You know that Money on your Bank Account? Well, it’s not Yours

By SUSANNE POSEL | OCCUPY CORPORATISM | AUGUST 24, 2012

In June of 2012, Eric Bloom, former chief executive, and Charles Mosely, head trader of Sentinel Management Group (SMG) were indicted for stealing $500 million in customer secured funds. Both Mosely and Bloom were accused of “exposing” customer segregated funds “to a portfolio of highly risky derivatives.”

These customer funds were used to “back up personal investments” which were part of “collateral for a loan from Bank of New York Mellon” (BNYM). This loan derived from stolen customer monies was “used to purchase millions of dollars worth of high-risk, illiquid securities, including collateralized debt obligations, or CDOs, for a trading portfolio that benefited Sentinel’s officers, including Mosley, Bloom and certain Bloom family members.”

Fast forward to August 9th of 2012, and the 7th Circuit Court of Appeals (CCA) rules that BNYM can be moved to first in line of creditors over the customers that had their funds stolen by SMG.

When a banking customer deposits their money into their bank account, the Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SPIC) are in place to protect the customer from fraud or theft. The ruling from the CCA means that these regulatory systems will not insure customer funds, investments, depositors and retirees who hold accounts in banks. In fact, the banking institution is now legally allowed to use those customer funds deposited as collateral, payment on debts for loans made, or free use on the stock market to purchase investments as the bank sees fit.

Fred Grede, SMG trustee, explained that brokers are no longer required to keep customer money separate from their own. “It does not bode well for the protection of customer funds.”

Since the ruling gives banks the right to co-mingle customer funds with their own, no crime can be committed for the use of customer deposited monies.
According to Walker Todd , former lawyer for the Federal Reserve Bank of New York and Cleveland: “Basically, there is a new 7th Circuit opinion saying that there is no reason to impose a constructive trust on a lender’s takings of customers’ funds from client commodity firms that were used (inappropriately) to secure the firms’ borrowings, as long as the lender can say that it did not know WITH CERTAINTY that customers’ funds were being repledged. Negligence and misappropriation (vs. knowing criminal intent) are now a sufficient excuse for letting the lender keep the money and go to the head of the line for distributions in bankruptcies of the client commodity firms.”

When a customer deposits money into a bank, the bank essentially issues a promise to have those funds available when the customer returns to withdraw the deposited amount. When the same customer withdraws funds from their account (whether checking or savings) the customer assumes that the bank has enough funds to cover their withdrawal; including the presumption that their monies are separate from the bank’s assets.

Now, those funds are up for grabs by the bank at their discretion without explanation to the customer – nor is the bank obligated to recoup the customer should they “lose” those funds due to bad loans, bankruptcy or stock market loss.

In Texas, Pamela Cobb, manager of Bank of America (BoA), stole an estimated $2 million from customer funds for personal use. Cobb had been taking customer segregated funds since 2002.

Customers have complained of fraudulent charges placed on their accounts that BoA cannot explain. When the customer brings these charges to the in-house fraud department, they are given the run-around until they acquiesce.

Other customers have had their private possessions stolen right out of their safety deposit box held at BoA. The safety deposit box was drilled into and the contents shipped to the BoA corporate holding center in South Carolina.

In 1992 to 2003, Citibank called their theft of customer funds “account sweeping” wherein they stole more than $14 million from customers nationally. Using computerized credit card processes to remove positive and negative balances from customers, the scheme included double payments or funds paid out on returned purchases that were then attributed back to the customer.

At Chase bank, an anonymous employee opened an account under a customer name (targeting an Alzheimer’s sufferer), complete with a personal debit card. An estimated $300 per day was withdrawn on the fraudulent account. When family representing the victim alerted Chase, they brushed them off with an internal investigation claim – even as the family sought legal action.

Banking fraud against the elderly has risen of late, since banks realize they can steal massive amounts of cash from their aging customers with little to no repercussions.

The recent ruling on SMG has given the banking industry the legal backing they have been lacking when stealing from their customers.

Our financial institutions have been planning for a financial collapse wherein the US government will not offer assistance. The resolution plans required by the Federal Reserve Bank, described schemes to have the major domestic banks remain afloat by selling off assets, finding alternative sources of funding, reducing risky measures that make a quick buck. These strategies were to be perfected with “no assumption of extraordinary support from the public sector.”

The mega-banks, through Wall Street, are also acquiring firearms, ammunition and control over private mercenary corporations like DynCorp and ‘Blackwater” as authorized by the Department of Defense (DoD) directive 3025.18 .

DynCorp is a military-based private mercenary contractor that provides (among other services) intelligence training and support, international security, contingency plans and operations. Ninety-six percent of their funding is based on annual revenues from the US federal government. The international branch of DynCorp has operated as a “police force” even assisting local law enforcement during Hurricane Katrina.

