Steaming Mad about a Big Bank Con: Email from a Concerned Senior

Everyday I receive anguished emails from concerned citizens regarding the state of the economy, Wall Street, the political-financial system, and how their future stability is impacted by the powers that be. This one stood out for its clarity, as well as being indicative of one of the many ways in which the banking system regularly undermines people’s economic stability by targetting their savings accounts (which thanks to the Fed's zero-interest-rate policy receive no interest, and thus, no relatively risk-free returns) for high-fee asset management services.

The Clinton administration’s 1999 repeal of Glass-Steagall, plus the two prior decades of various measures that weakened the intent of this 1933 Act that separated banks’ speculation activities from deposit and lending ones, has enabled big banks to engage in all manners of trading, leverage, and ill-concocted investment schemes, while holding trillions of dollars of individuals’ deposits.

It was Charles Mitchell, head of National City Bank (now Citigroup) back in the 1920s that realized if his bank could corner the deposits of ‘the Everyman’, it would be better positioned to engage in the bigger transactions that would catapult it to a financial superpower, as well as use the accounts for additive domestic gain. Nearly a century later, this aspect of converting depositor/savers to commission-providing risk-takers, provides fees to bankers, absent true responsibility for any related downside (as in the ‘past behavior is not indicative of future results’ small print.)  

But people should not act upon the “guidance” of the investment advisors resident at the very big banks where they keep their savings and other money – this leaves too much room for manipulation of their trust and money. And if legislation and politicians won’t divide these two financial items, people must do so for themselves.

For the evolution of institutionalized, government and central bank supported speculation has left populations footing the bill for bets taken beyond their knowledge and certainly, control. Even those people that believe they are taking the prudent steps with respect to their own financial situations as they approach old-age, are victims of a churn-and-burn mentality that incurs unnecessary fees and bonuses for the perpetuators, at their expense.

Having checked with the writer, who prefers to remain anonymous, I am leaving the contents of this email intact. The writer wanted others to know “how the nation’s banks target senior citizens and steal their life savings.“  These are the warning words I received from one of America’s seniors:

“Unlike many of the banks’ other schemes, this con is entirely avoidable if seniors and their families knew what to watch out for.

Here is how it works:

1. You are a conservative saver, and you have a large amount of money in the bank.  Since you are a “valued customer”, the bank gives you your own personal financial representative, with whom you build a relationship over time.  But this person is not on your side.  He will prod, coax, and sweet-talk you into moving your savings over to the bank’s investment arm.

2. If you do move your money over to the investment bank, your financial advisor will charge you high management fees (upwards of 1% of assets per year).  Moreover, you will pay big commissions on top of that.  But these won’t be disclosed as commissions – they will be incentives disguised in various ways that are buried deep within the fine print.  Since you don’t know about these, and since you trust the paid professional you’ve hired, you will be an easy victim.

3. Because of these incentives, your advisor will dump investments into your portfolio that may include: funds of funds (which charge layers upon layers of fees), IPO offerings that the bank can’t manage to sell off, complex structured products, variable annuities, and the like.  Anything the bank wants to get rid of, wishes to hawk, or gets a kickback to sell will be dumped into your account.  All the while, your advisor will be assuring you that these are excellent investments.

4. The result will be that you will almost certainly do worse than the market overall – at the very least, by the fees and commissions you pay (commissions that have been taken  –  stolen! – without your consent), and at worst, by scorching losses obtained via inappropriate investments.

5. If you figure out what has happened (and most people don’t, they will think that the market just did badly), you will have little recourse.  The bank will have forced you to sign a mandatory binding arbitration agreement that shuts you out of the court system.  Even if the bank has committed fraud, forgery, etc., it doesn’t matter.  The courts are closed to you.

6. If you manage to obtain a settlement or get a judgment from the arbitration forum, the results will almost certainly be kept confidential.  Therefore, the goings-on are kept quiet, and the banks can continue their practices unabated.

The victims of this fraud are not doing anything wrong or unreasonable.  They are working with large national banks.  They are hiring certified financial planners.  They are paying high management fees, so there is no expectation of anything “free”.  They are asking good questions and being reassured that their financial advisor is looking out for their best interest.  But they are being swindled nonetheless – because they don’t know about the hidden incentives, because they are unable to differentiate good investments from bad ones, and because they are being reassured by their advisor about how well they are doing compared to the market, even if the opposite is really true.

