Journalism in the Public Interest

Trust Bust: Why No One Believes the Banks

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By almost any measure, Morgan Stanley is fine.

Look at this impressive rundown of the bank’s critical numbers and ratios compiled by Paul Gulberg, an investment-banking analyst with the independent research firm Portales Partners.

Morgan Stanley has much more capital and lower leverage than it did at the height of the financial crisis, which I like to think of as 9/08. It has almost $60 billion in common equity, compared with $36 billion before September 2008, and its ratios are stronger. Its trading book — which is volatile and where any bank can take sudden, large losses — is smaller than it was. Morgan Stanley has more long-term debt and higher deposits, both of which stabilize its finances. The bank has more cash available in case there’s a crunch and a smaller amount of Level III assets, which don’t have an independently verifiable value and so must be estimated by the bank. Hedge funds have parked a smaller amount of assets at Morgan Stanley. That’s good because in the financial crisis, they pulled them from the bank.

Yes, Morgan Stanley by any measure is a safe and solid investment bank. Except for one: The amount of trust people have in the whole financial and political system. It’s just about zero.

That’s why the bank’s shares are down 42 percent this year. That’s why all the big bank stocks have double-digit dips.

True, they start their next round of quarterly reporting in a matter of days. Morgan Stanley is scheduled to report its third-quarter earnings on Oct. 19, and its earnings may calm fears temporarily.

But the essential problem will still be there, a slow burn beneath the global financial system that flares up at the worst moments. Banks don’t have faith in other banks, investors are deeply scarred and wary, and nobody believes that the governments around the world could grapple with the magnitude of the problems, even if they wanted to.

Three months ago, the Belgian bank Dexia passed the European stress tests. By that measure, it was fine. Then it collapsed.

This weekend France, Belgium and Luxembourg swooped in to save Dexia and pledged to figure out how to recapitalize European banks as a whole.

So investors had a moment of euphoria on Monday: Governments will save institutions!

While they probably won’t hesitate to wipe out equity holders in failed financial institutions and will perhaps force the value of bondholders’ investments to be trimmed, they will do everything they can to protect counterparties so that the system doesn’t melt down.

That’s the hope, at least, and it has a rational basis. Almost universally, regulators and political leaders believe that letting Lehman fail in the fall of 2008 was a disastrous mistake. Its downfall cascaded throughout the global financial world, collapsing money markets, terrifying lenders to banks and accelerating the implosion of multiple financial institutions.

So investors and policy makers, burned by the recent crisis, are all supposed to be acting more prudently and forcefully.

Yet, the moment one examines almost any detail of the global financial system, faith falters once again. Take the uncertainty about the derivatives markets. Morgan Stanley has a face value of $56 trillion in derivatives. That’s really nothing. JPMorgan Chase has more — amounting to the G.D.P. of large countries — a face value of $79 trillion in derivatives. If something goes wrong with just one-tenth of 1 percent of those trades, it’s kablooie.

Now those are gross numbers. Many people would dismiss those totals as ridiculous and misleading. Anyone who brings them up is merely displaying ignorance. The banks’ derivatives portfolios are full of off-setting trades that net out at a smaller number.

Derivatives can be dismissed as a popular bugaboo, but they really are just a symbol of the larger problem. A litany of daily stories reveals all kinds of reasons that banks don’t trust each other. To take just one news item, almost at random: Bloomberg News reported the other day that a Danish bank was refusing French sovereign debt as collateral.

Nobody really knows how much exposure the American banks have to the European financial and political crisis, with the Treasury Department minimizing the issue while other outlets raise the specter of catastrophic problems.

So trust, naturally, is the casualty. “If you get in a period of stress, everyone starts questioning whether the hedges will hold up and whether the collateral is good enough,” said Mr. Gulberg, the banking analyst.

Surely no bank would be so reckless as to accept dodgy collateral these days. It would hold out for something unassailable, like, say, Triple A mortgages on American homes. Wait, scratch that. It would accept sovereign debt, perhaps from some European realm that has been around for centuries. Whoops, no, no. Well, O.K., maybe United States Treasuries — and we’ll agree to ignore that one of the country’s two major political parties was willing to plunge the United States into default to achieve its aims.

