Posted on 02/27/2010 7:39:33 PM PST by TigerLikesRooster
February 26, 2010
How “Hot Money” is Wrecking the U.S. Banking System…
[Editor's Note: The Federal Deposit Insurance Corp. insurance fund that protects your deposits is $20.9 billion in the red. One of every 11 U.S. banks is in trouble. And it's going to get worse. Neither the FDIC, the Federal Reserve nor the Treasury Department will 'fess up that what's fueling bank failures is a risky form of funding called "brokered deposits." Industry insiders refer to them as "hot money." Credit-crisis expert Shah Gilani spent months investigating the often-murky world of hot money. This story is excerpted from an in-depth report, which readers can access by clicking here.]
By Shah Gilani, Contributing Editor, Money Morning
When the Federal Deposit Insurance Corp. (FDIC) released its list of "problem banks" this week, 702 institutions holding $402.8 billion in assets were found to be in trouble.
That's the longest list in 17 years, and it's only going to get worse. In fact, regulators are expecting the number of troubled lenders to grow at an accelerating rate this year. They claim that an uptick in commercial-real-estate losses will serve as the key culprit.
But the real culprit - the one that regulators won't talk about publicly - is the funding scheme banks employ to load themselves up on speculative loans. T his scheme - far removed from most investor radar screens - has played a major role in the banking sector's growing woes, and will continue to contribute heavily to bank failures in years to come.
* The centerpiece to this risky strategy is a funding vehicle known officially as a "brokered deposit." However, due to the narcotic-like effects brokered deposits can have on a bank's balance sheet, industry insiders have adopted a more-appropriate moniker - referring to them as "hot money."
(Excerpt) Read more at moneymorning.com ...
P!
How about lukewarm money?
I wonder where all that money went in 2008? Did Bush or Bambi ever say?
The bush money has largely been repaid with interest.
You will never see the Obama money.
That one escapes my understanding, care to expand?
Whatever happened to “Cold Hard Cash”?
Keeping it at zero Kelvin is the tricky part
Regan didn't take office until 1981.
This sounds like an unsubstaibale Fusion reactor...Just got too big and out of control. Once that happens the resulting mess isn't so pretty.
That and getting the tap in.
How original . . . NOT!
I’ve been reading this stuff for the last thirty years. Check out Adam Smith’s book ‘Paper Money’, written in the early 80’s.
Brokered deposits is just a fancy term for financial institutions and sovereign funds diversifying the places they place deposits.
Even in the days of the Soviet Union, Russia kept deposits in Western banks. This guy thinks he sees something risky?
I'll check it out. Thanks to fellow FReepers, this month I've learned more about the factors causing this crisis than any other source.
Indeed. Haven't finished the article yet, but so far the author is beginning to sound like a shill for regulators. He writes of "brave" regulators worrying over this or that practice of private banks.
This points up the difference between economics and finance as disciplines; they're not the same, and finance people usually have little or no understanding of basic economic principles. Private banks, like all other private businesses in a market economy, act "rationally"; i.e., they employ certain means at their disposal to achieve certain desired ends, namely profit. If banks start making risky loans or risky investments, it's because an incentive to act in a risky way has been planted in the economy -- invariably by the government via the Treasury or the Federal Reserve.
Congress is the culprit here, they change the laws governing accounting like regulations were dirty diapers. Instead of potty training banks, Congress encourages banks to soil themselves.
Nothing new here.
Tsk, tsk, TLR. We all know the banks aren’t the problem. Whatever they’re up to, it’s all above board and beyond reproach.
"...fraud, you probably think there should be rules against it, I think the market will figure it out."--Alan "The Wizard" Greenspan
Drug money laundering propped up markets during crisis - or - Crisis propped up money laundering? Hmmm.Nothing to see there.. move along - the market will "figure it out".
Thanks for the ping.
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