Answering some requests

I get emails asking "How did banks get us in this mess and why are they failing?"

Key to understanding the so called "crisis" and why all of the banks are insolvent is leverage.... It's very simple math....It used to be that banks were by law held to a 12 to 1 leverage rate....in other words they could loan out 12 dollars for every dollar they held as reserve...This is called "fractional reserve banking." This was bad enough as each bank could loan $12 for every dollar they got across the counter as a deposit...if YOU deposited a $1000 paycheck...THEY could immediately (even before you got out the door) loan out $12000...if they run short they borrowed from the FED at a less than 1% loan...

Henry Paulson, when he was still CEO of Goldman in 2004, successfully lobbied the SEC to change the rules on capital ratios. Leverage exploded from a previous limit of 12:1 to beyond 40:1.....THEN one must consider that a substantial portion of the assets were synthetics (a synthetic asset is artificially created by using other assets such as bundling defaulted loans and claiming them as REAL money thereby allowing the loan creation of 40:1 on money that had already been loaned at 40:1). These were often called Collateralized debt obligations (CDOs).

In a world of 40:1,(80 or 100:1 in some cases) assets don't have much downside. Consider what this means in a simple example.

Goldman Sachs could have $1 trillion in assets anchored by just $25 billion in capital. Assume Goldman's asset base loses 30% in value as happened in 2008, creating a paper loss of $300 billion, which if they were forced to mark honestly, would leave them insolvent to the tune of approximately $275 billion....the banks aren't just a little bit insolvent, instead their insolvency depth is a multiple (in this case 6x) of their original capital....or in other words....If your collective assets drop in value from 100 to 97, you're done. Toast. Game over...unless of course you get bailed out by We The People!

Now remember 'insolvent by multiples' as you consider the $144 billion paid out in bonuses in 2010 by a collective of bailed-out, bankrupt banks....Now consider that none of that matters anymore, not since the FASB (Financial Accounting Standards Board) rule change. Now it's a game of super-galactic Texas holdem as each and every bank survives by a single hair of their mismarked assets, all with the blessing of Congress, CNBC, accounting regulators, Sheila Bair, Tim Geithner, Obama and the Ber-nank.....last year we saw over 150 of those single hairs break and the the banks were taken over by FICA as we the people take it in the rear again...

This was all set up by the repeal of Glass Steagall act on November 12, 1999...prior to that such crazy accounting was illegal....NOW...what is even worse... WALL STREET BROKERS can operate in “deregulated” financial markets in which distinctions between loans, securities,stocks, bank deposits, insurance funds and pension funds are not drawn AT ALL.....All of these funds are operating on a between 40:1 to 150:1 leveraged accounting sheet....and we haven't even talked about derivatives which can be leveraged more than 10,000 to 1! its a complete house of cards....