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Your bank is not safe

December 21, 2011
Santiago, Chile

Let’s speak plainly.  If you are in the United States or Western Europe, chances are incredibly high that your bank is simply not safe. In other words, your money is at risk. Big time. Let’s review some of the chief concerns:

1) A black box of assets

Banking is a complicated industry… and especially when larger banks are concerned, nobody really knows what’s under the hood. Can we say with any accuracy what’s on Bank of America, Deutsche Bank, or Citi’s balance sheets?

No way. There’s $8.5 trillion worth of mortgage-backed securities floating around the system. Not to mention, tens of trillions of dollars worth of derivatives contracts tied to mortgage-backed securities on top of that.

These assets are all highly susceptible to downturns in housing, a rise in interest rates, and a host of other systemic risks. Yet we have no earthly idea who owns what, or who the counterparties are. It’s all a black box of assets.

In a world where the most basic foundations of the financial system can no longer be accepted as truth, we cannot assume away that bank balance sheets are healthy without more careful investigation and transparent information.

2) The assets that we do know about aren’t winning any beauty prizes

When governments auction-off tens of billions of dollars worth of bonds, it’s often the banks that buy. Large banks wielding hundreds of billions, trillions of dollars have few options where they park capital. They require enormous liquidity, and it’s ironic that the most liquid bond markets are the most dangerously indebted nations.

When $13 billion worth of 30-year bonds were sold last week at record low yields as low as 2.815%, your bank may very well have been one of the buyers.

In the all-too-likely event that price inflation surpasses 2.815% thanks to all the easing, twisting, and printing going on, your bank will essentially be sitting on even more worthless paper. And this doesn’t take into account the possibility of an all-out default.

3) Core banking business has all but shuttered

Do you remember the good old days when banks used to be responsible stewards of capital, paying depositors a fair rate (which exceeded inflation) and making sensible loans to creditworthy businesses and individuals?

I don’t either. But I’m told that’s how banking used to be. These days, banks hardly loan to anything that doesn’t come with a government guarantee.

This is not a well-functioning system. “Safe” banks are profitable… and in order to be profitable in the long-term, banks must engage in sound deposit and lending practices. This is no longer part of the banking landscape.

4) Lies, regulatory loopholes, and accounting tricks

Banks are adept at hiding the true nature of their financial condition. They conjure fake profits out of thin air and stuff their liabilities into off-balance sheet entities. And it’s all legal.

A recent paper by the Adam Smith Institute shows how banks book ghost profits from assets that are clearly toxic. The paper, appropriate entitled “The Law of Opposites,” discusses the material flaws in IFRS accounting and mark-to-market profit recognition on uncertain future cash flows:

“Much of the activity in the banking sector is aimed at nothing more than exploiting these accounting rules to register inflated fake profits and hence convert shareholders’ equity and, in extremis, debt-holders’ and taxpayers’ funds into executive bonuses.”

Government legislators and regulators are willing accomplices in the fraud. For example, risk-weighted capital adequacy ratios are the industry standard in assessing a bank’s safety. Even the Federal Reserve acknowledges that insufficient capital ratios portend bank failure.

Current regulations, however, allow banks to materially misstate the real risks on their books. Government bonds are assigned a risk weighting of zero… hardly a fair assessment in today’s environment.

As such, a bank filled with worthless government paper can legally tell its depositors, “we are completely safe.”

5) The backstops need backstopping

Today, “government-guaranteed” anything is a joke. Federal deposit insurance is just another false promise like social security. Deposit insurance funds are even more poorly capitalized than the banks, and the ultimate backstop (the government) is completely insolvent.  The buck stops nowhere, and depositors assume 100% of the risk.

6) No one is isolated

Even if your bank has acted responsibly, the issues are global. Given the derivatives exposure that cascades across the entire system, no bank is credibly isolated from the misfortunes of the others.

Here’s the bottom line: money is serious business, and the decisions we make should not be taken lightly. We don’t buy a stock without conducting a lot of research about the company and its growth prospects. Yet we make banking decisions without the most cursory consideration of the institution’s creditworthiness.

I want to urge you to think about options overseas, especially if you’re in the US or Western Europe. These banks are in precarious shape, and there are better options abroad where banks are much better capitalized.

You may want to consider Sharia-compliant banks in places like Abu Dhabi or Singapore (which has never had a bank failure) since Islamic code requires financial institutions to maintain significantly higher liquidity ratios.