Named as investors for the amassing of gun and ammunition manufacturers are Citibank, BoA, Barclays and Deutsche Bank who are pouring money into Cerebus and Veritas Equity who have taken over private corporations involved in the controlling riot situations.

The Federal Reserve Bank, one of the heads of banking cartels, has their own police force which operates as a protective security for the Fed against the American public. As part of the Federal Reserve Act signed in 1913, the designation of a Federal Law Enforcement – special police officers that are exclusively regulated by authority of the Fed (whether in uniform or plain clothes. These specialized police officers (who train with Special Response Teams) can work in tandem with local law enforcement or US federal agencies. These officers are heavily armed with semi-automatic pistols, sub machine guns and assault rifles as well as body armor.

Of recent, when withdrawing cash from an ATM, the daily allotted amount has decreased with some banks, thereby forcing the customer to go into the branch and extract the difference with a teller. At this point, according to anonymous informants, the customer is taken into a backroom to be questioned as to why they want the cash, what they are purchasing with the cash, why they are not choosing to use a debit card or another form of digital trade to make the purchase. These questions are not only intrusive, they are illegal.

Some anonymous sources have said that banking representatives who conduct the integrations are directed to keep a record of customer responses on an online application that will be sent to the FBI in conjunction with Patriot Act mandates on tracking banking activity.

Customer funds are no longer secure, no longer backed by the FDIC or other insurance corporations, and banks are legally allowed to co-mingled customer money with other funds of the bank. The only safe place for your money is with you.

Now is the time to close your bank account.

Kosovo’s “Mafia State” Sponsors Permanent US Heroin Trade and Money Laundering

By F. WILLIAM ENGDAHL | GLOBAL RESEARCH | APRIL 13, 2012

In one of the more bizarre foreign policy announcements of a bizarre Obama Administration, US Secretary of State Hillary Clinton has announced that Washington will “help” Kosovo to join NATO as well as the European Union. She made the pledge after a recent Washington meeting with Kosovan Prime Minister Hashim Thaci in Washington where she praised the progress of the Thaci government in its progress in “European integration and economic development.” 1

Her announcement no doubt caused serious gas pains among government and military officials in the various capitals of European NATO. Few people  appreciate just how mad Clinton’s plan to push Kosovo into NATO and the EU is.

Basic Kosovo geopolitics

The controversial piece of real estate today called Kosovo was a part of Yugoslavia and tied to Serbia until the NATO bombing campaign in 1999 demolished what remained of Milosevic’s Serbia and  opened the way for the United States, with the dubious assist of EU nations, above all Germany, to carve up the former Yugoslavia into tiny, dependent pseudo states. Kosovo became one, as did Macedonia. Slovenia and Croatia had earlier split off from Yugoslavia with a strong assist from the German Foreign Ministry.

Some brief review of the circumstances leading to the secession of Kosovo from Yugoslavia will help locate how risky a NATO membership or EU membership would be for the future of Europe. Hashim Thaci the current Kosovo Prime Minister, got his job, so to speak, through the US State Department and not via free democratic Kosovo elections. Kosovo is not recognized as a legitimate state by either Russia or Serbia or over one hundred other nations. However, it was immediately recognized when it declared independence in 2008 by the Bush Administration and by Berlin.

 Membership into the EU for Kosovo would be welcoming another failed state, something which may not bother US Secretary Clinton, but which the EU at this juncture definitely can do without. Best estimates place unemployment in the country at as much as 60%. That is not just Third World level. The economy was always the poorest in Yugoslavia and today it is worse. Yet the real issue in terms of the future of EU peace and security is the nature of the Kosovo state that has been created by Washington since the late 1990’s.

 Mafia State and Camp Bondsteel

 Kosovo is a tiny parcel of land in one of the most strategic locations in all Europe from a geopolitical standpoint of the US military objective of controlling oil flows and political developments from the oil-rich Middle East to Russia and Western Europe. The current US-led recognition of the self-declared Republic of Kosovo is a continuation of US policy for the Balkans since the illegal 1999 US-led NATO bombing of Serbia—a NATO “out-of-area” deployment never approved by the UN Security Council, allegedly on the premise that Milosevic’s army was on the verge of carrying out a genocidal massacre of Kosovo Albanians.

 Some months before the US-led bombing of Serbian targets, one of the heaviest bombings since World War II, a senior US intelligence official in private conversation told Croatian senior army officers in Zagreb about Washington’s strategy for former Yugoslavia. According to these reports, communicated privately to this author, the Pentagon goal already in late 1998 was to take control of Kosovo in order to secure a military base to control the entire southeast European region down to the Middle East oil lands.

 Since June 1999 when the NATO Kosovo Force (KFOR) occupied Kosovo, then an integral part of then-Yugoslavia, Kosovo was technically under a United Nations mandate, UN Security Council Resolution 1244. Russia and China also agreed to that mandate, which specifies the role of KFOR to ensure an end to inter-ethnic fighting and atrocities between the Serb minority population, others and the Kosovo Albanian Islamic majority. Under 1244 Kosovo would remain part of Serbia pending a peaceful resolution of its status. That UN Resolution was blatantly ignored by the US, German and other EU parties in 2008.

 Germany’s and Washington’s prompt recognition of Kosovo’s independence in February 2008, significantly, came days after elections for President in Serbia confirmed pro-Washington Boris Tadic had won a second four year term. With Tadic’s post secured, Washington could count on a compliant Serbian reaction to its support for Kosovo.

 Immediately after the bombing of Serbia in 1999 the Pentagon seized a 1000 acre large parcel of land in Kosovo at Uresevic near the border to Macedonia, and awarded a contract to Halliburton when Dick Cheney was CEO there, to build one of the largest US overseas military bases in the world, Camp Bondsteel, with more than 7000 troops today.

 The Pentagon has already secured seven new military bases in Bulgaria and Romania on the Black Sea in the Northern Balkans, including the Graf Ignatievo and Bezmer airbases in Bulgaria and Mihail Kogalniceanu Air Base in Romania, which are used for “downrange” military operations in Afghanistan and Iraq. The Romanian installation hosts the Pentagon’s Joint Task Force–East. The US’s colossal Camp Bondsteel in Kosovo and the use and upgrading of Croatian and Montenegrin Adriatic harbors for US Navy deployments complete the militarization of the Balkans.[ii]

 The US strategic agenda for Kosovo is primarily military, secondarily, it seems, narcotics trafficking. Its prime focus is against Russia and for control of oil flows from the Caspian Sea to the Middle East into Western Europe. By declaring its independence, Washington gains a weak state which it can fully control. So long as it remained a part of Serbia, that NATO military control would be politically insecure. Today Kosovo is controlled as a military satrapy of NATO, whose KFOR has 16,000 troops there for a tiny population of 2 million. Its Camp Bondsteel is one of a string of so-called forward operating bases and “lily pads” as Donald Rumsfeld called them, for military action to the east and south. Now formally bringing Kosovo into the EU and to NATO will solidify that military base now that the Republic of Georgia under US protégé Saakashvili failed so miserably in 2008 to fill that NATO role.

 Heroin Transport Corridor

 US-NATO military control of Kosovo serves several purposes for Washington’s greater geo-strategic agenda. First it enables greater US control over potential oil and gas pipeline routes into the EU from the Caspian and Middle East as well as control of the transport corridors linking the EU to the Black Sea.

 It also protects the multi-billion dollar heroin trade, which, significantly, has grown to record dimensions in Afghanistan according to UN narcotics officials, since the US occupation. Kosovo and Albania are major heroin transit routes into Europe. According to a 2008 US State Department annual report on international narcotics traffic, several key drug trafficking routes pass through the Balkans. Kosovo is mentioned as a key point for the transfer of heroin from Turkey and Afghanistan to Western Europe. Those drugs flow under the watchful eye of the Thaci government.

 Since its dealings with the Meo tribesmen in Laos during the Vietnam era, the CIA has protected narcotics traffic in key locations in order partly to finance its covert operations. The scale of international narcotics traffic today is such that major US banks such as Citigroup are reported to derive a significant share of their profits from laundering the proceeds.

 One of the notable features of the indecent rush by Washington and other states to immediately recognize the independence of Kosovo is the fact that they well knew its government and both major political parties were in fact run by Kosovo Albanian organized crime.

 Hashim Thaci, Prime Minister of Kosovo and head of the Democratic Party of Kosovo, is the former leader of the terrorist organization which the US and NATO trained and called the Kosovo Liberation Army, KLA, or in Albanian, UCK. In Kosovo crime circles he is known as Hashim “The Snake” for his personal ruthlessness against opponents.

 In 1997, President Clinton’s Special Balkans Envoy, Robert Gelbard described the KLA as, “without any question a terrorist group.” It was far more. It was a klan-based mafia, impossible therefore to infiltrate, which controlled the underground black economy of Kosovo. Today the Democratic Party of Thaci, according to European police sources, retains its links to organized crime.

 A February 22, 2005 German BND report, labeled Top Secret, which has since been leaked, stated, “Über die Key-Player (wie z. B. Haliti, Thaci, Haradinaj) bestehen engste Verflechtungen zwischen Politik, Wirtschaft und international operierenden OK-Strukturen im Kosovo. Die dahinter stehenden kriminellen Netzwerke fördern dort die politische Instabilität. Sie haben kein Interesse am Aufbau einer funktionierenden staatlichen Ordnung, durch die ihre florierenden Geschäfte beeinträchtigt werden können.“ (OK=Organized Kriminalität). (Translation: “Through the key players—for example Thaci, Haliti, Haradinaj—there is the closest interlink between politics, the economy and international organized crime in Kosovo. The criminal organizations in the background there foster political instability. They have no interest at all in the building of a functioning orderly state that could be detrimental to their booming business.”3

 The KLA began action in 1996 with the bombing of refugee camps housing Serbian refugees from the wars in Bosnia and Croatia. The KLA repeatedly called for the “liberation” of areas of Montenegro, Macedonia and parts of Northern Greece. Thaci is hardly a figure of regional stability to put it mildly.

