Fractional-Reserve Banking Is Pure Fraud, Part II by Jeff Nielson, Sprott Money

Part I of this series brought to attention several facts about our banking “industry.” Notably, that even the most accepted activities of this financial crime syndicate are inherently illegal and fraudulent. When the Big Banks simply lend out “their” deposits (i.e., our money), conduct that would be illegal for any other entity, it is the crime of conversion.

Banks are given the privilege of immunity from this crime, as it is deemed to be in “the public interest” that they be allowed to engage in such lending. But the banks have gone far beyond this initial premise of illegality. They have also been granted the privilege to practice what they euphemistically call fractional-reserve banking, or “lending” what does not even exist – naked fraud.

This, too, is somehow deemed to be in “the public interest,” despite the fact that, as explained/demonstrated in Part I, fractional-reserve fraud automatically transforms the monetary system of that jurisdiction into a leveraged Ponzi scheme. The banks have been granted the privilege to destroy our monetary system, slowly, and for their own profit.

However, even this extraordinary privilege (i.e., licence to commit fraud) has not been enough for the Big Bank crime syndicate, which regular readers know as “the One Bank.” It chose to destroy our system relatively quickly, and it did so by first bribing or deceiving its political stooges in government to gut all banking regulation. Then, relieved of any legal requirements to operate on a prudent (or even sane) basis, it embarked upon a spree of the most reckless and fraudulent gambling that the world has ever seen.

The result of this gambling, fraud, and insanity was the Crash of ’08, when the One Bank’s gambling/fraud imploded. It then bullied and threatened the corrupt governments of the West into endorsing what was (euphemistically) called “too big to fail.” This is a special status, reserved exclusively for the Big Bank tentacles of the One Bank, which allows those tentacles to engage in permanent, institutionalized extortion against our governments: “pay off all of our bad debts (forever), or else.”

“Too big to fail” is the antithesis of anything and everything that falls under the doctrine of capitalism. In what we call “capitalism,” there can never be an entity that is too big to fail. Insolvent entities are supposed to be put out of their misery – and as quickly as possible. In real capitalism, there can only be too big to exist.

It is with this context in mind that our corrupt governments promised us “never again.” The Big Banks would never again be allowed to engage in such reckless gambling, naked fraud, and institutionalized extortion, they told us, because there would be “tough, new rules” to rein in the reckless criminality of the One Bank.

From the U.S. government, we got the “Dodd/Frank” law: page after page of meaningless window-dressing. The one new regulation that would have actually impinged upon this crime syndicate (slightly), “position limits” in commodity markets, was never put into place (in the form in which it was written).

Meanwhile, many bankers themselves also promised “new regulations” because (incredibly) the banking crime syndicate is allowed to self-regulate most facets of its criminal operations. These regulations were to be specifically aimed at reducing the insane leverage (i.e., fraud-ratio) practiced by these Big Banks, which was the direct cause of the implosion of our financial system.

As noted in Part I, in the original model of fractional-reserve fraud, the fraud ratio was fixed at 10:1. This alone enabled these banks to lend/spend ten times more (of other people’s money) than they even possessed. It allowed these banks to conjure 90% of our “money” out of thin air and into their own vaults. But those days are long behind us.

When the Big Banks, and primarily the Big Banks of Wall Street, imploded our financial system with their reckless gambling, their “leverage ratio” (fraud ratio) averaged over 30:1 . Only 3% of our money supply was created by the central banks, and 97% of this funny money was conjured out of thin air by this crime syndicate.

In the Crash of ’08, the mere $100s of billions in extortion payments that the Big Banks called their “bail outs” were only the tip of the iceberg. The actual cost of the bail outs of ’08 was in the $10s of TRILLIONS once all of the hidden “tax breaks” and “loss guarantees” for the Wall Street banks were fully priced. This was what was supposed to happen “never again.”

The previous rules that were in place were known as the “Basel II” regulations. These banking protocols are named after the city in Switzerland in which they were drafted. While New York and London are the centres for the One Bank’s empire of crime, it is Switzerland that is its home.

Under Basel II , the “capital cushion” of the Big Banks (and thus their leverage) was defined in two ways. Under one definition of capital, the Big Banks were required to maintain a microscopic 2% capital cushion, meaning a fraud ratio of 50:1. Under the slightly more rigorous definition of capital, the Big Banks were required to maintain a tiny 4% capital cushion, a fraud ratio of a mere 25:1.

With “Basel III,” the bankers promised us they would reduce their fraud ratio back to acceptable levels, but still nowhere near the original (and still insane) 10:1 fraud ratio upon which fractional-reserve “banking” is based. In the new Basel III rules, this is what we are supposed to believe. According to the broadest definition of leverage, Big Bank capital cushion is supposedly being raised from a microscopic 2% level to a still absurd 4.5% ratio, going from 50:1 leverage to leverage still in excess of 20:1.

Under the more stringent definition, the Big Bank capital cushion is supposedly being raised from 4% to 6%. In other words, the fraud ratio is supposedly being reduced from 25:1 to a ratio still in excess of 16:1. The problem is that this is not what these banksters actually did.

How did they lie to us? What did they actually do?

They lied to us through more of their “definitions.” In this case, it is one particular definition, and arguably the most-important definition of all: “Calculation of Derivative Liability Amounts.”

  1. 19. Derivative liabilities are calculated first based on the replacement cost for derivative contracts (obtained by marking to market) where the contract has a negative value. When an eligible bilateral netting contract is in place that meets the conditions as specified in paragraphs 8 and 9 of the annex of Basel III leverage ratio framework and disclosure requirements, 5 the replacement cost for the set of derivative exposures covered by the contract will be the net replacement cost. [emphasis mine]

First, some translation of the text above. Banks are required to hold a capital cushion to (supposedly) cover any potential liabilities. But this doesn’t mean their total potential liabilities. Rather, they are only required to hold sufficient assets to cover some of their potential liabilities (a “fractional reserve”).

But even this extreme latitude was not sufficient for this crime syndicate, so it “re-defined” its

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