WHERE ARE WE GOING WITH THIS?
By: Charles Wallshein Esq., & Steven Schwartz
All Rights Reserved May 2011
Steve and I were doing our Monday re-cap and outlining our next show. From the e-mails we received, the listeners expressed real interest in two main topics. The first is an explanation of VULTURE SERVICERS, and the second is the BANK BAIL OUT of 2008.
We were in my kitchen and I was explaining how and why the vultures were created and from where I think they are getting their money. As we talked it became apparent that I can’t explain the first without explaining the second.
Contrary to what we have heard and what we are still hearing from the press, the BAILOUT isn’t over. Yes, the banks have stabilized and yes, there is a nascent beginning of a securitization market. Yes, the Banks are showing profits. Yes, they have paid back their TARP money. So the BAILOUT was a success, right? Wrong. The answer is we really wont know for a while.
The net result from the bailout thus far is that we rescued most of the passengers from drowning. Where are we now? Well, we made it to the lifeboats and are still trying to find dry land. I say this because the only reason the banks are still in business is because they can borrow money from the Federal Reserve Bank at .25%. That’s right. One quarter of one percent. It’s almost free money. What this policy amounts to is an unqualified and arguably unnecessary government SUBSIDY to the big banks.
Let me begin with a short lesson in BIG-BANK FINANCE. Banks borrow from the Federal Reserve Bank. The Federal Reserve borrows from the treasury. The treasury gets its money from collecting taxes and selling treasury notes. For the last 50 years the treasury collected less money than it took to meet the national budget’s requirements. To make up the gap, the treasury has to sell bonds, or T-NOTES (T-BILLS) as they are called.
A T-NOTE is nothing more than the US treasury’s promise to pay back money. The collateral for the note is the full backing of the US government and the US economy. This means that when a buyer of a government note gets his money back they can convert that note to cash and come to America, or go anywhere else in the world where they accept the US dollar as currency (which is everywhere) and spend that money.
In my lifetime (48 years) I have seen the yield (interest rate) on the T-note as high as 17%. It is now at historic lows. The rate at which the treasury has to re-pay its debts for the 5 year note, today is a little less than 2.5%. For the 10 year note it is a little less than 3.5%. So that means we, Americans are promising to repay about a trillion dollars in debt at 3.5% over the next 10 years.
However, we are giving money to the big banks at a .25 interest rate. That means that for every hundred dollars we lend to the big banks we are collecting twenty five cents, a quarter. However, we are paying $3.20 (as of May 13th’s rate) to borrow that money. That’s right, for every dollar lend to the banks, we are losing three cents. It doesn’t sound like much, but multiply that number by a trillion and it starts to add up. Multiply that number by the amount of our total outstanding debt and it really adds up. It’s HUNDREDS OF BILLIONS!
So Steve asked me the obvious question. “Where are we going with this?” My answer: “No place good.”
Link to the Federal Reserve’s published rates for all Treasury financial instruments:
