February 23, 2015
Hong Kong
Hong Kong
In 1494, a 47-year old Franciscan friar
named Luca Pacioli invented something that was revolutionary.
Pacioli was, in fact, a friend and
contemporary of Leonardo da Vinci, and the two collaborated frequently.
So you’re probably guessing that
Pacioli was a co-designer in Leonardo’s famed flying machine, or a new
architectural technique.
On the contrary.
Pacioli’s invention was the
double-entry accounting system; in fact he’s known by bean counters today
as the father of accounting.
This was a major and much needed
innovation at the time.
In the 15th century, Italy was
dominating global trade and commerce.
Yet unlike in the centuries before where
merchants were primarily transporters and traders of exotic goods, 15th century
merchants had essentially become proto-bankers whose primary business was
extending and trading credit.
This was a major change in the way that
business was done, and it absolutely demanded a new way to keep track of it
all.
That’s exactly what Pacioli
invented. And his system of accounting is still being used today, over 500
years later.
This was a seminal moment in business
history—the near simultaneous birth and convergence of credit-based
money, banking, and accounting that would eventually become the global
financial system.
It revolutionized everything.
Back then, just as today, few people
really understood it. And those who did were often clever enough to find
loopholes in the system to hide their fraud. Especially banks.
There are some really stunning (and
sometimes hilarious) examples of early banks who learned how to cook their
books and misstate their capital using Pacioli’s system.
Curiously very little has changed. Banks
still use accounting tricks to hide their true condition.
Bloomberg showcased one such technique
last year, exposing the way that many US banks are rebooking their assets from
“available for sale (AFS)” to the “held-to-maturity
(HTM)” designation.
This is a very subtle move that means
nothing to most people.
But to banks, it’s a highly
effective way of concealing losses they’ve suffered in their investment
portfolios.
Banks ordinarily buy bonds and other
securities with the purpose of generating a return on that money until they
have to, you know, give it back to their depositors.
That’s why they’re called
“available for sale,” because the bank has to sell these assets to
pay their depositors back.
But here’s the problem—many
of these investments have either lost money, or they soon will be. And banks
don’t want to disclose those losses.
So instead, they simply redesignate
assets as HTM.
It’s like saying “I
don’t care that these bonds aren’t worth as much money as when I
bought them because I intend to hold them forever.”
Thing is, this simply isn’t true.
Banks don’t have the luxury of holding some government bond for the next
30-years.
This is money they might have to repay
their customers tomorrow, which makes the entire charade intellectually
dishonest.
That doesn’t stop them.
JP Morgan alone boosted its HTM mortgage
bonds from less than $10 million to nearly $17 billion (1700x higher) in just
one year. This is a huge shift.
Nearly every big bank is doing this, and
is doing it deliberately. This is no accident. And there’s only one
reason to do it—to use accounting minutia to conceal losses.
But the accounting tricks don’t
stop there. And in many cases they’re fueled by the government.
One recent example is how federal
regulators created a new ‘rule’ which allows banks to consciously
reduce the risk-weighting it assigns its assets.
The Federal Financial Institution
Examination Council recently told banks that, “if a particular asset . .
. has features that could place it in more than one risk category, it is
assigned to the category that has the lowest risk weight.”
This gives banks extraordinary latitude
to underreport the risk levels of their investments.
Bankers can now arbitrarily decide that
a risky asset ‘has features’ of a lower risk asset, and thus they
can completely misrepresent their investments.
Bottom line, it’s becoming
extremely difficult to have confidence in western banks’ financial
health.
They employ every trick in the book to
overstate their capital ratios and understate their risk levels.
This, backed by a central bank that is
borderline insolvent and a federal government that is entirely insolvent.
It certainly begs the question—is
it really worth keeping 100% of your savings in this system?
I would respectfully suggest finding a
new home for at least a portion of your savings.
After all, it’s 2015. You no
longer need to bank in the same place as you live and work.
It’s possible to establish an
account offshore—at a safe, stable, well-capitalized bank overseas in a
country with no debt.
You might even find that the bank will
pay you a reasonable interest rate that actually exceeds inflation
(shocking!).
And in many cases you may be able to do
all of this without leaving your living room.
It’s hard to imagine anyone would
be worse off.
PS- If you’ve ever asked the
question ‘WHEN will this bubbly stock market crash?’ then you will
probably enjoy Tim Price’s commentary today, which you can read
here: http://sov.mn/1D3fpjq
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