So there’s concern about the collateral. But what about the hedges? Of course, they wouldn’t hedge with some bank like Dexia, which at year-end had $700 billion worth of loans, undrawn commitments, financial guarantees and the like. Some financial institutions have to be on the other side of Dexia’s commitments. Some might even be those supposedly strong and prudent banks that were supposed to have learned so much from the financial crisis. Did Morgan Stanley learn its lesson from the crisis?

You begin to see the problem.

There’s a disconnect to the situation that this article highlights but unfortunately fails to (no pun intended) capitalize on.

The banks talk about trust and they back it with numbers.  They talk about, as this article does, their leverage and their reserves.  They claim that they’re untrustworthy despite being good investments on paper.

What’s neglected (and the final paragraph hints at this, but it’s the core of the issue) is that the banks ran a systematic campaign of creating and exploiting bubbles using fictional (leveraged) assets in order to steal from investors.  And when the scam failed, they threw a tantrum in Washington for permission to loot the treasury and put the taxpayer on the hook for its losses.

The problem isn’t that we don’t believe that banks have money.  We don’t believe that banks are run ethically, because we had an open demonstration to the contrary followed by rewards heaped on the perpetrators.

Keep in mind that, for one tiny example, when ATMs were rolled out, banks told us that it would save them money through the hiring of fewer clerks.  Today, it costs as much as four bucks (and potentially twice that, depending on the combination of banks) for permission to access your money.

We see the problem:  No matter what trust placed in them, they will violate it.  The banks do not and hand us more numbers that no third party is allowed to audit.

I support both the demonstrations at Wall Street AND the Tea Party, but let’s get real. We are ALL lambs! As long as the Pols can keep us fighting between the Left and Right, they are tickled pink. It’s called payola. Politicians of both parties are as corrupt as the other, and voters of both parties are as dense as the other.

So we march on government. We fight for “issues” and fail to fight for “why the issues became issues” in the first place. Which is—100%—because of corrupt politicians. Like the Mafia the politicians GIVE (taxpayer assets) where they GET (the most in campaign contributions).

So let’s recognize the worldwide rip-off as it is and do something about it!!! Like vote 100% of the jerks out of office. ONLY public funding of campaigns will reverse the corruption, and at $5 per taxpayer per year it would be a bargain.

Jack Lohman

John: You said exactly what I intended to say, only much better! Spot on!

The trust issues go back to 2007 when the big banks said they had contained and ring fenced the bad mortgages.  The banks clearly understated the problem.  I am not talking about the number of home loans that went bad after the economy went bad.  I am talking about hundreds of thousands and maybe millions of loans that collapsed six months after issuance meaning that no payments were ever made on those loans.

If I could put a message in a time capsule it would be the moment the banks tell you they have contained the problem.  Go 100% to cash and wait out the storms to follow.

Here is the truth, Jesse E…please dig deeper…we need you!


ANONYMOUS, on October 12, 2011 at 5:31 am said:

