Welcome to our Friday mailbag edition!
Every week, we receive some great questions and comments from your fellow readers on our recently published essays. And every Friday, I answer as many as I can.
This week, we have questions on banks, bailouts, and Bitcoin…
But before I get to your questions, I want to quickly tell you about an urgent briefing I launched recently.
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But the greatest wealth transfer in the history of America is about to commence. And I firmly believe that this time will be different… if you see what’s coming.
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Now, let’s dive right into your questions… starting with your thoughts on the excerpt I shared recently from my book It Takes a Pillage. It focused on the shady financial techniques Wall Street firms and big banks used to carry out what amounted to a $140 trillion heist… and how they got away with it…
It appears from your article that commercial banks were involved in the subprime mess. If this is the case, where were the federal auditors of these banks, who audit the safety and soundness of the banks?
– Eugene L.
Hi Eugene, thanks for your observation. That’s exactly right.
The big, commercial banks, like JPM Chase and Citigroup, provided the leverage, or loans. Investment banks, including Bear Stearns and Lehman Brothers, used this to buy all sorts of toxic assets laced with subprime loans.
Bear Stearns, one of my former employers, blew up because it couldn’t make its interim loan payments on the money it used to buy subprime-related assets.
And what happened? The Federal Reserve and U.S. Treasury Department decided to give it to JPM Chase on the cheap.
Lehman Brothers, another of my former employers, blew up for the same reasons. But no one wanted it.
Merrill Lynch was heading toward bankruptcy when the government enabled Bank of America to take it over cheaply.
As a result, the big banks got bigger. Banks like Goldman Sachs, another of my former employers, faced similar problems to Bear Stearns and Lehman Brothers. But Goldman managed to stay independent. That’s because of the big bailout it got from the government.
Now, the really shocking thing about all of this is that the banks were allowed to carry on their nefarious practices, no questions asked.
After the financial crisis of 2008, the U.S. Government Accounting Office (GAO) carried out an audit of all of this activity.
It found that trillions of dollars were given to the big banks in various forms of financial help (bailout money, cheap loans, guarantees for risky assets).
The result of those findings was $243 billion in fines. That might seem like a lot of money. But it’s just pocket change to the big banks.
The close relationships, revolving doors, and political support between Wall Street and Washington insulated the biggest banks and their CEOs from greater ramifications.
I’ll leave you with this: Just prior to the onset of the financial crisis, the former CEO of Goldman Sachs, Hank Paulson, was appointed as U.S. Treasury Secretary. So of course, he helped Goldman Sachs navigate the crisis.
Not every relationship was that obvious. But the overall connections shielded the big banks from greater consequences.
Next, John has a great suggestion for how to avoid the banks causing another financial crisis…
The history of what happened during the housing bubble crisis is interesting. But in 2022, so what? Nothing has changed.
I would offer one thing that might cause the rascals and weasels of the banks and Wall Street to think twice before promoting such schemes in the future.
Force them to establish a chain of personal liability extending to their fortunes and families when their organizations are involved in failed frauds. Then see just how much they believe in their asset-backed securities (ABS) and CDC-type theft instruments when they are on the hook.
This would include all of the corporate officers and the boards of directors promoting the chicanery.
– John W.
Hi John, thank you for your email. Yes, unfortunately nothing has changed.
And I totally agree, banks should not have been bailed out. As I wrote in It Takes a Pillage, it would have been more direct – and cheaper – to pay off the culprit mortgages than bail out the banks.
The bailouts established a new precedent for the Federal Reserve and other central banks. It meant they were now able to create unlimited money from nothing to help the big banks survive.
Plus, if the fines these banks paid came from the pockets of their CEOs and the boards of directors, rather than from their corporate coffers, things might have been different. And they might be different now.
But as to how likely it is your suggestion will become a reality? Well… let’s just say I can’t see it happening in my lifetime.
And speaking of rascals and weasels… Wayne reminds me of a very apt quote…
Nomi, the best quote I heard describing the bank bailouts was, “The bailouts were all about taking money from the competent and giving it to the incompetent so the incompetent could compete with the competent.”
How incompetent is that? I would love to hear your thoughts on this quote.
– Wayne P.
Hi Wayne, that’s a great quote. Thank you for sharing it. Here are two of my other favorite quotes…
From Mark Twain: “A banker is a fellow who lends you his umbrella when the sun is shining but wants it back the minute it begins to rain.”
