Big Banks Enjoy Stealth Bailouts – A DCReport Exclusive

Yet Again Big Banks Are Short of Cash. Signs of Another Historic Bailout and Recession to Come? 

Ominous signs that at least one of America’s “Too Big to Fail” banks is yet again seriously short of cash emerged this weekend in documents examined by James Henry, DCReport’s economics correspondent.

For the past two months the Federal Reserve has been silently injecting tens of billions of dollars of cash into banks. No one announced this. Henry found the evidence in public records that few, if any,  Wall Street journalists consult, but that we routinely review at DCReport.

The Federal Reserve Bank of New York (NYFed), acting like a financial Santa Claus to recklessly naughty bankers, delivered $17 billion in cash to an unknown bank or banks at 8 AM the morning after Christmas.

That’s just the latest scary development that has gone unreported until now.

The sudden spate of cash shortfalls raises serious concerns about the stability of the largest banks and the utter failure of 21^st Century regulators to identify problems and protect the public.

The sudden demands for cash to cover shortfalls began on Halloween. That day the NYFed injected more than $50 Billion into one or more unnamed banks. Since then, it has injected tens of billions into banks 14 times, delivering greenbacks galore roughly every third business day.

Contrast this with the five years beginning in July 2020. Virtually no such cash infusions were made during that time, as the graphic below from the NYFed website shows.

While the NYFed doesn’t identify which banks benefitted, other records Henry found indicate that major beneficiaries are Bank of America, Barclays, Citi, HSBC, UBS, and likely of greatest concern the nation’s largest bank holding company, JP Morgan Chase & Co.

There’s more. Cash infusions are likely to grow enormously—and soon.

In a vaguely worded NYFed policy change on Dec. 10—which not one of the major financial news organizations has reported—the Fed flung its vaults wide open to troubled banks. The only reason the NYFed would do this is because it has good reason to expect that cash infusion demands are about to balloon.

Unlimited Cash

“Going forward, standing overnight repo operations will no longer have an aggregate operational limit,” the NYFed said.

The vaguely worded announcement seems to tell bankers that they can get up to $240 Billion in cash each day to cover shortfalls. Even if read narrowly, the policy would allow cash infusions twice per day, so up to $80 billion per bank on any one day with no overall banking industry limit.

To give you an idea of how much money is involved consider this: together the six biggest banks earned $152 billion in profits last year, less than any two of them could get in cash on a single day by a narrow reading of the new policy.

To get the cash, banks hand over Treasury notes and bonds, mortgages, and other securities, known as a “repo.” Then they get to borrow cash at face value.

The banks also pay super-low interest rates, noted Bill Black, who as a banking regulator uncovered the savings and loan scandals three decades ago that resulted in almost 900 high-level bankers going to prison. And, Black notes, should their corporate parents seek refuge in bankruptcy courts the normal rules don’t apply, another little-known government favor for misbehaving bankers.

Recurring Problem

“This comes up about every five years,” Black said of banks turning to the Fed for cash. Indeed, other Fed records we examined basically confirm this pattern.

But why? Henry and Black both argue, reasonably, that banking regulators aren’t doing their job. Previously Black showed that the much ballyhooed “stress tests” for banks are designed to ensure that no bank fails. Henry has shown that big banks flout rules and even court orders that conditioned forgiveness for past misconduct on no repeats.

American banking has what I call the appearance of regulation, an issue I explored in my 1992 casino industry expose´ Temples of Chance.

Both Henry and Black should be hailed as a national heroes for looking out for the public’s wallets. Instead, Black is persona non grata on Capitol Hill and at banking regulatory functions while I’ve dealt with public officials and academics who snarl at the mention of Henry’s decades of work without citing any flaw.

Inside Job

Black later developed a whole new field of criminology and wrote a fascinating book about what he uncovered:  The Best Way to Rob a Bank Is to Own One.

During the Great Recession of 2008-10, JPMorgan got billions in bailout money. The bank says federal rules forced it to take the money.

Should America face a new Wall Street debacle, JP Morgan would likely get all the help it wants, perhaps even by forcing it to accept cash infusions.

Tons of Silver

JPMorgan Chase & Co. , the bank’s parent, is of particular concern because in mandatory disclosures, that few journalists examine but our Jim Henry did, the company revealed it is on the hook to deliver more than 5,900 tons of silver it doesn’t have. Tradeable silver is relatively scarce right now, government data shows.

The bank sold contracts for silver it didn’t own, expecting the price would fall. Then it planned to buy the contracts back for less, making a profit by selling high and buying low. This risky practice is known as “short selling.”

Buying stocks or other assets and holding them in the hope the price will rise is called “going long,” which is what most investors do because its less risky.

