When Banks Play Fast and Loose With Your Savings

Written by: James Cordelaine

Our traditional picture of a bank is a starchy, all-business institution where the loan officer says “no” to our request for a company startup loan…unless we offer substantial collateral and proof of two consecutive years of profitable performance. Of course if we were already that successful, we wouldn’t need the startup loan.

Still, we console ourselves, such a hardline response is really a good thing. After all, that loan officer is only being responsible with depositors’ money, isn’t he? But what if it turns out banks weren’t all that starchy? Suppose they’d actually been playing fast and loose with our conscientiously saved cash the whole time?

That’s exactly what some banks have been doing – European banks, to be precise. Now they’re requesting government bailouts to help them survive the mess of their own making. According to Zero Hedge, Italian banks have been swamped with three hundred and sixty billion euros’ worth of bad loans. And Italian Prime Minister Matteo Renzi has continually approached EU regulators for a “tax-payer funded rescue” to no avail. German political leaders have objected strenuously to his requests.

Refusing to be put off, Renzi shrewdly exposed the Germans’ own dirty financial secrets. At a July 6 news conference he pointed out, “If this non-performing loan problem is worth one, the question of derivatives at other banks, at big banks, is worth one hundred. This is the ratio: one to one hundred….”

By “other, big” banks, he means Germany’s own Deutsche Bank. As Zero Hedge also points out, the giant financial institution holds tens of trillions of euros in derivatives on its books.

Derivatives have received a great deal of attention from the financial press in recent years. Per Investopedia, “A derivative is a security with a price that is dependent upon or derived from one or more underlying assets.”  Because they’re highly leveraged, derivatives are considered very risky. In his 2002 letter to Berkshire Hathaway shareholders, Warren Buffett characterized them as “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

In his comments to Germany’s welt am Sonntag, Deutsche Bank chief economist David Folkerts-Landau appeared to take the Italian prime minister’s bait when he called for a multi-billion-dollar bailout for European banks in general.  In the process Folkerts-Landau did his own shrewd finger pointing, likening the bailout the European banks now want to the $475 billion TARP rescue the U.S. extended our own banks almost a decade ago.

Although his observation about the U.S. bank bailout comes off like sour grapes, the Deutsche Bank economist makes a valid point. Welcome to the twenty-first century! Starchy, prudent banks barely exist anymore. So many now are just playing perilous games with our cash, and casually ponying up government fines as though they’re no more than cost of doing business—in a way they don’t intend to change. But by speculating with derivatives, bank traders and executives might as well be using our cash for a racetrack holiday.

It’s a distinction with serious ramifications, and immediate relevance, as investors are still rushing to precious metals to hedge against anxious post-Brexit markets.  When you think about what a derivative really is, doesn’t it make sense for you to hold the “underlying asset” as your actual investment—rather than one that’s derived from it? Aren’t you better off holding actual physical gold than the “paper gold” offered by gold options or a gold futures contract?

Instead of relying on a paper promise, and hoping and praying for the right price on the right expiration date, you can sleep nights knowing you’re already sitting on true value: an investment that shows us what “money in the bank” really used to mean.

DB Derivatives