About That Missing $9 Trillion

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There was talk a few months back about $9 trillion "missing" from the Federal Reserve Bank in off-balance sheet transactions. 


On camera, Representative Alan Grayson of Florida drilled Elizabeth Coleman, Inspector General for the Federal Reserve, about the $9 trillion in a YouTube video clip that cannot be deciphered any longer because someone inserted audio interference so viewers can no longer hear the online testimony.  CNN video clip (viainfowars.com) can still be understood. 


Here is text of Rep. Grayson's key question to Coleman: "What have you done to investigate the off-balance-sheet transactions conducted by the Federal Reserve which, according to Bloomberg, now total $9 trillion in the last 8 months?" Grayson asked Coleman.  Coleman responded her office hadn't examined that yet.


On Feb 9, 2009 Bloomberg News reported that "the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates enacted in 2008 have been voted on by lawmakers. Theremaining $8 trillion is in lending programs and guarantees, almost all under the Fed and FDIC. Recipients' names have not been disclosed."


So, Bloomberg News breaks down that "missing $9 trillion," with about $1 trillion going to the Fed as bailout money for ailing banks and financial institutions, and presumably a big chunk going to the FDIC to cover deposits at failed banks. 


But we don't see record of the FDIC receiving trillion of dollars.  The FDIC insures bank depositors and facilitates dissolution of failed banks.  Working under the assumption trillions of dollars were funneled to the FDIC, why would the FDIC need that much money?  At about that time (early 2009) the FDIC insurance fund had been depleted to around $13 billion.  That wouldn't explain a need for trillions.  This would tip off that there are more failed banks than the FDIC lets on.


Upon examination of the FDIC quarterly report for the 1st-Quarter 2009 we find there were $7.538 trillion in domestic bank deposits and an additional $1.416 trillion in foreign deposits in the nation's 8000 FDIC-insured banks, for a total of $8.954 trillion in deposits in the nation's 8000 banks.


The money that isn't there


So the question is, were US banks in such sad financial shape at the time that they had evaporated all their depositors' money - all $8+ trillion?


Recognize that banks lend out most of their depositors' money and keep only a small amount in reserve.  As actor Jimmy Stewart said, in playing the role of banker George Bailey in the 1946 movie "It's A Wonderful Life": "The money's not here. Your money's in Joe's house ...and in the Kennedy house, and Mrs. Macklin's house, and a hundred others."


I sent an e-mail inquiry to the ombudsman for the FDIC and asked if depositors' money is actually in the bank? The FDIC ombudsman provided me with the George Bailey answer: "At all times, banks keep only a portion of deposits in reserve to meet demands of depositors. The rest of the deposits are not available for immediate withdrawal as they are invested in assets such as loans or U.S. Treasuries." 


So how much of the $8 trillion in bank deposits should US banks have been holding in reserve at that time (early 2009)? 


According to the Federal Reserve, the simple answer is 10%.  That would amount to about $800 billion.  The rest would have been loaned out. 


But US banks were playing fast and loose with the people's money, relaxing loan and income requirements (liar's home loans), and accepting home loans with no-down payment, and offering initial low "teaser" interest rates (sub-prime loans), which in combination with low interest rates made possible by the Federal Reserve, created false demand for residential real estate and resulted in a "bubble" in housing values. 


As foreclosures on home loans soared, banks took losses so great that their reserves were quickly depleted. 


Reserves vanish


So, even the 10% reserves weren't there. It's obvious, with the collapse of housing values and 20 million empty homes, that nearly all 8000 US banks had no reserves at one point!  Their asset values also collapsed.  The only reserves most banks now carry on their accounting books are provided by the Federal Reserve in the form of bailout loans.  Let that fact hit the streets of America and you really have a bank run on your hands. 


While most Americans may still be shocked to learn their bank doesn't have but a fraction of their banked money in their electronic money vault, just as people were shocked to learn this in the movie "It's Is A Wonderful Life," they should be even more concerned that banks carry such a thin margin of reserves that if anything dire happens to the bank or the economy, its reserves can easily vanish. 


That must be why Federal Reserve chieftain Ben Bernanke wouldn't disclose which banks got all the bailout money.  It was virtually all of them - they were all insolvent! 


The FDIC currently claims only 800 or so US banks are unprofitable.  But recall that US banks had their bad home loans taken off their accounting books (the Federal Reserve now carries them on their balance sheet), received near zero-interest rate bailout money to replenish their reserves, and now receive a 3% parking fee for not lending their money into the economy from the Federal Reserve.  So yes, US banks now report a profit, but if the props are removed, in reality, most all banks are insolvent and beyond any outside capitalization saving them. 


Furthermore, US banks have no future because residential real estate loans, which represented 70% of their revenues, have disappeared.  Revenues from debit card charges, which were preposterous and unethical, were also halted by Congress.  So, American banks are down to generating revenues from credit cards, and investing their depositors' money in the stock market (without forwarding a portion of any dividends to depositors).

Essentially, US banks today are zombie banks (dead banks walking).  They have no future.


Fed Chairman Bernanke acted like disclosure of a few big banks that received bailout funds would cause depositors to flee those banks and place their money in less indebted banks.  But in reality, it was the entire banking system that had nothing in their vault to back their depositors' money. 


Fractional banking turns against the banks


Just how do normal safeguards at banks disappear so rapidly?  Well, as more and more home mortgages went into foreclosure, the fractional banking system began to turn against the banks exponentially.  It was like an army had been overrun by an enemy who captured their cannons and turned them around against them.


Fractional banking permits banks to create 10-fold more money "out of thin air" than what is on deposit as a reserve.  Ten-thousand dollars in bank deposits becomes $100,000, with the $10,000 kept in reserve and $90,000 available to loan.  But when home loans began to go into mass foreclosure and became a depreciated asset, they fell back on the bank at 10-times the loss over what the bank invested in real money.  The banks put $10,000 of their depositors' money at risk, but took a $100,000 loss on their accounting books!


So where are the trillions of dollars?


Let's go back to the Federal Reserve and examine what ledger the Fed had stuck the $9 trillion into.  It was an off-balance sheet account.  Why would the Federal Reserve place $9 trillion in an off-balance sheet account? It's obvious  -- to hide these nameless transactions.


First, let's examine the on-balance sheet transactions at the Federal Reserve Bank which have been unprecedented.  You can view the current balance sheet of the Federal Reserve Bank here, which shows theFed has extended credit or holds $2.284 trillion on its balance sheet as of September 1, 2010. 


That amount represents, for the most part, the non-performing real estate mortgages that dead banks were holding, which the Federal Reserve moved to their ledger (if this isn't cooking the books, what is?).  That move took the bad assets off of the banks' accounting books, but certainly didn't fix their depleted reserves problem. 


Since the Federal Reserve isn't being transparent, we have to guess where the $9 trillion in off-balance sheet accounts went.  The Fed likely provided a couple trillion dollars in electronically created money to US banks in exchange for these lame real estate assets.  But that still only accounts for $2 trillion of the reported $8 trillion in off-balance sheet transactions said to have been disbursed over an 8-month period.


Fortunately, by December of 2009 Bloomberg News had done much of the sleuthing work to track down the missing trillions.  Americans still don't have names of institutions attached to dole outs, but the well-publicized $9 trillion, which grew to over $11 trillion for a time, had been plied down to $8.169 trillion.  These funds were disbursed to the Federal Reserve ($3.955 trillion); Treasury Department ($1.360 trillion); FDIC ($1.566 trillion); $984 billion for the fiscal stimulus; HUD $304 billion). 


How much of these trillions of bailout dollars went to bail out the investment banks (Merrill Lynch, Lehman Brothers, Goldman Sachs, Morgan Stanley, JP Morgan) is also difficult to ascertain. 


So American can learn where, if they want to look, the trillions of dollars were invested, or at least were committed, in a general sense. 


What really rankles the public


To the consternation of most Americans, Bloomberg News reported that the $8.169 trillion in pledges is begins to approach an amount sufficient enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.

No one is advocating free homes for everybody, but what elites in power did was choose in favor of reckless bankers and to vanquish American homeowners, destroy the real estate market and the construction industry and plunge millions of Americans into prolonged unemployment.  Well, at least we can say the balance sheets at the banks have been corrected. 


Had bailout money been directed to pay down part of the principle on homes purchased since 2003 when the housing bubble began, the financial crisis could have been calmed.  It would have cost far less to partially pay off the principle amount on recent home loans than to bailout the banks.  Instead, it became obvious that those in power first opted to protect their banking buddies at the expense of the entire economy. 

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