 The 44 year old Thaci was a personal protégé of Clinton Secretary of State Madeleine Albright during the 1990s, when he was a mere 30-year old gangster. The KLA was supported from the outset by the CIA and the German BND. During the 1999 war the KLA was directly supported by NATO. At the time he was picked up by the USA in the mid-1990s, Thaci was founder of the Drenica Group, a criminal syndicate in Kosovo with ties to Albanian, Macedonian and Italian organized mafias.  A classified January 2007 report prepared for the EU Commission, labeled “VS-Nur für den Dienstgebrauch” was leaked to the media. It detailed the organized criminal activity of KLA and its successor Democratic Party under Thaci.

 A December 2010 Council of Europe report, released a day after Kosovo’s election commission said Mr Thaci’s party won the first post-independence election, accused Western powers of complicity in ignoring the activities of the crime ring headed by Thaci: “Thaci and these other ‘Drenica Group’ members are consistently named as ‘key players’ in intelligence reports on Kosovo’s mafia-like structures of organised crime,” the report said. “We found that the ‘Drenica Group’ had as its chief – or, to use the terminology of organised crime networks, its ‘boss’ – the renowned political operator … Hashim Thaci.” 4

 The report stated that Thaci exerted “violent control” over the heroin trade. Dick Marty, the European Union investigator, presented the report to European diplomats from all member states. The response was silence. Washington was behind Thaci.5

 The same Council of Europe report on Kosovo organized crime accused Thaci’s mafia organization of dealing in trade in human organs. Figures from Thaçi’s inner circle were accused of taking captives across the border into Albania after the war, where a number of Serbs are said to have been murdered for their kidneys that were sold on the black market. In one case revealed in legal proceedings in a Pristina district court in 2008 organs were said to have been taken from impoverished victims at a clinic known as Medicus – linked to Kosovo Liberation Army (KLA) organ harvesting in 2000.6

 The question then becomes, why are Washington, NATO, the EU and inclusive and importantly, the German Government, so eager to legitimize the breakaway Kosovo? A Kosovo run internally by organized criminal networks is easy for NATO to control. It insures a weak state which is far easier to bring under NATO domination. Combined with NATO control over Afghanistan where the Kosovo heroin controlled by Prime Minister Thaci originates, the Pentagon is building a web of encirclement around Russia that is anything but peaceful.

 The Thaci dependence on US and NATO good graces insures Thaci’s government will do what it is asked. That, in turn, assures the US a major military gain consolidating its permanent presence in the strategically vital southeast Europe. It is a major step in consolidating NATO control of Eurasia, and gives the US a large swing its way in the European balance of power. Little wonder Moscow has not welcomed the development, nor have numerous other states. The US is literally playing with dynamite, potentially as well with nuclear war in the Balkans.

*F. William Engdahl is author of Full Spectrum Dominance: Totalitarian Democracy in the New World Order. He may be contacted via his website, www.engdahl.oilgeopolitics.net

Notes

1 RIA Novosti, US to Help Kosovo Join EU NATO: Clinton, April 5, 2012, accessed in
http://en.rian.ru/world/20120405/172621125.html.

 2 Rick Rozoff, Pentagon and NATO Complete Their Conquest of The Balkans, Global Research, November 28, 2009, accessed in
www.globalresearch.ca/index.php?context=va&aid=16311.

 3 Tom Burghardt, The End of the Affair: The BND, CIA and Kosovo’s Deep State, accessed in

http://wikileaks.org/wiki/The_End_of_the_Affair%3F_The_BND%2C_CIA_and_Kosovo%27s_Deep_State.

 4 The Telegraph, Kosovo’s prime minister ‘key player in mafia-like gang,’ December 14, 2010, accessed in
http://www.telegraph.co.uk/news/worldnews/europe/kosovo/8202700/Kosovos-prime-minister-key-player-in-mafia-like-gang.html.

 5 Ibid.

 6  Paul Lewis, Kosovo PM is head of human organ and arms ring Council of Europe reports, The Guardian, 14 December 2010.

 F. William Engdahl is a frequent contributor to Global Research.  Global Research Articles by F. William Engdahl

S&P Downgrades Goldman Sachs, Citigroup and BofA

by Dunstan Prial
Fox Business
November 30, 2011

Standard & Poor’s on Tuesday cut its credit ratings for many of the world’s largest banks, including Citigroup (NYSE: C), Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC).

