(Dr. Joseph P. Farrell) Yesterday I began this two part blog by noting an important article that appeared in Bloomberg Business Weekly, authored by Vernon Silver and Elissa Martinuzzi, concerning how Deutsche Bank made billions disappear from its books. At the end of that blog, I noted the banker deaths that mysteriously surrounded the Deutsche Bank transactions with Michele Faissola and the Italian Banca dei Paschi di Sienna, a bank in continuous operation since the Renaissance. I also noted Bloomberg's "take" that this transaction was a microcosm of Deutsche Bank's other operations. Finally, I noted that the banker deaths were not confined to associations with Deutsche Bank, but that they engulfed other prime banks and even some insurance institutions in the Western financial system, among them J.P. Morgan Chase. So to refresh our memory, we have the following elements:
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by Dr. Joseph P. Farrell, January 29th, 2017
(1) Derivatives trade, which comprise in part mortgage-based securities, that are tied to "triggers" such as interest rates;
(2) Deutsche Bank's role in helping rig the LIBOR (London Inter-Bank Offered Rate), one such "trigger";
(3) the global phenomenon of banker deaths, which I now hypothesize is an indicator that Deutsche Bank's practices are, indeed, not confined to that bank alone but part of a systemic "operating procedure" for purposes yet to be speculated about; and,
(4) the details of the Deutsche Bank-Banca dei Paschi di Sienna transaction, currently being investigated and adjudicated in Italy.
Let us refresh our memory on the details of that last point, for they bear directly on today's high octane speculation, which I have titled "I PROMIS you it will Float":
That’s typically a red flag to auditors and regulators, and it took almost a month for Deutsche to alter the deal so it contained a small amount of actual risk. The bankers did this by mixing in two interest rate triggers—that is, prices to be fed into a formula that would determine how much money the participants in the trade had to pay or receive from each other. But that created a slight possibility that Paschi could win both sides of the bet. To mitigate this potential Deutsche loss—as much as €500 million—Deutsche added a third trigger. Underlying the now complex flowcharts of rates, payments, and triggering events was the asset on which the transactions were to be based: about €2 billion in Italian government bonds.
Further illustrating the incestuousness of the deal, Paschi would need to buy the bonds and hand them over to Deutsche as collateral. Deutsche, for the sake of its own accounting, would need to sell the bonds to come up with cash that it then would give right back to Paschi to pay off the Santorini loss. And Paschi would buy the bonds in the first place from a third bank that had bought them from Deutsche.
Now notice that this is simply a circular "triangle" designed to facilitate the accounting practice that would allow the whole transaction to be kept off the balance sheets:
Deutsche also benefited from the way it accounted internally for its side of the deal. That complex shuttling of Italian bonds? The bank decided that all of the back-and-forth maneuvers canceled themselves out and did not need to appear on its balance sheet. Deutsche began to apply the practice to transactions around the world, totaling more than $10 billion that never showed up on its books and making the bank look smaller and less risky than it really was.
But what is really going on? I suspect it has a great deal to do with a method of generating money and keeping that money off the books, a method known as the "float." (There are actually two kinds of floats here, but we're only considering one of them in this exercise of high octane speculation). Investopedia defines the first type of float this way:
Money in the banking system that is briefly counted twice due to delays in processing checks. Float is created when a bank credits a customer’s account as soon as a check is deposited. However, it takes some time for the check to be received from the payer’s bank. Until the check clears from the payer’s bank, the amount of the check appears in the accounts of both the recipient’s and payer’s banks.(See Investopedia: What does "float" mean?)
Notice that money deposited in an account appears on the bank's books as a liability of the bank; however, prior to actual clearing of the transaction, both at the paying and receiving end, that money is in a kind of accounting limbo, during which time it can actually function as a "hidden" reserve, allowing the bank to use it for very quick transactions on which it will earn more money, before the transaction is cleared.
Did You Read: WHAT'S UP WITH THAT EMERGENCY FED MEETING?
