How far will gold and silver fall?

The real reason interest rates are unrealistically low now is because the Federal Reserve has loaned out $1.5T to the largest banks in the world. If they raise rates at all, it immediately crushes these banks and they collapse. This news came out over the past week, and only after a supreme court case that forced the Federal Reserve to reveal it, and which has also been completely ignored by the mainstream media. (of course)

So in one case, BofA, the Fed loaned them $100B. Using the old rule of thumbs if BofA has any chance of paying this back they would have to make $1T in loans which is a simple impossiblility in an economy that is only producing about $10T real GDP. (if that, you can't believe any statistic from the government now) An interest rate rise by the Fed simply pushes this bank off the cliff. People ought to be insanely mad about this, but it is what it is. It's the reason many are buying gold.

 

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You didn't make your case about the investment banker with this example. The party who organized the cattle drive is part of the production arm and may or may not make a profit depending upon the results of the cattle drive. The big difference between the cattleman, and the banker, it's assumed the banker gets paid regardless of results, the cattleman doesn't. Hence your contention that I don't understand, isn't proven by this case.

It's critical to understand this difference in an asset based system vs a fiat based system. In the latter case, if the cattleman can't pay back the banker, then the central bank simply prints more money and hands it over to the bank to protect the bank. In the former case, if the cattleman can't pay back the bank, then the bank just lost $10,000 in gold. Where are the assets to replace this gold? It creates a huge difference in the dynamic of the economy. In the days of the cattle drive, the banksters were usually not involved because of this fact and the economy operated on a cash and carry basis. i.e. nobody got paid until the cattle were delivered to a Chicago slaughter house.

 

I completely agree with your outrage Fatima about the Fed keeping interest rates low and bailing out banks. I don't understand the "old rule of thumb" about having to loan $1 trillion to pay back $100 billion. First, BoA used to make about 10 billion a quarter before this mess, and I believe after everything settles down they will go back to that level. But to pay back the Fed they can simply liquidate some loans when the economy stabilizes, between that and earnings they will have the cash to pay it back I believe. You simply lost me on the "having to loan out $1 trillion" part. You do understand they have the entire earning potential of BoA, Merrill Lynch, Countrywide, and many other divisions, as well as massive company assets, to pay this money back, right?

 

I presume the $1T assumed that $10 would be lent for every $1 received, but that would be a system-wide effect and is not possible for one company to do. Also, most of the money received by B of A went toward replacing capital losses and was not available for new loans. I also cannot document the $100B to B of A unless it combines the TARP, TALF and loan guarantees.

 

The only thing I can think is that they still have so many bad loans on the books that will come to light again once they're allowed to move forward with foreclosures, because nothing else makes sense as to why the big banks can still all be hurting. If one of you know what the deal is, please post it.

Think about this:

Right now CD rates are at historically low levels, under 1% for a 12 month CD. Yet credit card rates havent' come down at all. So a bank chargest someone 12% on credit cardss and pays out 1% on a CD. Do you what banks use to pay for CDS? They're using longer term coporate or municipal bonds. You can walk into any bank and ask to see their financial papers. If you do it - you will see what they're doing. They buy bonds paying 6% and use that interest to pay out the 1% CD. Thats a 5% net profit at least, plus all the relief money they've taken from the government. How can they still possibly be so fragile, unless their books are loaded with bad loans...

 

Good questions. The two things I know, (or at least believe), is the new credit card laws has made credit cards more dangerous a lending game, that is why interest rates are higher. Whenever they pass "consumer" laws they make it more expensive to do business, and end up costing consumers more in the long run. Second, you are right there are a lot of bad real estate loans still on their books. If the Fed would have allowed these foreclosures to happen in 2007 and 2008, we would be done with this by now. Putting in moratoriums and the like has greatly increased the length and pain from the whole housing mess. Again, the Fed meddling has increased costs and suffering.

Overall, the less government gets involved in economics the better everyone is. It is government interference that adds costs and prolongs corrections, and it was the assumed government bailout that allowed these banks to get into this mess to begin with. With no Fed backup of Fannie and Freddie, the market would not have made these bad loans to begin with, and without the Fed Reserve keeping interest rates low for 7 years before that, many more people would not have qualified for the loans anyway.

Chris

 

If you check out the balance sheets of banks such as BAC, WFC and C, you will notice that they have enormous cash balances and strong capital positions. This flies in the face of common wisdom, but the numbers are what they are. If the banks are "weak," and it is no sure thing that they are, it may be because of the credit default swaps and other derivatives where it is difficult to assess the impact. On the other hand, it is possible that the money center banks are screaming bargains right now -- and noboby wants to own them.