The move follows S&P’s shift, announced earlier this month, in the methods it uses for rating the banks.

Citigroup, Goldman Sachs and Bank of America Corp. each had their long-term credit rating downgraded a single notch to A- from A. Similar cuts were applied to JPMorgan Chase (NYSE: JPM), Wells Fargo & Co. (NYSE: WFC) and Morgan Stanley (NYSE: MS).

Dozens of other banks were also affected by S&P’s new criteria and many of the downgrades stemmed from the affected banks’ exposure to the European debt crisis. S&P cited weaker confidence in governments’ ability to bail out struggling banks.

The new criteria for rating banks comes in the wake of criticism leveled at all three major rating firms – Moody’s and Fitch’s are the other two — that they rubber stamped their highest ratings on investment products loaded with subprime mortgages in the years leading up to the financial crisis.

Congress has considered reforming ratings system to remove perceived conflicts of interest.

S&P alerted the markets and the banks of the pending changes in March 2010 and again in January 2011. Analysts praised the ratings firms for their communication with affected banks as the new criteria was being established.

British banks that also saw downgrades include Barclays, HSBC Holdings, Lloyds Banking Group and The Royal Bank of Scotland.

However, due to the complexity of the new criteria, ratings for several big European banks, including Credit Suisse, Deutsche Bank, ING and Societe Generale remained unchanged despite the ongoing debt crisis there.

Wall Street Aristocracy Got $1.2 Trillion in Loans from Fed

Bloomberg
August 22, 2011

Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.

By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.”

(View the Bloomberg interactive graphic to chart the Fed’s financial bailout.)

Foreign Borrowers

It wasn’t just American finance. Almost half of the Fed’s top 30 borrowers, measured by peak balances, were European firms. They included Edinburgh-based Royal Bank of Scotland Plc, which took $84.5 billion, the most of any non-U.S. lender, and Zurich-based UBS AG (UBSN), which got $77.2 billion. Germany’s Hypo Real Estate Holding AG borrowed $28.7 billion, an average of $21 million for each of its 1,366 employees.

The largest borrowers also included Dexia SA (DEXB), Belgium’s biggest bank by assets, and Societe Generale SA, based in Paris, whose bond-insurance prices have surged in the past month as investors speculated that the spreading sovereign debt crisis in Europe might increase their chances of default.

The $1.2 trillion peak on Dec. 5, 2008 — the combined outstanding balance under the seven programs tallied by Bloomberg — was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg.

Peak Balance

The balance was more than 25 times the Fed’s pre-crisis lending peak of $46 billion on Sept. 12, 2001, the day after terrorists attacked the World Trade Center in New York and the Pentagon. Denominated in $1 bills, the $1.2 trillion would fill 539 Olympic-size swimming pools.

The Fed has said it had “no credit losses” on any of the emergency programs, and a report by Federal Reserve Bank of New York staffers in February said the central bank netted $13 billion in interest and fee income from the programs from August 2007 through December 2009.

“We designed our broad-based emergency programs to both effectively stem the crisis and minimize the financial risks to the U.S. taxpayer,” said James Clouse, deputy director of the Fed’s division of monetary affairs in Washington. “Nearly all of our emergency-lending programs have been closed. We have incurred no losses and expect no losses.”

While the 18-month U.S. recession that ended in June 2009 after a 5.1 percent contraction in gross domestic product was nowhere near the four-year, 27 percent decline between August 1929 and March 1933, banks and the economy remain stressed.

Odds of Recession

The odds of another recession have climbed during the past six months, according to five of nine economists on the Business Cycle Dating Committee of the National Bureau of Economic Research, an academic panel that dates recessions.

Bank of America’s bond-insurance prices last week surged to a rate of $342,040 a year for coverage on $10 million of debt, above where Lehman Brothers Holdings Inc. (LEHMQ)’s bond insurance was priced at the start of the week before the firm collapsed. Citigroup’s shares are trading below the split-adjusted price of $28 that they hit on the day the bank’s Fed loans peaked in January 2009. The U.S. unemployment rate was at 9.1 percent in July, compared with 4.7 percent in November 2007, before the recession began.

Homeowners are more than 30 days past due on their mortgage payments on 4.38 million properties in the U.S., and 2.16 million more properties are in foreclosure, representing a combined $1.27 trillion of unpaid principal, estimates Jacksonville, Florida-based Lender Processing Services Inc.

Liquidity Requirements

“Why in hell does the Federal Reserve seem to be able to find the way to help these entities that are gigantic?” U.S. Representative Walter B. Jones, a Republican from North Carolina, said at a June 1 congressional hearing in Washington on Fed lending disclosure. “They get help when the average businessperson down in eastern North Carolina, and probably across America, they can’t even go to a bank they’ve been banking with for 15 or 20 years and get a loan.”

