The Triumph of Structured Finance
By Mike Whitney
The entire global financial structure is becoming uncontrollable in crucial ways that its nominal leaders never expected, and instability is its hallmark. The scope and operation of international financial markets, their “architecture”, as establishment experts describe it, has evolved haphazardly and its regulation is inefficient — indeed, almost nonexistent. Banks do not understand the chain of exposure and who owns what: senior financial regulators and bankers now admit this.” Gabriel Kolko “An Economy of Buccaneers and Fantacists” “Ben Bernanke, the Federal Reserve chairman, is like a man who, after spending a lifetime playing with train sets, finally gets to drive the real thing – only to find it hurtling towards the edge of a cliff.” U.K. Observer
By now, you’ve probably seen the photos of the angry customers queued up outside of Northern Rock Bank waiting to withdraw their money. http://news.bbc.co.uk/2/hi/uk_news/6998507.stm The pictures are headline news in the UK but have been stuck on the back pages of US newspapers. The reason for this is obvious—the same Force 5 economic-hurricane that just touched ground in Great Britain is headed for America and gaining strength on the way.
This is what a good old fashioned bank run looks like—the likes of which we haven’t seen since the Great Depression. And, just like 1929, the bank owners are frantically trying to calm down their customers by reassuring them that their money is safe. But—human nature being what it is—people are not so easily pacified when they think their hard-earned savings are at risk. The bottom line is this: The people want their money—not excuses.
But Northern Rock doesn’t have their money and, surprisingly, it is not because the bank was dabbling in risky subprime loans. Rather, NR had unwisely adopted the model of “borrowing short to go long” in financing their mortgages just like many of the major banks in the US. In other words, they depended on wholesale financing of their mortgages from eager investors in the market, instead of the traditional method of maintaining sufficient capital to back up the loans on their books.