These are professional con men that are swindling millions of seniors, every day, all over the country -- decimating their life savings in their final years. 

I know, because I have seen it happen.  And I am mad.  Steaming mad.”

This writer is not the only one that is steaming mad. So are millions of people - retirees that don’t have the luxury of ‘making it back’ and workers that aren’t getting paid enough to leave unnecessary money ‘on the table’ of brokers and advisors whose best interests are institutionally and legislatively their own. Heeding the warning in here, and separating one’s bank deposits from the bank’s asset management arm that views them as fee-fodder, would be one way to protect against the damage that this regulatory fusion of bank practices causes.

QE isn’t dying, it’s morphing

A funny thing happened on the way to the ‘end’ of the multi-trillion dollar bond buying program known as QE - the Fed chronicles. Aside from the shift to a globalization of QE via the European Central Bank (ECB) and Bank of Japan (BOJ) as I wrote about earlier, what lingers in the air of “post-taper” time is an absence of absence. For QE is not over. Instead, in the United States, the process has simply morphed from being predominantly executed by the Federal Reserve (Fed) to being executed by its major private bank members. Fed Chair, Janet Yellen, has failed to point this out in any of her speeches about the labor force, inflation, or inequality. 

The financial system has failed and remains a threat to us all. Only cheap money and the artificial inflation of asset values can make it appear temporarily healthy. Yet, the Fed (and the Obama Administration) continue to perpetuate the illusion that making the cost of (printed) money zero by any means has had a positive effect on the population at large, when in fact, all that has occurred is a pass-the-debt-ponzi-scheme co-engineered by the Fed and big US bank beneficiaries. That debt, caught in the crossfires of this central-private bank arrangement, is still doing nothing for American citizens or the broader national or global economy. 

The Fed is already the largest hedge fund in the world, with a book of $4.5 trillion of assets. These will plummet in value if rates rise.  Cue the banks that are gearing up their own (still small in comparison, but give them time) role in this big bamboozle. By doing so, they too are amassing additional risk with respect to interest rates rising, on top of all their other risk that counts on leveraging cheap money.

Only the naïve could possibly believe that the Fed and its key banks haven’t been in regular communication about this US Treasury security shell game.  Yet, aside from a few politicians, such as former Congressman Ron Paul, Congressman Sherrod Brown and Senators Bernie Sanders and Elizabeth Warren, the notion that Fed policy has helped bankers, rather than other people, remains largely divorced from bi-partisan political discussion. 

Adding more fuel to the central-private bank collusion fire, is the fact that the Fed is a paying client of the JPM Chase. The banking behemoth is bagging fees for holding and executing transactions on the $1.7 trillion New York Fed’s QE mortgage portfolio, as brilliantly exposed by Pam Martens and Russ Martens.

 Wouldn’t it be convenient if JPM Chase was also trading this massive mortgage book for its own profits? Or rather - why wouldn’t they be?  Who’s going to stop them – the Fed? Besides, they hold more trading assets than any other US bank, so why not trade the Fed’s securities ostensibly purchased to help the public - recover?

According to call report data compiled by the extremely thorough website www.BankRegData.com, nearly 97% of all bank trading assets (including US Treasuries) are held by just 10 banks, led by JPM Chase with 43.80% and followed by Citigroup at 24.51% of all bank trading assets.

Last quarter, US Treasuries were the fastest growing form of security bought by banks, increasing by 26.3% or $72 billion over the prior quarter. As the Fed tapered, banks stepped in to do their part in the coordinated Fed-private bank QE game. In the past year, banks have added $185.8 billion of US Treasuries to their books, more than doubling their share of government debt.

Just seven banks comprised nearly all ($70.5 billion) of this quarterly increase: State Street Bank, Capital One, JPM Chase, Wells Fargo, Bank of America, Bank of NY Mellon and Citigroup. By the end of the third quarter of 2014, Citigroup, with $95 billion, was the largest holder of US Treasuries, followed by Bank of America at $54.8 billion and Wells Fargo at $37.8 billion from nearly zero at the start of 2014. Bank of NY Mellon holds $25.3 billion and JPM Chase holds $15 billion US Treasuries.

