Banking, Explained

From a forwarded email in my Inbox:

Benefits of Banks

The following piece was published in Punch Magazine on 3rd April 1957

Q: What are banks for?
A: To make money.

Q: For the customers?
A: For the banks.

Q: Why doesn't bank advertising mention this?
A: It would not be in good taste. But it is mentioned by implication in references to reserves of £249,000,000,000 or thereabouts. That is the money they have made.

Q: Out of the customers?
A: I suppose so.

Q: They also mention Assets of £500,000,000,000 or thereabouts. Have they made that too?
A: Not exactly. That is the money they use to make money.

Q: I see. And they keep it in a safe somewhere?
A: Not at all. They lend it to customers.

Q: Then they haven't got it?
A: No.

Q: Then how is it Assets?
A: They maintain that it would be if they got it back.

Q: But they must have some money in a safe somewhere?
A: Yes, usually £500,000,000,000 or thereabouts. This is called Liabilities.

Q: But if they've got it, how can they be liable for it?
A: Because it isn't theirs.

Q: Then why do they have it?
A: It has been lent to them by customers.

Q: You mean customers lend banks money?
A: In effect. They put money into their accounts, so it is really lent to the banks.

Q: And what do the banks do with it?
A: Lend it to other customers.

Q: But you said that money they lent to other people was Assets?
A: Yes.

Q: Then Assets and Liabilities must be the same thing?
A: You can't really say that.

Q: But you've just said it! If I put £100 into my account the bank is liable to have to pay it back, so it's Liabilities. But they go and lend it to someone else and he is liable to have to pay it back, so it's Assets. It's the same £100 isn't it?
A: Yes, but....

Q: Then it cancels out. It means, doesn't it, that banks haven't really any money at all?
A: Theoretically......

Q: Never mind theoretically! And if they haven't any money, where do they get their Reserves of £249,000,000,000 or thereabouts??
A: I told you. That is the money they have made.

Q: How?
A: Well, when they lend your £100 to someone they charge him interest.

Q: How much?
A: It depends on the Bank Rate. Say five and a-half percent. That's their profit.

Q: Why isn't it my profit? Isn't it my money?
A: It's the theory of banking practice that.........

Q: When I lend them my £100 why don't I charge them interest?
A: You do.

Q: You don't say. How much?
A: It depends on the Bank Rate. Say a half percent.

Q: Grasping of me, rather?
A: But that's only if you're not going to draw the money out again.

Q: But of course I'm going to draw the money out again! If I hadn't wanted to draw it out again I could have buried it in the garden!
A: They wouldn't like you to draw it out again.

Q: Why not? If I keep it there you say it's a Liability. Wouldn't they be glad if I reduced their Liabilities by removing it?
A: No. Because if you remove it they can't lend it to anyone else.

Q: But if I wanted to remove it they'd have to let me?
A: Certainly.

Q: But suppose they've already lent it to another customer?
A: Then they'll let you have some other customers money.

Q: But suppose he wants his too....and they've already let me have it?
A: You're being purposely obtuse.

Q: I think I'm being acute. What if everyone wanted their money all at once?
A: It's the theory of banking practice that they never would.

Q: So what banks bank on, is not having to meet their commitments?
A. YOU GOT IT!

Now you know why Bank CEO’s are paid multi-million dollar salaries and bonusesand you pay so much in fees.

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Royal Bank Of Scotland Still In A Wee Bind

Back in November, I had a good time publicly mocking the Royal Bank of Scotland for postponing their inevitable collapse via a 20:1 reverse stock split.

True to form, they continue their slow, stately death spiral, hitting a new 52-week low today at $11.93. That would have been 59-cents pre-split. So much for the ancient adage that "if it's nawt Scottish, it's crap."

**The content contained in this blog represents the opinions of Mr. Distad. This commentary may contain forward looking statements and definetely contains sarcasm and rude sentiments. This commentary in no way constitutes a solicitation of business or investment advice. If you're looking for stock picks from me, look somewhere else. Really, what were you thinking? If you came here because you were trolling Google looking for someone to help you get rich in only twenty minutes a month, you need to seriously re-evaluate your worldview. This blog is intended solely for the entertainment of the reader, and the author, and not neccessarily in that order.

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Royal Bank Of Scotland Postpones Inevitable

UK's Royal Bank of Scotland has been tempest-tossed as one of the non-US banks most exposed to the gyrations in the US mortgage market. So much so that their stock took an absolute drubbing, falling below US$1 at one point.

That is, until the geniuses at RBS undertook a 20:1 reverse-stock split. For readers who don't know, a reverse split reduces the total float of common shares while maintaining the same total market cap, mashing the stock price of 20 shares into the price of one super-share. Thus a 94-cent stock became an $18.85 stock.