“First, derivatives are not securities and not bonds — they are contracts that are derived from the mezzanine (credit enhancement) lower tranches in “pooled” structuring – and protection on top pass-through tranches.
Second, the upper tranche “security investors” were already paid “investment” back by credit default swap protection.
Third, the percentage value of lower tranches investment was significantly lower than the total “pool” investment. In subprime (and Freddie/Fannie also purchased subprime securities), these bottom tranches were sold first with the banks (security underwriters) retaining the upper “security” tranches. Since these bottom tranches did not have direct swap protection — but rather provided swap enhancement — it is these lower tranche holders (including residual tranche) that guarantee purchase of default loans by removal of the defaults from the trusts.
Fourth, since the distressed debt buyers could not perform obligation due to mass default and, therefore could not purchase defaults by derivative contract obligation — government also had to bail-out the contract facilitators — including AIG (who in turn sold their contracts elsewhere).
Fifth, government intention when they purchased derivatives and remnant securities was to take off banks books (they were also derivative contract holders– who liked purchased “loans” from originator to being with) because securities and derivatives on banks books had become worthless due to collapsed value of the “assets” that supported the securities and derivatives. Governments goal was to repackage these worthless securities and derivatives into one big Trust — and sell off to new distressed debt buyers — which is what has been done.
Sixth, security investor law suits are primarily about lost income investment — that is they cannot find “alternative” investments that pay the same usury rates.
Problem with all of this — is that securities never transferred “collection rights” to loans (and that is what subprime was — fabricated collection rights). Securities can only be current cash pass-through — that is all securities can do. But, derivatives can transfer collection rights. Because derivatives are NOT securities but rather a “contract” that can sell/assign collection rights. So, as stated above, the “bank” that purchased loans from originators — were also likely derivative contract owner — assuring that the bank would make money on falsified securities – AND — retain the false collection rights by derivative contract (until they dispose of collection rights elsewhere by sale of contract –or direct sale).
Foreclosure attorneys try to attach derivatives (ownership not disclosed due to deregulation) — to the securities trust — this is false since derivatives are not part of the trust –and not a security — they are DERIVED.
Finally, just try to figure out who owns collection rights today given the above — it is impossible. But, IT IS NOT the party standing before you — or in court — claiming the right to foreclose.
Security investors — get over it — you are not going to make 14% interest for a very long time.
Derivative contract “investors” — you are being allowed to hugely profit by fraudulent foreclosures. Government is protecting your “investment” — but can only do this if courts accept the fraud of a faceless creditor stealing your home — and making a huge profit on it – especially if sold by the bank. Servicers also cover for you. But, there can be no future “secondary market” if fraud now is not brought to surface. And, economy cannot grow without a healthy housing market.
Government and Congress — admit and fix your mistakes — you allowed.all to happen — by deregulation.
Subprime refinance homeowners — you were put in false default before you ever even actually defaulted. “Mortgage” contract was not a valid contract — all securities and derivatives — a “sham” to start with. The only party still not being helped is the victim and “targeted” homeowners.”

I believe that a significant number of consumers have changed from banks to credit unions and that most common sense people have lost trust completely in the financial services industry. I have an IRA with a huge fund/brokerage outfit and wish there was some other place to stick the funds where I would get a nominal return but feel absolutely stuck. This fund house lent overnight monies to Bear and Lehman until they went bust; obviously the fund company sweated both for collateral on a daily basis until the end game developed. I do not trust any bank and believe the big ones, Citi, BofA, etc all need busted up and any, ANY, possible chance of trading with other peoples monies stopped forever.

We just need to imbalanced financial policies also. It will be easier than the top economists can imagine.
We should not forget about all these topics we are discussing, because they are connected and we have to present a clear picture before the world.
More later. ................

I believe everything the banks say…about the lousy interest rates they give the consumer on savings and CDs.

Those rates are so very lousy - particularly in relationship to the spread between what the banks pay the Fed and what they charge the consumer in interest - I can feel my veins start to throb when I hear a banker or a politician bemoaning the fact that the U.S. citizenry doesn’t save enough.

lolll…is a scam, though; if the banks offered decent savings rates, then the consumer would run away from Wall Street like a cat with its tail afire - and that would kill the goose that lays the golden eggs.

John Anderson

Oct. 13, 2011, 5:52 a.m.

At the risk of sounding like an old man, the starting point for this well-described situation goes back to the years just prior to the repeal of Glass-Steagall. Before then all the banks were settled into their respective strategies capable of generating sufficient returns for the investors.  The pure investment banks had their models; the bigger universal banks had their models consisting of the non-sexy bits of wholesale banking plus their retail franchices.  The confluence of technology disintermediating the institutional client base plus the ultimate repeal of Glass-Steagall pushed everyone toward a homogeneous state chasing a shrinking pool of clients.  Despite the fact that markets are always a zero-sum game, no one wanted to admit to themselves they couldn’t compete in this new world order.  Hence everyone started chasing yield in their own weird wonderful way and from that day forward the banking industry has been a steady stream of car crashes and tears. What i find particularly disturbing is that we’re not reading these kind of stories anywhere other ProPublica. The main stream press is doing a great job covering the passing parade; too bad the parade is going right off a cliff.

