Thursday, July 18, 2013


The Chairman went before the Senate today with a reprise of his testimony of yesterday in which he said nothing.  Lizzy was there, however, having beamed down from Planet Liz or wherever she stores her brain these days to pick up on her one-trick-pony act she started on CNBC this week.  "Mr. Chairman, she asked, "do yo agree with Secretary Lew (that's Jacob/Jack if you had forgotten) that the threat of TBTF will have been ended by the end of the year?"  "Well," says Ben, "perhaps at the end of 2014," which is essentially like saying never.  Needless to say Lizzy didn't get it and was joyous at the belief that she had won.

I'm going to try this out one more time and I promise that I will never do this again.

Think about this:  Citibank, which operates in about 80 countries and has major subsidiaries in a dozen more, announces one day that yes, they are indeed in trouble, and following the rules laid out in Dodd/Frank  (ed. comment:  as of yet we have no idea what those rules are)  they are to be intervened by the FDIC but their "living will" will make their dissolution a piece of cake.  In the meantime, just carry on as though nothing has happened.

Now during the course of it's daily business, Citibank will probably process hundreds of billions of dollars of interbank payments for it's correspondents around the world through a network known as CHIPS which stands for Clearing House Interbank Payment System the "Clearinghouse" being banks based in New York City who actually own the system.  Payments are done on a "net" basis; if the bank of Rawalpindi asks Citi to transfer $30 million to 1st. of Kansas City and 1st. of Montana asks Citi to transfer $50 million to Rawalpindi, Citi "nets" the transactions and credits Rawalpindi with $20 million;  if Rawalpindi expects more to come in that go out, otherwise Citi is the net receipient.

Now think for a moment: the Rawapindi instructions are sent to Citi while everyone is asleep in New York (I know, "The Citi never sleeps;" that's crap, they do).  Citi wakes up and tells the world they are about to go down the gurgle tube but not to worry, Lizzy is on the case and so are her appointees at the FDIC.  Do you think for one moment that Rawapindi is going to continue to allow Citi to have their $30 million or any part thereof?  No way in hell.  They will begin what is know in the trade as a CHIPS unwind which is the closest thing to WW III that we will ever see, because once they do it, everybody does it.  It is musical chairs and when the music stops...  It almost happened with Italy in 1974, with Brazil in 1983, in 1997 and certainly in 2008.  And once it starts, it cannot be stopped EXCEPT by the Secretary of the Treasury and the Head of the Federal Reserve standing up on their hind legs and saying, "YOU'RE COVERED."  The end of Too Big To Fail?  Only in the minds of those who know nothing about this business and refuse to learn.  In the above scenario to speak of "adequate capital to survive the crisis"  is to speak of capital as being at 100%.  I've been there; it's scary.  This has been really a thumb-nail sketch, but read up on CHIPS and the payment systems...late at night is the best time.  It's scarier than The Best of Stephen King.

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