 

Ok, I understand what you are saying Cloud, but as you said that would be systemic and not just on BoA. I still say BoA once they work through this will have plenty of assets and earning power to pay this back. Btw, for full disclosure, I own some BoA stock. I have added some more with recent lows as well. I am not advocating buying it, as it is a longer term play, and fairly risky.

Chris

 

BAC has two lawsuits filed against them (AIG, State of NY) for about $20B alleging numerous types of fraud committed by this bank. If so, their balance sheets are meaningless. The SEC now also being investigated covering up much of this sort of activity for the last 20 years by illegally destroying documents.

 

This is traditional banking. The reserve requirement was 10%. Banking business plans assumed the other 90% was loaned out earning money for the bank. Yes, it is impossible. The numbers are so absurdly large that no economy can support it without massive inflation. The Federal Reserve lent out 1.5T to the TBTF banks. They have no possible way to earn enough to pay this back. This is why the building(s) is (are) burning down.

 

BAC has $706billion in cash and short term investments on their balance sheet.

 

What are their liabilities?

 

I don't find anything about the amounts to be absurdly large. Check out the balance sheets of a few large banks and combine them. Citigroup alone has more than $1T in performing loans. The US and world economies are enormous and the economy can and is supporting it. There might be some inflation and there might be some deflation, depending on future policy decisions. But the recovery potential is far greater than the doom and gloom internet gurus would have you believe.

 

Still following you guys..

All these balance sheet figures etc.., active loans..what about all the defaults happening out in john q public land? There are SO many..at least in my neck of the woods.. folks are just walking away. Many if not most (not all of course) will never ever pay down their loans..and I mean common people, not wealthy folks.Banks made it so very easy for just about anyone to secure a loan or two or three, and still do to some degree. It's a hand wringer to me, and I see no fix, though I certainly hope there is one.
Numbers on a piece of paper...

Lucy

 

This $1.5T loan alone to the banks is $230 for every single person on the planet. It's $10,296 for every working person in the USA where the average yearly earnings are $39,650. The printing of these amounts of currencies, relative to the productive output of the labor force, should be criminal.

There is no mathematical way for the banks to earn these kinds of amounts back from the population. It's 25% of the yearly per capita output going to a handful of financial institutions. It's not gonna work.

 

http://finance.yahoo.com/q/bs?s=BAC

 

First, you are assuming these banks only do business in the US. They don't. Second, if US assets are 50 trillion, then 1.5 trillion is only 3% of US assets, (and remember these banks are in 100 countries or more). These two banks in particular can easily pay that money back.

Second, like Cloud said, I don't think you understand how large BoA or Citi is. They have massive assets all over the world. The money lent was to improve short term liquidity. Let the crisis pass, and values of the loans come back to normal, and these loans are almost trivial to them.

I will publicly predict that every penny loaned to those two entities will be paid back, with interest, and at a profit to the taxpayers. The loans to AIG will probably be made good as well. The loans to GM and Chrysler had more to do with the UAW than it did for economics, and those two loans will be losses to taxpayers. Talk to me in three years and see if I am right. Almost all bailouts to financial companies have resulted in profits to taxpyers over the years, something little talked about. I am not talking about failing banks, but these liquidity crisis loans.

I disagree with even making loans to banks, but because we have in the past the expectatino is there. Personally I would prefer the US flatly refuses to ever do it again in the future, and take away US backing of Fannie and Freddie, that action would instill financial discipline. That is a pipe dream now I am afraid.

Chris

 

OK, so they have $144B in assets when the liabilities are subtracted out and they have a $100B loan from the Fed that isn't even on that sheet. Total = $44B.

 

Your numbers are incorrect. That isn't how it works. Think about a simplistic example. If you go into a bank and borrow $10,000, the bank deposits the balance in an account in your name, and the bank records a loan asset of $10K and a liability of $10K. So the money already exists to repay the loan. If you take the money out of the bank and give it to someone else for some economic purpose and they deposit it, the money still exists, but perhaps in a different bank. So systemically, the money still exists to repay the loans. The numbers seem large because the amount of commerce taking place world-wide is enormous, but that's just the way it is.

 

Well, BofA is in the midst of laying off 10,000 workers and in the letter the CEO sent to the employees the week before last, he said the reason was because the business was not there. (letter was sent before layoffs announced) 3,500 will be let go by the end of the month. Doesn't sound to me like a bank that can easily pay back anything.

BofA is also in the process of selling off it's foriegn operations in hopes of raising cash. What you are stating isn't being reflected by the actions of the bank.