I simply can not believe the intelligence of ProPublica’s reader/commentators. Why can’t we get a few of you in government. Why is it that it’s never cream that floats in politics but dreck?
Until we get a handle on why our government doesn’t represent its citizens/taxpayers (which is the only legitimate function of any government) merde like these serial financials meltdowns will proceed. 
Campaign finance reform is at the heart of this matter. We get lousy legislation, which allows frank fraud, because we pay, and pay, and pay…..and no one represents us. If “Occupy Wall Street” doesn’t prompt a return to Glass Steagall-type protections, then perhaps all that is left to us to get Washington’s attention is a tax strike.  There isn’t room for all of us in prisons…...and nothing will get attention like drying up the cash cows that we have become.

It does seem like you dance around the real issues. You talk about how the numbers make these banks look good, but other banks do not believe the numbers. Why? Because they know that their own numbers are baloney. Their numbers are baloney because the rules allow them to be baloney. Remember the fight over FASB 157? The banks basically got their way; the rules were watered down so they could continue to make stuff up. The credit bubble was floated on a sea of fraud, from liar loans up to cherry-picked CDOs, and yet there have been few investigations or prosecutions. Management kept their jobs and bonuses. Ethically, these institutions are corrupt to the core, and little has been done to fix the essential problems. Why would any sane person want to have anything to do with them?

It’s interesting Jess stated the Treasury is “minimizing” the danger in this euro-mess. I wish he’d have included some of Ben Bernanke’s
statements last week. ..where he assured the Europeans the U.S.
is standing by with plenty of “liquidity” in case we’re needed!!
(From Where??I thought we are broke!!)
Also told Congress last week about “swap Lines” wherein the U.S. buys Euros with dollars and holds the euros and eventually we’ll “swap back” and get paid back in dollars with Interest!!
Excuse me—I thought Europe was broke and can’t pay ITS debts.
How can we prop up anybody—explain this if you can. It’s a giant shell game—I’ll lend to you and you lend to me.  Neither of us can ever pay back—but maybe we can keep the Titanic floating a little longer…Numbers don’t lie, or do they??The world financial system is kaput!!  Everyone is Broke..except of course for our dear friend and benefactor—China…but wait, they’ll never get their money back either..

“JPMorgan Chase has more — amounting to the G.D.P. of large countries — a face value of $79 trillion in derivatives.”

No country has a GDP of around $79 trillion/year.  Global GDP is about $50 trillion/year.  U.S. GDP is about $15 trillion/year.

Global face value of derivatives (gross) is estimated to be $650 trillion - $1 quadrillion.  Net:  at ~1% of gross, that’s $6-$10 trillion.  But who knows - that’s why standardization and centralized clearinghouses are good ideas.

For comparison, the entire Earth is estimated to have about $150 trillion in financial assets - trade-able assets, private real estate, financial instruments, government & public & private debt + equity, currencies, not public infrastructure or public assets, not commodities still in the ground on public land (that last one is another $100 trillion). $50 trillion of that is public equities.

If you’re going to get on the banks’ case, one of the things you can’t do is give them ammunition to show you’re off base and we’re getting off base with this talk on derivatives. Two points:

—Derivatives as an asset class are not inherently problematic.(See Carie’s note above for a good discussion of what the real problem was.)

—Secondly, talking about the notional value of derivatives is very misleading and I’m afraid Jesse undereported that in his initial column.  The only figure that counts is the exposure inherent in those derivatives and while that is sometimes hard to tell in bank’s financial reporting it is nowhere near the notional value. For illustrations sake, imagine a bookie the day before the Super Bowl. He might have a gazillion dollars worth of notional value in bets, but if he’s set his book correctly he will have no exposure.)

There is enough stuff going on out there that is grounds for legitimate concern. Let’s not raise issues that don’t directly weigh on the discussion.

Barry Schmittou

Oct. 13, 2011, 12:04 p.m.

Obama and Bush protect the criminal banks and mafia corporations!!

Wachovia laundered $378 billion for Mexican drug cartels responsible for 35,000 murders !

Obama prosecuted no one !

Wachovia was fined 110 million which is one third of one percent of the money they laundered !

