If you are new to this blog, you are invited to read first “The Largest Heist in History” which was accepted as evidence and published by the British Parliament, House of Commons, Treasury Committee.

"It is typically characterised by strong, compelling, logic. I loosely use the term 'pyramid selling' to describe the activities of the City but you explain in crystal clear terms why this is so." commented Dr Vincent Cable MP to the author.

This blog demonstrates that:

- the financial system was turned into a pyramid scheme in a technical, legal sense (not just proverbial);

- the current crisis was easily predictable (without any benefit of hindsight) by any competent financier, i.e. with rudimentary knowledge of mathematics, hence avoidable.

It is up to readers to draw their own conclusions. Whether this crisis is a result of a conspiracy to defraud taxpayers, or a massive negligence, or it is just a misfortune, or maybe a Swedish count, Axel Oxenstierna, was right when he said to his son in the 17th century: "Do you not know, my son, with how little wisdom the world is governed?".

Saturday, 30 January 2010

Davos 2010: a "cunning" plan how we will all pay for "the largest heist in history"



The current financial crisis was caused by the banks engineering and operating a massive, global pyramid scheme. As a results the banks debt and potential liabilities became too large for underlying cash reserves. Or, more technically, the Money Multiplier became too high. Effectively, banks lost liquidity.

To save such pyramid from collapse governments injected trillions of dollars to improve banks liquidity, or, more technically, to reduce the Money Multiplier. This was done in two ways: by injecting cash (and giving governments' guarantees which are as good as cash) and taking banks’ equity for that and by quantitative easing, i.e. generating additional liquidity by printing money. The former risks putting governments' debt onto unsustainable level, whilst the latter carries high risk of backfiring with hyperinflation. Despite the massive amounts injected, testing the public financing and markets to the limits, those actions did not bring about the desired results. The banks' liquidity remains dire. This is a testimony to a massive scale of the pyramid (i.e. a level of Money Multiplier) engineered and operated by the financial industry.

Nearly a year ago, Professor Nouriel Roubini suggested converting banks debt and liabilities to equity. This idea reappeared at the meeting in Davos. Banks will be allowed to issue their own shares and settle their debt with them. Whilst it may not apply to individual depositors who have government guarantees (although this is also far from being certain as it is not known how the system may be developed in the future), in practice it would mean that a depositor or a creditor may receive in return a bunch of bank's shares having demanded a payment in cash. The practicality is that such solution will not cost governments directly (i.e. it will not be reflected as a part of governments’ debt) and will not carry a risk of high inflation as no new cash will be printed.

So what are the pitfalls? Issuing new shares will dilute their value. As the size of the pyramid is massive, we really talk about massive dilution. Therefore the depositors and creditors will be paid with practically worthless shares and, on top of that, existing shareholders will lose the value of their holding. It is likely to be very similar to Zimbabwe-style hyperinflation but not of cash currency but of share value of a bank being diluted (i.e. hyperdevaluation of the share value). It is not really a concern for short-term speculative investors as they always find a way to make money on the margins of fluctuations. Apart from affecting depositors and creditors of a bank, it will affect long-term investors, cumulatively large-scale through pension funds, endowments and unit trust investments. They are mainly middle class, responsible people who took care about their financial planning, their children education and pension. They have been the pillars of the free market economy for a century. They cannot do much to escape a beating if "banks' debt to equity plan" goes ahead: their funds' shareholding of banks is substantial so even if they try to escape by selling it out, they will be punished. This appears to be another way of making taxpayers pay for the largest heist in history. This time round, rather than through governments' finances or inflation, the toxic waste will be unloaded on depositors and creditors with additional diluted worthless shares. Clever, eh?

This kind of shareholding dilution strategy has been associated with companies regarded as rather dodgy, trading on OTC or AIM in London. (No doubt other countries have their equivalents.) Some City lawyers joke that "a criminal record" is a mandatory entry on their Board Directors' CV's. Now this kind of "unorthodox" financial practices looks destined for mainstream markets with governments' blessing. Similarly to governments' stimuli and quantitative easing it will make ordinary folk who worked, saved and paid for his/her pension poorer.

4 comments:

  1. Great article. I particularly liked the last paragraph and comparisons with Albania might certainly help the wider public realise the true extent of the calumny being visited upon them by the bankstas.

    ReplyDelete
  2. Thanks readeian.

    To convince that my comparison to Albanian crisis is not just a cheap rhetoric, below is an excerpt from IMF report on the Albanian crisis:

    "Few studies have been done on the macroeconomic effect of pyramid schemes on the scale of those in Albania, which, fortunately, are extremely rare. The closest analogy to such schemes is the asset bubble, whose economic impact is due to changes in perceived wealth. As a bubble expands, people believe themselves to be better off than they actually are, and their demand for goods and money increases, leading to a deterioration in a country's external current account as well as increased output or accelerated inflation or both. If the bubble attracts foreign investors, capital inflows might be sufficient to fund the current account deficit. After the bubble bursts, perceived wealth falls dramatically. Demand for goods and money, as well as output and inflation rates, can be expected to decrease, while the current account balance is likely to improve."

    http://www.imf.org/external/pubs/ft/fandd/2000/03/jarvis.htm

    I hope other will reflect too.

    ReplyDelete
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