You could also consider physical precious metals as they carry no counterparty risk. There are security risks with gold and silver, however such risks pale in comparison to the systemic risks in today’s banking environment.

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens.

If you liked this post, please click the box below. You can watch a compelling video you’ll find very interesting.

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Just think about this for a couple of minutes. What if the U.S. Dollar wasn’t the world’s reserve currency? Ponder that… what if…

Empires Rise, they peak, they decline, they collapse, this is the cycle of history.

This historical pattern has formed and is already underway in many parts of the world, including the United States.

Don’t be one of the millions of people who gets their savings, retirement, and investments wiped out.

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About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

Comments on this entry are closed.

  • Patrick

    While the US government may be bankrupt, you and I both know they would just print more money if necessary to cover any FDIC insured assets if a major bank went under. More than likely they wouldn’t even let it go under. To say that anyone with cash in an FDIC insured bank is taking a big risk is a bit of a “scare tactic” wouldn’t you say?

    • Mark

      @Patrick a “Scare Tactic”? Come on man, wake and smell the reality. Where do you think they will get the money to back people up when the system crumbles? Print it. And that will essentially make your 250K of insurance worth very little. It’s time to wake up and stop thinking this can’t happen! It will happen, and it is happening, start making decisions now to protect yourself, and your assets.


    Dear Daily Crux Readers:

      Isn’t a wounder/miricle too that any of us are able to conduct any kind of business at all within this kind of bankrupt banking invironment?  This corruption can’t last indefinitely can it and so let’s prepare for the worse but plan for the best that will get us FREE again!!  What’s to be gained ladies and gentlemen from the last corrupt man standing?


  • Kuhnoberholtzer


    The common man doesn’t understand this stuff!

    In fact the only people safe are the ones that owe the bank money.

    My money is safe. I haven’t got any!

  • Marty17kovar

    They are all a bunch of crooks, and stay a step ahead of the laws. Some things they do I believe should be illegal.

  • Original Reginald

    This report on banking is the truth.  You have freedom of choice to believe it or not.  The central banking cabal does not care about you.  They can fool some of the people all the time and all of the people some of the time but they cannot fool all of the people all of the time.

  • http://www.animalsdinosaursandbugs.com/The-Future.htm Peter Legrove

    Singapore seems to be positioning itself into a serious Asia
    Financial Center with its new round of regulations brought on by the Lehman
    Brothers minibond mess. The payout to the people in Singapore who brought the
    minibonds was less than in Hong Kong. I don’t think HK has changed any
    regulations to try and stop that type of thing happening here again. In HK
    I think the govn basically had to pay back most of the Lehman Brothers minibond
    mess money as it wouldn’t take much to run over the border into Shenzhen and
    open a bank account in RMB. This way the money would stay in HK. Now RMB
    accounts are big time in HK. I have my RMB account in the mainland.

    In HK we have this little thing called ‘mislead’ and it
    seems to be part of the culture here, and some financial institutions have it
    all worked. When I queried something that happened in a bank they said I had no
    proof substantiating my claim, which is true because I was querying what was
    said or more likely what was not said. And there were two bank staff involved
    so I had no chance.

    I would like to see a similar situation here in HK where the
    banks have a “Code of Ethics” but I think the ‘mislead’ thing will make sure
    that never happens. Now I pay for independent financial advisor that is not on
    commission. I pay a flat fee and the advice so far has been exceptionally good.

    Also just recently Singapore has brought out an investor
    assessment profile where the advisor has to assess the investor’s knowledge
    about investing before selling them a product. So they don’t sell them a
    product they do not understand. This came out as a by product of the Lehman
    Brothers minibond mess.

    In HK the insurance regulatory bodies are due to be changed
    either 2012 or 2013, I don’t know if that is because of the minibond mess. I
    really can’t understand why the insurance regulatory bodies are to be changed
    as in my dealings with them they are very professional and they checked
    everything I asked. 

    Hong Kong to me is just a pimple on the backside of the next
    superpower. Where would you want to put your money, in the next superpower or
    in the pimple? As soon as China sorts out its currency and the Renminbi becomes
    a global currency what will happen to the HK dollar. And for that matter what
    will happen to HK as a financial center. China wants Shanghai as a financial
    center and what China wants China usually gets. And Singapore is setting itself
    up as a close second, a financial center that looks after its customers.

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