The sheer size of the Fed loans bolsters the case for minimum liquidity requirements that global regulators last year agreed to impose on banks for the first time, said Litan, now a vice president at the Kansas City, Missouri-based Kauffman Foundation, which supports entrepreneurship research. Liquidity refers to the daily funds a bank needs to operate, including cash to cover depositor withdrawals.

The rules, which mandate that banks keep enough cash and easily liquidated assets on hand to survive a 30-day crisis, don’t take effect until 2015. Another proposed requirement for lenders to keep “stable funding” for a one-year horizon was postponed until at least 2018 after banks showed they’d have to raise as much as $6 trillion in new long-term debt to comply.

‘Stark Illustration’

Regulators are “not going to go far enough to prevent this from happening again,” said Kenneth Rogoff, a former chief economist at the International Monetary Fund and now an economics professor at Harvard University.

Reforms undertaken since the crisis might not insulate U.S. markets and financial institutions from the sovereign budget and debt crises facing Greece, Ireland and Portugal, according to the U.S. Financial Stability Oversight Council, a 10-member body created by the Dodd-Frank Act and led by Treasury Secretary Timothy Geithner.

“The recent financial crisis provides a stark illustration of how quickly confidence can erode and financial contagion can spread,” the council said in its July 26 report.

21,000 Transactions

Any new rescues by the U.S. central bank would be governed by transparency laws adopted in 2010 that require the Fed to disclose borrowers after two years.

Fed officials argued for more than two years that releasing the identities of borrowers and the terms of their loans would stigmatize banks, damaging stock prices or leading to depositor runs. A group of the biggest commercial banks last year asked the U.S. Supreme Court to keep at least some Fed borrowings secret. In March, the high court declined to hear that appeal, and the central bank made an unprecedented release of records.

Data gleaned from 29,346 pages of documents obtained under the Freedom of Information Act and from other Fed databases of more than 21,000 transactions make clear for the first time how deeply the world’s largest banks depended on the U.S. central bank to stave off cash shortfalls. Even as the firms asserted in news releases or earnings calls that they had ample cash, they drew Fed funding in secret, avoiding the stigma of weakness.

Morgan Stanley Borrowing

Two weeks after Lehman’s bankruptcy in September 2008, Morgan Stanley countered concerns that it might be next to go by announcing it had “strong capital and liquidity positions.” The statement, in a Sept. 29, 2008, press release about a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial Group Inc., said nothing about Morgan Stanley’s Fed loans.

That was the same day as the firm’s $107.3 billion peak in borrowing from the central bank, which was the source of almost all of Morgan Stanley’s available cash, according to the lending data and documents released more than two years later by the Financial Crisis Inquiry Commission. The amount was almost three times the company’s total profits over the past decade, data compiled by Bloomberg show.

Mark Lake, a spokesman for New York-based Morgan Stanley, said the crisis caused the industry to “fundamentally re- evaluate” the way it manages its cash.

“We have taken the lessons we learned from that period and applied them to our liquidity-management program to protect both our franchise and our clients going forward,” Lake said. He declined to say what changes the bank had made.

Acceptable Collateral

In most cases, the Fed demanded collateral for its loans — Treasuries or corporate bonds and mortgage bonds that could be seized and sold if the money wasn’t repaid. That meant the central bank’s main risk was that collateral pledged by banks that collapsed would be worth less than the amount borrowed.

As the crisis deepened, the Fed relaxed its standards for acceptable collateral. Typically, the central bank accepts only bonds with the highest credit grades, such as U.S. Treasuries. By late 2008, it was accepting “junk” bonds, those rated below investment grade. It even took stocks, which are first to get wiped out in a liquidation.

Morgan Stanley borrowed $61.3 billion from one Fed program in September 2008, pledging a total of $66.5 billion of collateral, according to Fed documents. Securities pledged included $21.5 billion of stocks, $6.68 billion of bonds with a junk credit rating and $19.5 billion of assets with an “unknown rating,” according to the documents. About 25 percent of the collateral was foreign-denominated.

‘Willingness to Lend’

“What you’re looking at is a willingness to lend against just about anything,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta and now chief monetary economist in Atlanta for Sarasota, Florida-based Cumberland Advisors Inc.

The lack of private-market alternatives for lending shows how skeptical trading partners and depositors were about the value of the banks’ capital and collateral, Eisenbeis said.

“The markets were just plain shut,” said Tanya Azarchs, former head of bank research at Standard & Poor’s and now an independent consultant in Briarcliff Manor, New York. “If you needed liquidity, there was only one place to go.”

Even banks that survived the crisis without government capital injections tapped the Fed through programs that promised confidentiality. London-based Barclays Plc (BARC) borrowed $64.9 billion and Frankfurt-based Deutsche Bank AG (DBK) got $66 billion. Sarah MacDonald, a spokeswoman for Barclays, and John Gallagher, a spokesman for Deutsche Bank, declined to comment.