JP Morgan got caught in a squeeze because the spot price of silver has nearly tripled since Donald Trump took office, creating an exposure that I calculate at up to $13.7 billion, roughly equal to the profits JP Morgan earns every 90 days, though likely just a costly fraction of that.

Silver Squeeze

A big problem is that there’s not enough actual silver available for trading to get JP Morgan out of the squeeze it got into through unbridled greed. The more silver prices rise the more JP Morgan gets hurt.

Compounding this, Samsung has developed a powerful  battery for electric vehicles that can go a thousand miles and recharge in under ten minutes. It requires roughly a kilo of silver for each car or truck. And while EV sales are falling in America, they are soaring in China, the world’s largest car market, and other places. About 90% of new cars sold in Norway are electric.

A smaller problem arises from the Trump administration, which on Christmas Day alone lobbed at least a dozen Tomahawk missiles at supposed Muslim extremists in Nigeria. Each Tomahawk used about 500 ounces of silver, currently priced at about $80 per ounce or $40,000 per missile.

DCReport emailed and texted five JPMorgan spokespeople on Sunday afternoon but has not heard back. That’s what we experienced in the past, but if the bank gets in touch we will promptly give you a full report on their stance.

Bad Bets

JP Morgan has a well-documented history of making wildly bad speculative bets, including a 2012 deal that ballooned into a loss of $6 Billion or so, a disaster it initially passed off to leading financial journalists as a minor matter.

The bank claimed that a hedge that was meant to reduce risk had “morphed” into a speculative and unauthorized bet by a London office trader,  who was cashiered.

The reality, as I reported at the time, is that a hedge—a complex legal contract—can no more “morph” into a speculative bet than my marriage can morph into a dog. But go-along-to-get-along Wall Street journalists faithfully repeated the bank’s nonsense.

Deep concerns

The sudden spate of cash shortfalls raises serious concerns about the stability of the largest banks and the utter failure of 21^st Century regulators to identify problems and protect the public.

Will Wall Street soon seek another huge bailout of the kind that the George W. Bush administration forced on the public in its final months? Congressional leaders from both parties insisted in 2008 and 2009 that such a debacle would never again be allowed or become necessary. Do you believe that?

If you think there’s little to no chance that the Trump Administration will give Wall Street whatever it wants, keep in mind that Donald Trump just blew nearly $40 billion dollars of your money bailing out Argentina.

There’s an obvious question raised by the sudden need for serial and now unlimited cash infusions now: are we facing a repeat of the economic collapse of 2008, which by some measures caused deeper and more lasting harm than the Great Depression?

Huge Cost

The Great Recession cost America the value of two years of economic output, known as Gross Domestic Product, according to Prof. Alexander J, Field of Santa Clara University’s business school. His estimate fits my own back-of-the-envelope calculations back then when I was one of the few journalists critical of the bailout terms.

Ponder Prof. Field’s assessment for a moment – two years of all the economic activity of economic everyone in America down the drain, tens of millions of people wiped out financially with many yet to recoup, while instead of being prosecuted, or at least fired, the top bankers remain in power, their gigantic pay packages growing larger each year.

Henry calls these cash infusions “bankster socialism.” Henry is referring to the de facto policy of letting banks reap outsized profits when their speculative bets win big and shoving the losses onto the rest of us when they sour.

I agree. So long as shareholders aren’t at risk of being wiped out, top bank executives will keep engaging in financially dangerous behavior, aided by dubious accounting, and so called “stress tests” that were designed to ensure that the banks would pass no matter how shaky their financial condition. The winning bets, and Fed bailouts, increase the value of executive and board stock and stock options, the losses cost them noting.

Moral Bankers?

In a heads-we-win, tails-the-public picks up the losses, who but that rarest of rarities, a deeply moral banker, would do otherwise?

Henry views the recent cash infusions as eerily reminiscent of the NYFed bail-out of child rapist Jeffrey Epstein’s strange offshore firm Liquid Capital Funding 17 years ago. When Epstein’s capital evaporated, the New York Federal Reserve Bank stepped in with cash. Epstein’s firm failed anyway.

But why did NYFed intrude into a routine business failure? After all, capitalism is based in good part on the idea that businesses fail while better managed operations prosper. And why try to save an offshore firm?

Henry, a Yale University Global Justice Fellow who has spent decades exposing illicit financial transactions, notes that Bear Stearns, a venerable Wall Street investment house, owned 40% of the illiquid Liquid Funding. JP Morgan was also involved in the firm, which was partly a criminal tax dodge. Bear Stearns soon collapsed, costing many investors the bulk of their fortunes, as did the collapse of Lehman Brothers. In both cases rampant speculation, weak  internal financial controls, and see-no-evil regulators bear the blame.

Let’s hope Wall Street journalists, and politicians, get onto this story now that DCReport has broken it. But don’t hold your breath.

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