Wachovia gave Obama and other candidates $1.3 million in contributions in 2008. Wells Fargo bought Wachovia and they also gave huge contributions during this time period.

Drug money controls many banks. Here’s a United Nations quote from England’s Guardian Observer News :

“At the height of the 2008 banking crisis, Antonio Maria Costa, then head of the United Nations office on drugs and crime, said he had evidence to suggest the proceeds from drugs and crime were “the only liquid investment capital” available to banks on the brink of collapse. “Inter-bank loans were funded by money that originated from the drugs trade,” he said. “There were signs that some banks were rescued that way.”

Here’s a short version of mass murder evidence followed by numerous corporations who committed multiple crimes and no one was prosecuted !!

(The full version can be seen by pasting and

On 9/15/11 CNN wrote :

“Two mangled bodies hanging like cuts of meat from a pedestrian bridge. A woman was hogtied and disemboweled, her intestines protruding from three deep cuts on her abdomen. Attackers left her topless, dangling by her feet and hands from a bridge. Mexico’s notoriously ruthless drug gangs regularly hang victims from bridges and highway overpasses.”

Huffington Post wrote :

MEXICO CITY — Suspected drug traffickers dumped 35 bodies at rush hour beneath a busy overpass in the heart of a major Gulf coast city as gunmen pointed weapons at frightened drivers.

Bloomberg wrote :

“It’s the banks laundering money for the cartels that finances the tragedy,” says Martin Woods, director of Wachovia’s anti-money-laundering unit in London from 2006 to 2009. Woods says he quit the bank in disgust after executives ignored his documentation that drug dealers were funneling money through Wachovia.

“If you don’t see the correlation between the money laundering by banks and the 22,000 people killed in Mexico, you’re missing the point,” Woods says.

“I am sure Wachovia knew what was going on,” says Jose Marmolejo, who oversaw the criminal investigation into Wachovia’s customers in Mexico. “It went on too long and they made too much money not to have known.”

(In the Obama ATF Gun Walking scandal CBS wrote there are now 35,000 murders associated with the drug cartels that benefited from Wachovia’s laundering)

Bullet points of Non Prosecution agreements :

(1) Wachovia’s $378 Billion laundered for mass murderers

(2) Bank of America, American Express Bank and Western Union also laundered drug money, no one was prosecuted.

(3) AIG received a Non Prosecution agreement for rigging huge bids to increase sales of Workers Comp;

In 2006 the SEC wrote :

“AIG will pay in excess of $1.6 billion to resolve claims related to improper accounting, bid rigging and practices involving workers’ compensation funds.”

No one was charged with a crime for this huge bid rigging !! Two years later AIG received $182 Billion of taxpayer money to bail them out !!

While huge bids are rigged injured workers lives are being destroyed.

WFAA-TV wrote “a remarkable number of Texans committed suicide because they could no longer endure the pain caused by their injuries and they had been repeatedly turned down for worker’s comp care.”

(4) AIG received a Second Non Prosecution agreement for Aiding & Abetting Securities Fraud

(5) AIG and Prudential received a Non Prosecution agreement for accounting frauds

(6) Prudential was also fined $600 Million in Securities Fraud Fines
*Later you’ll see how Prudential rigged bids to increase sales of health policies

(7) JP Morgan received a non prosecution agreement for bid rigging in 32 States

(8) JP Morgan received another Non Prosecution agreement from the SEC as seen on the website linked above

(10) Prudential, Unum and MetLife also committed bid rigging of health care plans and have received multiple Non Prosecution agreements

(11) Quotes from Numerous Federal Court Judges seen at prove doctors’ paid by MetLife are still ignoring life threatening medical conditions when patients file claims on the policies that MetLife committed frauds to sell.

Ignored conditions include Brain lesions and Multiple Sclerosis, cardiac conditions of many patients, and a foot that a new mother broke in 5 places ! Obama’s DOL and DOJ Directors will not stop MetLife !

In 2008 Obama took $30,000 from MetLife VP James Lipscomb, and $2,600 from attorney Bruce Yannett. 