Below-Market Rates

While the Fed’s last-resort lending programs generally charge above-market interest rates to deter routine borrowing, that practice sometimes flipped during the crisis. On Oct. 20, 2008, for example, the central bank agreed to make $113.3 billion of 28-day loans through its Term Auction Facility at a rate of 1.1 percent, according to a press release at the time.

The rate was less than a third of the 3.8 percent that banks were charging each other to make one-month loans on that day. Bank of America and Wachovia Corp. each got $15 billion of the 1.1 percent TAF loans, followed by Royal Bank of Scotland’s RBS Citizens NA unit with $10 billion, Fed data show.

JPMorgan Chase & Co. (JPM), the New York-based lender that touted its “fortress balance sheet” at least 16 times in press releases and conference calls from October 2007 through February 2010, took as much as $48 billion in February 2009 from TAF. The facility, set up in December 2007, was a temporary alternative to the discount window, the central bank’s 97-year-old primary lending program to help banks in a cash squeeze.

‘Larger Than TARP’

Goldman Sachs Group Inc. (GS), which in 2007 was the most profitable securities firm in Wall Street history, borrowed $69 billion from the Fed on Dec. 31, 2008. Among the programs New York-based Goldman Sachs tapped after the Lehman bankruptcy was the Primary Dealer Credit Facility, or PDCF, designed to lend money to brokerage firms ineligible for the Fed’s bank-lending programs.

Michael Duvally, a spokesman for Goldman Sachs, declined to comment.

The Fed’s liquidity lifelines may increase the chances that banks engage in excessive risk-taking with borrowed money, Rogoff said. Such a phenomenon, known as moral hazard, occurs if banks assume the Fed will be there when they need it, he said. The size of bank borrowings “certainly shows the Fed bailout was in many ways much larger than TARP,” Rogoff said.

TARP is the Treasury Department’s Troubled Asset Relief Program, a $700 billion bank-bailout fund that provided capital injections of $45 billion each to Citigroup and Bank of America, and $10 billion to Morgan Stanley. Because most of the Treasury’s investments were made in the form of preferred stock, they were considered riskier than the Fed’s loans, a type of senior debt.

Dodd-Frank Requirement

In December, in response to the Dodd-Frank Act, the Fed released 18 databases detailing its temporary emergency-lending programs.

Congress required the disclosure after the Fed rejected requests in 2008 from the late Bloomberg News reporter Mark Pittman and other media companies that sought details of its loans under the Freedom of Information Act. After fighting to keep the data secret, the central bank released unprecedented information about its discount window and other programs under court order in March 2011.

Bloomberg News combined Fed databases made available in December and July with the discount-window records released in March to produce daily totals for banks across all the programs, including the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Commercial Paper Funding Facility, discount window, PDCF, TAF, Term Securities Lending Facility and single-tranche open market operations. The programs supplied loans from August 2007 through April 2010.

Rolling Crisis

The result is a timeline illustrating how the credit crisis rolled from one bank to another as financial contagion spread.

Fed borrowings by Societe Generale (GLE), France’s second-biggest bank, peaked at $17.4 billion in May 2008, four months after the Paris-based lender announced a record 4.9 billion-euro ($7.2 billion) loss on unauthorized stock-index futures bets by former trader Jerome Kerviel.

Morgan Stanley’s top borrowing came four months later, after Lehman’s bankruptcy. Citigroup crested in January 2009, as did 43 other banks, the largest number of peak borrowings for any month during the crisis. Bank of America’s heaviest borrowings came two months after that.

Sixteen banks, including Plano, Texas-based Beal Financial Corp. and Jacksonville, Florida-based EverBank Financial Corp., didn’t hit their peaks until February or March 2010.

Using Subsidiaries

“At no point was there a material risk to the Fed or the taxpayer, as the loan required collateralization,” said Reshma Fernandes, a spokeswoman for EverBank, which borrowed as much as $250 million.

Banks maximized their borrowings by using subsidiaries to tap Fed programs at the same time. In March 2009, Charlotte, North Carolina-based Bank of America drew $78 billion from one facility through two banking units and $11.8 billion more from two other programs through its broker-dealer, Bank of America Securities LLC.

Banks also shifted balances among Fed programs. Many preferred the TAF because it carried less of the stigma associated with the discount window, often seen as the last resort for lenders in distress, according to a January 2011 paper by researchers at the New York Fed.

After the Lehman bankruptcy, hedge funds began pulling their cash out of Morgan Stanley, fearing it might be the next to collapse, the Financial Crisis Inquiry Commission said in a January report, citing interviews with former Chief Executive Officer John Mack and then-Treasurer David Wong.