This increase in US Treasury holdings reflects another easy money element of our federally subsidized banking system. Banks take deposits from individuals for which they pay close to zero in interest, in fact, charge customers fees for keeping their money  (courtesy of the Fed’s Zero-Interest-Rate policy.) They can turn that around to make a cool risk-free 2.3% by parking the money in 10-year US Treasuries. Why lend to Joe the Plumber, when the US government is providing such a great deal?

But, the recent timing here is key. Banks only started buying US Treasuries in earnest when the Fed announced its tapering plans. Thus, not only are they participants in the ZIRP game as recipients of cheap money, they are complicit in effecting monetary policy. As the data analyzed so expertly by Bill Moreland at www.BankRegData.com makes clear, there has been no taper.  Thus, the publicized reason for tapering – better job and economic growth – is also bogus.

During the third quarter, Wells Fargo and Bank of America matched Fed purchases of US Treasuries, keeping the total amount of US Treasuries in QE land neutral. With such orchestration to keep rates down and the prices of US Treasury securities up, all the talk about whether the labor force is strengthening or inflation exists or not is mere show. Banks haven’t even propped up the labor market in their own industry. They chopped 11,400 jobs last quarter. In the past two years, they cut 57,236 jobs.  

No sucessful candidate in either political party mentioned any of this during the mid-term elections. Yet, our political-financial system has gone from the dysfunctional to the failed to the surreal. Speculation, once left to individuals and investors, is now federally sponsored, subsidized and institutionalized.  When this sham finally buckles and the next shoe falls and rates do eventually rise, the stock market will tank, liquidity will die, and the broader economy will plunge into a worse Depression than before. We are not there yet because of these coordinated moves and the political force behind them. But we are on a precarious path to that inevitability.  

Why the Financial and Political System Failed and Stability Matters

The recent spike in global political-financial volatility that was temporarily soothed by European Central Bank (ECB) covered bond buying and Bank of Japan (BOJ) stimulus reveals another crack in the six-year-old throw-money-at-the-banks strategies of politicians and central bankers. The premise of using banks as credit portals to transport public funds from the government to citizens is as inefficient as it is not happening. The power elite may exude belabored moans about slow growth and rising inequality in speeches and press releases, but they continue to find ways to provide liquidity, sustenance and comfort to financial institutions, not to populations.

The very fact - that without excessive artificial stimulation or the promise of it - more hell breaks loose - is one that government heads neither admit, nor appear to discuss. But the truth is that the global financial system has already failed. Big banks have been propped up, and their capital bases rejuvenated, by various means of external intervention, not their own business models.

In late October, the Federal Reserve released its latest 2015 stress test scenarios. They don’t even exceed the parameters of what actually took place during the 2008-2009-crisis period. This makes them, though statistically viable, completely irrelevant in an inevitable full-scale meltdown of greater magnitude. This Sunday, the ECB announced that 25 banks failed their tests, none of which were the biggest banks (that received the most help). These tests are the equivalent of SAT exams for which students provide the questions and answers, and a few get thrown under the bus for cheating to make it all look legit. 

Regardless of the outcome of the next set of tests, it’s the very need for them that should be examined. If we had a more controllable, stable, accountable and transparent system (let alone one not in constant litigation and crime-committing mode) neither the pretense of well-thought-out stress tests making a difference in crisis preparation, nor the administering of them, would be necessary as a soothing tool. But we don’t. We have an unreformed (legally and morally) international banking system still laden with risk and losses, whose major players control more assets than ever before, with our help.  

The biggest banks, and the US and European markets, are now floating on more than $7 trillion of Fed and ECB intervention with little to show for it on the ground and more to come. To put that into perspective – consider that the top 100 global hedge funds manage about $1.5 trillion in assets. The Fed’s book has ballooned to $4.5 trillion and the ECB’s book stands at $2.7 trillion – a figure ECB President, Mario Draghi considers too low. Thus, to sustain the illusion of international systemic health, the Fed and the ECB are each, as well as collectively, larger than the top 100 global hedge funds combined. The BOJ has joined the fray wit its own path to QE. 

Providing ‘liquidity crack’ to the global financial system has required heightened international government and central bank coordination to maintain an illusion of stability, but not true stability. The definition of instability is this epic support network. It is more dangerous than in past financial crises precisely because of its size and level of political backing.