Lipscomb and Yannett signed the agreement where multiple frauds were admitted. No one was prosecuted. Obama also took hundreds of thousands of dollars from MetLife and the law firm that employs Mr. Yannett !!

Multiple Professor’s quotes prove many insurers are destroying the lives of very sick patients !!

Joseph Belth, Professor Emeritus at Indiana University wrote :

“They’ve turned Erisa on its head,”  “It was supposed to protect employees, and it’s being used to protect insurers.”

That’s a small portion of the evidence I’ve posted at and filed in federal Court as seen at

I believe Obama and Bush’s Directors’ are as evil as the criminal bankers and corporations they protect !!

John, i think the notional value IS the problem here. The problem is that the OTC derivatives game (no exchanges and clearinghouses) does not work in a world with counterparty credit risk.

Your example with the bookie does not correspond to the derivates trade. The bookie takes in ALL the customers money before the game, keeps it until the results are known, and then redistributes it. A “bank derivative” bookie would simultaneously take in money from some, and pay other customers, all before the game. During all times, he has almost no money in the bank compared to his’ and his customer’s obligations. If, after the game, the losers cannot pay the bookie, the bookie cannot pay the winners.

If you hedged part of your trade with Dexia or another bank you think may be at risk, you are essentially unhedged and the notional value comes into play. And, once one participant is rumored to be at the edge, not only direct trading parties are affected, everyone will get vary about indirect effects as well.

In a promiscuous town, once a local nymphomaniac is rumored to be ill, EVERYONE will quickly show up at the clinic to have himself tested, not only the direct partners…

OTC derivatives trading needs to be banned. All trading should take place on transparent exchanges, where central clearinghouses impose substantial margin requirements.

Moopheus, exactly, why would one bank trust another bank when they know how they themselves have been operating at the margins of the law and without regard to customers or investors.

Finance Addict

Oct. 13, 2011, 2:28 p.m.

I couldn’t agree more. It’s impossible to know how much capital banks need when we can’t even trust the figures given by the banks themselves. Have you seen how not 1, but 2 stress-tested banks gave faulty figures? And what Benford’s law has to do with it:

What i saw in the past years from inside banks was that critically thinking risk analysts were kicked out. I’ve allways worked that all decisionmakers were able to see what was going on. But management did not like this… So, Boards or did not get to the underlying risks or did not want to know the underlying risks. Eather one of it. Critical risk analysts, well educated risk analysts etc, all vanished, like me. No matter what organisation i’ve worked for. There is nowhere management support in such jobs to guard integrity of analysts that are attracted to guard safety of their employer. So they keep quiet or get kicked out. Now they go for fast looking young analysts, easy to impress / influence, to reduce discussion on facts, because the deals must be approved in order to receive bonusses. I’ve struggled decades and financial crisis made me clear that i was Don Quichotte. I refuse to continue. It happened to me about four times…

So now that i want to work outside banks, recruiters do not want to send these people to job applications in companies (except banks), as they do not understand what is going on right now. I hope this little insight will contribute. Many suffer same situation.

Thomas Jefferson

Oct. 14, 2011, 10:12 a.m.

“I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power (of money) should be taken away from the banks and restored to the people to whom it properly belongs.”
-Thomas Jefferson

—Derivatives as an asset class are not inherently problematic.(See Carie’s note above for a good discussion of what the real problem was.)

BAAAAAAAHHHHHHHAAAAAAAAAA.  Spoken like a true gambler.  Derivatives are NOT assets.  They are backed by NOTHING.  They are paper contracts.  PIECES OF PAPER.  And, they are not backed by the full faith of the United States government pieces of paper either.  And those paper contracts, were they to require ACTUAL ASSETS to write them, wouldn’t even exist. 

It’s all one big casino with absolutely no relevance to democracy, jobs or sustainable economics.  It’s ALL based on MASSIVE fraud and corruption.  Derivatives are simply contracts that allow Wall Street to fleece people in the Great Wealth Shifting - the theft of our democracy by monied elites.

Doug Guillory

Oct. 15, 2011, 8:44 a.m.

The article misses the issue of mark-to-model accounting which the government forced the FASB to adopt. Who can believe the banks when they are allowed to use creative license in valuing their assets?


Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)