And from J. Paul Getty: “If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”
The point about all of these quotes is that banks enjoy a benefit that mere mortals don’t.
The big ones are considered too big to fail. So whenever they run into problems of their own making, they just talk about how lots of people will get hurt if they can’t get the help (money) they need to make up for their own incompetence.
And the Fed acts upon these sob stories every time.
But if you or I ran into similar problems, I doubt we would be shown such compassion.
Next, a couple of readers share concerns about the government’s plans to regulate cryptocurrencies, which I wrote about last month. Specifically, they ask how any such move might affect their money…
As you know, the government has discussed regulating cryptocurrency. I suspect that any future regulatory action would be presented, in part, as providing greater protection for the consumer.
However, these regulations might also be enacted to protect the United States currency – i.e., the dollar – during a time of monetary upheaval.
What’s the chance that at some point, perhaps following further massive growth in the price of Bitcoin, and in the midst of a tumultuous financial period for the U.S. economy, the federal government outlaws Bitcoin (and other cryptocurrencies as well)?
Obviously, there would be a public outcry. But in your view, could this happen if the economy collapsed and the dollar’s strength on the world stage was threatened?
In this scenario, perhaps Bitcoin would be replaced with a government-backed digital currency. But of course, there is no way of knowing whether or not the exchange would be dollar-for-dollar. Your thoughts?
– Randy S.
I was wondering if you had any concern about (or heard) what the government is going to do about changing the dollar to a digital currency?
How will that affect our dollars? Will our money just vanish? Or will the government give digital money in exchange for the dollar?
– Elaine W.
Hi Randy and Elaine, thank you for your emails. You both raise some important points.
Outlawing prevalent cryptocurrencies, like Bitcoin, will be hard. Maybe impossible. That’s because at this point, you’d basically have to shut down the entire internet to do that.
And even if Bitcoin was outlawed for use by the big commercial banks, users can transact in Bitcoin on any number of other platforms.
Now that said, there could be stricter regulations on the horizon. Those could hamper the use and growth of Bitcoin. That would hurt its price.
But that could be countered by more people and companies using Bitcoin precisely because it is more regulated.
I really believe regulating cryptocurrency and cryptocurrency platforms would go a long way to creating confidence in them. It could also serve to differentiate the cryptos that will remain relevant from the thousands that won’t.
Bitcoin is still very young. But it has withstood much scrutiny and negativity. And it is accepted as a means of exchange by more and more companies.
The Fed doesn’t like that trend. But it may be hard for them to do anything about it. That’s why it wants to maintain control over what forms of money are used.
Also, I think it’s inevitable that at some point, it will adopt a digital currency form – of the dollar.
This won’t happen tomorrow. But I think it’s more a “when” than an “if.”
When it happens, people will probably be able to choose to have a digital dollar account or a physical dollar account (which is what we have now).
The digital account would be used for financial transactions that go directly through the Fed. Or through a select few banks the Fed chooses to service digital currency transactions.
Now, I’m hoping this sort of account would be FDIC-insured, like your current checking and savings accounts are. So you shouldn’t lose money in your choice.
My main concern with this, though, is that the Fed would then have two ways to inflate the size of its books. It could do more quantitative easing (QE) using both digital and physical currency.
That would give it even more power. And it would create even more of a distortion between the financial markets and the real economy.
Naturally, I’ll be watching how all this unfolds very closely…
And finally, Keith’s heartfelt message really touched me…
I will be 80 this year. So fortunately, I won’t have to put up with all this ridiculous inflation much longer.
But I do worry about my children and grandchildren. And that is why I forward your emails to them when I think you have something that they should pay attention to.
I cannot thank you enough for keeping your public well informed… something that all governments go out of their way to avoid doing. Thank you again.
– Keith E.
Hi Keith, thanks so much. That’s awesome that you are forwarding my emails to your kids and grandkids. I think protecting and building wealth should always be a multi-generational exercise. We all have different experiences and perspectives on the future.
I recently gave my niece a fine silver eagle coin for her 13th birthday. (I give all my nieces and nephews a silver coin on their birthdays. It’s a little family tradition I have.)
My niece asked me where she could sell her coins if she wanted to. Now, I always tell her not to. So I reminded her again that some things are for the future and not for spending now. They are there for protection against inflation and to grow your wealth – from any age. I hope she’s heeding my advice.
That’s it for this week’s mailbag. Thanks again to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition. I do my best to respond to as many of your questions and comments as I can.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
In the meantime, happy investing… and have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins
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