During the Panic of 1907, President Teddy Roosevelt’s Treasury Secretary, Cortelyou announced the first US bank bailout in the country’s history. Though not a member of the government, financier J.P. Morgan was chosen by Roosevelt to deploy $25 million from the Treasury. He and a team of associates decided which banks would live or die with this federal money and some private (or customers’) capital thrown in.

The Federal Reserve was established in 1913 to back the private banking system in advance from requiring future such government injections of capital. After World War I, a Laissez Faire policy toward finance and speculation, but not alcohol, marked the 1920s. before the financial system crumbled under the weight of its own recklessness again. So on October 24, 1929, the Big Six bankers convened at the Morgan Bank at noon (for 20 minutes) to form a plan to 'save' the ailing markets by injecting their own (well, their customer’s) capital.  It didn’t work. What transpired instead was the Great Depression.

After the Crash of 1929, markets rallied, and then lost 90% of their value. Liquidity froze. Credit for the masses was as unavailable, as was real money. The combined will of President FDR and the key bankers of the day worked to bolster people’s confidence in the system that had crushed them - by reforming it, by making the biggest banks smaller, by separating bet-taking arms from those in which people could store, and borrow money from, safely. Political and financial leaderships collaboratively ushered in the reform measures of the Glass-Steagall Act.  As I note in my most recent book, All the Presidents' Bankers, this Act was not merely a piece of legislation passed in spirited bi-partisan fashion, but it was also a means to stabilize a system for participants at the top, middle and bottom of it. Stability itself was the political and financial goal.

Through World War II, the Cold War, and Vietnam, and until the dissolution of the gold standard, the financial system remained fairly stable, with banks handling their own risks, which were separate from the funds of citizens. No capital injections or bailouts were required until the mid-1970s Penn Central debacle. But with the bailout floodgates reopened, big banks launched a frenzied drive for Middle East petro-dollar profits to use as capital for a hot new area of speculation, Third World loans.

By the 1980s, the Latin American Debt crisis resulted, and with it, the magnitude of federally backed bank bailouts based on Washington alliances, ballooned. When the 1994 Mexican Peso Crisis hit, bank losses were ‘handled’ by President Clinton’s Treasury Secretary (and former Goldman Sachs co-CEO) Robert Rubin and his Asst. Treasury Secretary, Larry Summers via congressionally approved aid.

Afterwards, the repeal of the Glass Steagall Act, the mega-merging of financial players, the explosion of the derivatives market, and the rise of global ‘competition’ amongst government supported gambling firms, lead to increase speculative complexity and instability, and the recent and ongoing 2008 financial crisis.  

By its actions, the US government (under both political parties) has chosen to embrace volatility rather than stability from a policy perspective, and has convinced governments in Europe to follow suit. Too big to fail has been replaced by bigger than ever.

Today, the Big Six US banks are mostly incarnations of the Big Six banks in 1929 with a few add-ons due to political relationships (notably that of Goldman Sachs, whose past partner, Sidney Weinberg struck up lasting relationships with FDR and other presidents.) 

We no longer have a private financial system responsible for its own risk, regardless of how it’s computed or supervised. We have a system whose risk is shouldered by the federal government and its central bank entities, and therefore, the people whose deposits seed that risk and whose taxes and futures sustain it.

We have a private financial system that routinely commits financial crimes against humanity with miniscule punishments, as approved by the government. We don’t even have a free market system based on the impossible notion of full transparency and opportunity, we have a publicly funded betting arena, where the largest players are the most politically connected and the most powerful politicians are enablers, contributors and supporters. We talk about wealth inequality but not this substantial power inequality that generates it. 

Today, neither the leadership in Washington, nor throughout Europe, has the foresight to consider what kind of real stress would happen when zero and negative interest rate and bond-buying policies truly run their course and wreak further havoc on their respective economies, because the very banks supported by them, will crush people, now in a weaker economic condition, more horrifically than before.

The political system that stumbles to sustain the illusion that economies can be built on rampant financial instability, has also failed us. Past presidents talked of a square deal, a new deal and a fair deal. It’s high time for a stability deal that prioritizes the real financial health of individuals over the false one of financial institutions.