Borrowings Surge

Morgan Stanley’s borrowings from the PDCF surged to $61.3 billion on Sept. 29 from zero on Sept. 14. At the same time, its loans from the Term Securities Lending Facility, or TSLF, rose to $36 billion from $3.5 billion. Morgan Stanley treasury reports released by the FCIC show the firm had $99.8 billion of liquidity on Sept. 29, a figure that included Fed borrowings.

“The cash flow was all drying up,” said Roger Lister, a former Fed economist who’s now head of financial-institutions coverage at credit-rating firm DBRS Inc. in New York. “Did they have enough resources to cope with it? The answer would be yes, but they needed the Fed.”

While Morgan Stanley’s Fed demands were the most acute, Citigroup was the most chronic borrower among the largest U.S. banks. The New York-based company borrowed $10 million from the TAF on the program’s first day in December 2007 and had more than $25 billion outstanding under all programs by May 2008, according to Bloomberg data.

Tapping Six Programs

By Nov. 21, when Citigroup began talks with the government to get a $20 billion capital injection on top of the $25 billion received a month earlier, its Fed borrowings had doubled to about $50 billion.

Over the next two months the amount almost doubled again. On Jan. 20, as the stock sank below $3 for the first time in 16 years amid investor concerns that the lender’s capital cushion might be inadequate, Citigroup was tapping six Fed programs at once. Its total borrowings amounted to more than twice the federal Department of Education’s 2011 budget.

Citigroup was in debt to the Fed on seven out of every 10 days from August 2007 through April 2010, the most frequent U.S. borrower among the 100 biggest publicly traded firms by pre- crisis market valuation. On average, the bank had a daily balance at the Fed of almost $20 billion.

‘Help Motivate Others’

“Citibank basically was sustained by the Fed for a very long time,” said Richard Herring, a finance professor at the University of Pennsylvania in Philadelphia who has studied financial crises.

Jon Diat, a Citigroup spokesman, said the bank made use of programs that “achieved the goal of instilling confidence in the markets.”

JPMorgan CEO Jamie Dimon said in a letter to shareholders last year that his bank avoided many government programs. It did use TAF, Dimon said in the letter, “but this was done at the request of the Federal Reserve to help motivate others to use the system.”

The bank, the second-largest in the U.S. by assets, first tapped the TAF in May 2008, six months after the program debuted, and then zeroed out its borrowings in September 2008. The next month, it started using TAF again.

On Feb. 26, 2009, more than a year after TAF’s creation, JPMorgan’s borrowings under the program climbed to $48 billion. On that day, the overall TAF balance for all banks hit its peak, $493.2 billion. Two weeks later, the figure began declining.

“Our prior comment is accurate,” said Howard Opinsky, a spokesman for JPMorgan.

‘The Cheapest Source’

Herring, the University of Pennsylvania professor, said some banks may have used the program to maximize profits by borrowing “from the cheapest source, because this was supposed to be secret and never revealed.”

Whether banks needed the Fed’s money for survival or used it because it offered advantageous rates, the central bank’s lender-of-last-resort role amounts to a free insurance policy for banks guaranteeing the arrival of funds in a disaster, Herring said.

An IMF report last October said regulators should consider charging banks for the right to access central bank funds.

“The extent of official intervention is clear evidence that systemic liquidity risks were under-recognized and mispriced by both the private and public sectors,” the IMF said in a separate report in April.

Access to Fed backup support “leads you to subject yourself to greater risks,” Herring said. “If it’s not there, you’re not going to take the risks that would put you in trouble and require you to have access to that kind of funding.”

AIG sues Bank Of America for Fraud

Reuters
August 8, 2011

Bank of America Corp (BAC.N) shares fell as much as 9.5 percent to their lowest level since April 2009 on Monday morning over fears of a slowing U.S. economy and challenges to a multi-billion dollar mortgage settlement.

Bank stocks broadly fell after Standard & Poor’s stripped the United States of its top credit rating and the European Central Bank intervened in bond markets, triggering fears that the global economy is destabilizing.

Bank of America’s shares fell more than most of its peers after insurer American International Group (AIG.N) said it would sue the bank to recoup more than $10 billion in mortgage bond losses.

Bank of America shares were down 8.4 percent at $7.48 in morning trading. The KBW Bank Index .BKX fell 2.97 percent.

Analysts said investors were reacting to the latest challenge to Bank of America’s $8.5 billion proposed settlement with mortgage investors over repurchasing toxic home loans.

“It makes investors question whether the bank will need to raise capital,” said Keefe, Bruyette & Woods Inc analyst Jefferson Harralson.

Citigroup Inc (C.N) shares fell 5.4 percent to $31.60, JPMorgan Chase & Co (JPM.N) fell 2.1 percent to $36.80 and Wells Fargo & Co (WFC.N) shares dipped 1.3 percent to $24.87.