to deteriorate before americans get angry enough to raise hell. we’ve got a lot further to go….

  49. Anonymous

    Hi, this is David W (as worried!) again. I did a goggle search on CDARS and found this http://www.cdars.com/index.php . I think this service is mainly for CDs and not for the regular checking accounts. So your comapny payroll money might have some difficulties in getting this service. Anyway, I think there is nothing to lose by asking directly to these people and the participating banks. Maybe they have other safe ways (but not published in their website) to handle your situation. You can find the participating banks from the above website too. Good luck.

  50. Anonymous

    Where’s the outrage?

    That’s a good question. I’ll attempt to answer that in two parts:

    1) I think for a number of people, their reality is shaped by what they encounter on a day to day basis in their local environments and what’s on TV.

    TV attempting to comment on politics/financials tends to, at best, be confusing pap that really promotes confusion–hence, it serves to preserve the status quo of doing nothing.

    And what these people experience on a local day-to-day basis has not caused them to become perpetually outraged: their kids are not being drafted into the military, their banks are not going broke, Wal-Mart is still supplying cheap goods, government is still supplying most expected services, they can still run up their credit card debt, gas isn’t $10/gallon, and the NFL training camp is still starting.

    When these start to change on a wide scale, you’ll start to see outrage from these people.

    It seems increasingly likely that if the Fed does nothing, we’ll have lots of bankrupt banks, high interest rates, collapsing prices of many different assets. But if the Fed continues to bail everyone out, the dollar is going to be absolutely ravished. Either path will eventually force outrage on a majority of currently happy-go-lucky Americans.

    2) I’ll use myself as the example for part 2. I’ve been outraged a lot over the last ten years.

    But what have I done? Tried to Vote The Bums Out. Gave money to Ron Paul; also to the Glenn Greenwald coalition about holding Democrats accountable to the whole FISA mess. Try to influence my Bush-loving in-laws. Got my assets out of the U.S. Dollar.

    I didn’t protest in the streets. I haven’t run for any political office. I haven’t filed any lawsuits. Why? Because I can’t see how any of that would help. And I probably resemble the people I describe in part 1) more than I care to admit.

    Hmm…perhaps another question is, where are the useful, practical, change-oriented, possibly helpful outlets for anger and outrage?

    I’m afraid I’ll eventually fall victim to David Foster Wallace’s maxim. To paraphrase him, acceptance is usually more a matter of fatigue than anything else.

  51. Anonymous

    David W., thanks.

    This same issue has exploded on my Vistage CEO board today– apparantly a member did get caught when IndyMac went down.

    The CDARS do seem to be the most suggested solution.. I am not sure yet if Chevy Chase offers them as apparantly they are only offered by a limited number of banks (Citigroup. Merril, JP, etc…).

    No one has talked about the CD vs. cash management issue.

    I’ll let you know



  52. Glass Steagall

    “Hmm…perhaps another question is, where are the useful, practical, change-oriented, possibly helpful outlets for anger and outrage?”

    Interesting. That makes two of us – lost in the big, wide, still-useless internet. Too many blogs, too much talk and too little agreement. I check the NC sometimes because I respect the intelligent people who post here. Eventually, we may find (or create) a place with a more focused agenda.

    There are many issues before us, we should select one as a starting point and try to build support for it. I wrote here about restoration of Glass-Steagall. Do you think it’s a viable candidate?

  53. Anonymous

    Thinking of all the money and lobbying that went into repeal Glass-Steagall in the late 90's, I figure the only way to re-implement it is when the U.S. is picking up the pieces of the economy.

    I've been thinking more recently about how to apply the organizing potential of the internet to local issues. Local news (TV & newspaper) is getting worse by the day. And I can't remember when any local congressional representative has been scrutinized rather consistently. (e.g. I don't even know how my Senators and Congressman voted on G.S. in 1999).

    One could cover local issues and then periodically tap into "national" sites like Yves's.

Comments are closed.