Sunday, January 25, 2009

Britain: Three hours from collapse

Anyone wonder why bankers lie? Britain's City Minister Paul Myners said that Britain's banking system was on the verge of a complete collapse, and if there was going to be a run on RBS, Gordon Brown was going to be forced to nationalize the entire banking system and guarantee all deposits.

Here's the story:

Britain was just three hours away from going bust last year after a secret run on the banks, one of Gordon Brown's Ministers has revealed.

City Minister Paul Myners disclosed that on Friday, October 10, the country was 'very close' to a complete banking collapse after 'major depositors' attempted to withdraw their money en masse.

The Mail on Sunday has been told that the Treasury was preparing for the banks to shut their doors to all customers, terminate electronic transfers and even block hole-in-the-wall cash withdrawals.

Only frantic behind-the-scenes efforts averted financial meltdown.

If the moves had failed, Mr Brown would have been forced to announce that the Government was nationalising the entire financial system and guaranteeing all deposits.

But 60-year-old Lord Myners was accused last night of being 'completely irresponsible' for admitting the scale of the crisis while the recession was still deepening and major institutions such as Barclays remain under intense pressure.

The build-up to 'Black Friday' started on Monday, October 6, when the FTSE 100 dropped by nearly eight per cent as bad news on the economy started to multiply.

The following day, Chancellor Alistair Darling began all-night talks ahead of an announcement on the Wednesday that billions of pounds of taxpayers' money would be used to pour liquidity into the system.

Here's the punchline: What makes anyone think that the situation in Britain is now materially better? Has anyone seen the run on the pound? How about the oil industry? How about the banking industry? How was the system insolvent then, and not insolvent now when things are materially worse?

We've already had a run on the banks, but it's been in slow motion. First we had a run on the mortgage industry. Then we had a run on the investment banks, starting with Bear Stearns and then of course Lehman Brothers. We then had a run on the "shadow" banking system. These were the hedge funds that pretended they were banks but weren't. Then we had the run on the weaker banks like WaMu, PNC and Wachovia. Then we had a run on the banking and insurance companies, but this run started with their stock prices. We've already had that run, as their stock prices have already been crushed, and most now are just call options on the franchise value of the banking system. We just haven't had the run where the public has yanked their dollars from the banks, because most of their money is already gone. The banks money, is of course, gone already, but they are pretending that it isn't, until they get the next TARP investment.

The next run, of which we are now in the first inning is the run on Government bonds. We already are getting selective runs in currencies. Look at the pound. The run in the dollar can't start yet, though, until the whole world gets long dollars. Bubbles suck in everybody and now we are still the world's "safe haven" because we still have a lot of dollars overseas that needs to be repatriated over here. An example of this is the merger of Pfizer with Wyeth. Where do you think Pfizer's dollars are and where are they going to go?

Our banking system is already been "Madoffed." Investors with Bernie, still think that they just lost their money on December 12, when he admitted that his investment was just a giant "ponzi" scheme. That money was already lost years ago with Madoff; it's just that was the date when investors found out they were snookered. It's the same with our banks. Your money has already been lost, but it's been covered up in fancy accounting gimmicks and derivatives and off balance sheets conduits and special purpose vehicles. It's just that now, Uncle Sam has guaranteed your deposits, so that the banks losses will be paid back with your grand children's money!

But this guarantee wouldn't work, if the public decided to pull their cash. That's the bank run, we haven't yet seen.

Look at this nugget in the above story:

Ruth Lea, economic adviser to the Arbuthnot Banking Group, said last night that it was 'highly irresponsible' for Lord Myners to reveal the scale of the problems because it could serve to further wreck already fragile levels of confidence.

Banks have no interest in telling you the truth. Jeff Immelt of GE can go on CNBC and tell the world that GE Capital's leverage is only 7 to 1, but he won't tell the world that includes billions and billions of intangible dollars of goodwill, and if that "intangible" capital would be taken out their leverage would then be higher than the levels that pushed the investment banks to fail.

Now Immelt, isn't a banker, and compared to these bankers, he's a straight shooter. So that begs the question. How bad are the banks woes?

In Britain, we now know that answer.

It was three hours.

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