There's a specific financial term for this sort of hocus pocus: bullshit. For a start, there's zero value created for existing investors. If you owned 10,000 shares when they were worth a 94-cents each, you promptly own 500 shares worth $18.85. Six of one half a dozen of the other, since the value of your shares are valued at $9425 either way. Hooray.

Of course, if you jumped in after the split and bought 10,000 shares at $18, God help you. Obviously, none of the problems vexing RBS have simply gone away. The market concurs, since RBS has continued to slide downwards since the split, reaching yet another 52-week low of $14.76 today. You don't have to be George Soros to know that pre-split that would have been 73.8-cents a share. Woof.

**The content contained in this blog represents the opinions of Mr. Distad. This commentary may contain forward looking statements and definetely contains sarcasm and rude sentiments. This commentary in no way constitutes a solicitation of business or investment advice. If you're looking for stock picks from me, look somewhere else. Really, what were you thinking? If you came here because you were trolling Google looking for someone to help you get rich in only twenty minutes a month, you need to seriously re-evaluate your worldview. This blog is intended solely for the entertainment of the reader, and the author, and not neccessarily in that order.

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Financial Post really wants Canadian banks to go shopping

Just got this story sent to me in my email:

National Post: Fed trolls Canada to rescue U.S. banks

In a desperate bid to help U.S. banks recapitalize, Washington is reaching out to Canadian financial institutions to gauge their willingness to participate in rescue operations.
...
The communications have included phone calls from Fed officials pitching potential sales of assets of U.S. financial companies and at least one intensive discussion of a major rescue operation, according to people familiar with the contacts.
"I don't think Canadian banks want to take a lot of balance sheet risk but I don't think they are going to have to," the [UNNAMED] source said, adding that while the target banks have manysubprime mortgages, the Federal Reserve will backstop these high-risk liabilities. "We could end up in a funny situation two years from now saying this was a once in a generational opportunity for Canadian banks."

While it's been widely reported that the Fed is exhorting foreign banks to check under the sofa cushions for anything they can spare, reading this I see a little conjecture, and a whole lot of effort to drum up a Canadian angle to the story. Call it the financial version of "you provide the pictures and I'll provide the war."

Given the generally provincial and introspective attitude of Canadian banks, I would be deeply surprised if any of them went all-in on distressed US finance assets. A Calgary-born friend who works on Wall Steet is fond of pointing out that Canadian bankers with big balls, bigger ambition and a huge appetite for risk end up in New York, London or Honk Kong. The ones who stay home, well, you could call them cautious, although he uses a different word that starts with "P."

This may indeed be a once-in-a-bubble fire sale. Certainly some big global players are taking advantage. Do Canadian banks have the sack to play too? I have my doubts.

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IOU Central Encounters Regulatory Hiccups

Microlending is not generally my beat, but this email from one of my regular correspodents caught my attention.

Check it out:
https://www.ioucentral.ca/iou_status
They aren't facilitating new loans at the moment - right after an article was published in the Globe & Mail reported that one woman had averaged a 14% return with only a 0.05% default rate. A conspiracy theorist would have fun with this one!

More information here, here, and here, if you're interested in the back story.

As I told my correspondent, I think that conspiracy theories are a tool of underachievers with an overdeveloped sense of entitlement to rationalize their own failures according to a complex web of the ways that "The Man" is keeping them down.

This is a case of a company brushing up against a regulatory structure that they weren't fully aware of. It happens all the time. A few years ago, HBC used to offer "balance insurance" on new account signups as well as existing accounts for their credit card: promising payment of your oustanding balance if you were unemployed, injured or dead. As an associate, you got a $5 "commission" for every cardholder you got to agree to check and initial the little box on the credit app. I think it was something like a two dollar a month premium, but it adds up.

This went on for years, until various provincial governments, including Alberta and Quebec caught wind of it, and landed on them like a sack of hammers. If you're selling "insurance" the people selling it need to be licenced and registered, which HBC retail associates most certainly weren't.

IOU Central is an interesting concept, and I don't think they're loansharking, but they certainly should have paid for more due dillegence on Canada's banking laws...

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Bank Cancels People's Credit Cards: Hilarity Ensues

Yahoo!: Internet bank to cancel thousands of credit cards

LONDON (AFP) - Internet bank Egg has cancelled the credit cards of around 160,000 customers who have a "higher than acceptable risk profile".
Egg, which was bought by Citigroup last year, denied the move was linked to the global credit crunch and has faced an angry backlash from some of those whose cards will stop working in 35 days.

The BBC news then goes on to rustle up an outraged cardholder who allegedly has zero debt, no matter how much of an outlier from the mean they might be.

As the saying goes "the plural of annecdote is not data." I seriously doubt that the majority of cardholders whose credit has been yanked had immaculate credit scores, nor "zero debt." In fact, it's tempting to overlook the obvious motivation that Egg is reducing it's exposure to default risk and briefly fantasize that they're acting altruistically for their client's own good. Wouldn't that be lovely?

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