Is your money safe?

November 21, 2008 12:49 PM

Another secret of the banking world: Large banks fueled growth by stashing their clients' money overseas. They offer businesses and wealthy clients sweep accounts that stash money in the Cayman Islands and get around rules banning interest on checking accounts. They screwed clients and enriched themselves with these sweep accounts. Citigroup got into this game in a big way. Now it's teetering on the edge of collapse. And the vast majority of its deposits -- half a trillion dollars -- are held outside the United States. Trouble is the FDIC doesn't insure overseas deposits.
posted by up in the old hotel (28 comments total)

I consider having to follow the regulations of the U.S. in order to be federally insured to be a feature of the FDIC, not a bug. Damn right they're not insuring overseas accounts created to circumvent the law.
posted by Navelgazer at 12:55 PM on November 21, 2008 [9 favorites]

The Best and the Brightest. Top minds deserving of, earning, astronomical salaries.

And now they all turn out to be Robert s. McNamaras.

And now we, the dumb shit little people, will be told we have to foot the bill to save Citi and its super-rich depositors who went around the law because after all, they were above it and laws are for little people.
posted by orthogonality at 1:14 PM on November 21, 2008 [4 favorites]

The same problem has happened in the UK-controlled tax havens of the Isle of Man and Guernsey. Quite rightly, since these places have been living high on the hog by enabling tax avoidance, the UK Government has said it will not bail out the theoretically independent jurisdictions.
posted by athenian at 1:19 PM on November 21, 2008

Metafilter is starting to make me think there's a banking conspiracy.
posted by cjorgensen at 1:19 PM on November 21, 2008

Am I reading this right, the 700bil bailout part of it going to Citi, will be used by the bank to pay on international accounts? That can't be right can it?
posted by hexxed at 1:26 PM on November 21, 2008

What I don't get is this wealth isn't being destroyed, since a) money isn't wealth and, more importantly, b) money is only a medium of exchange and its value is only lost via price inflation.

IIRC Dillinger's last robbery netted him $20,000. If Roubini is right somebody's is going to end up having taken $2,000,000,000,000 from the system before this is all done and I'd kinda like to know where the heck this money has gone to.

We joked that Casey Serin had a coffee can full of cash buried somewhere after his $2.1M, six-month adventure in federal fraud. One wonders.
posted by troy at 1:31 PM on November 21, 2008 [1 favorite]

These people begin to sound more and more like Argentine economic luminaries with each passing week.

In case you're wondering, no, it's not a compliment... (cf. '01 meltdown, Cavallo, Martinez de Hoz, '80s debt nationalization, differential rate money pumping across borders, and now this too: tax havens deposits' sleight of hand!)

Oy.
posted by Iosephus at 1:41 PM on November 21, 2008

What I don't get is this wealth isn't being destroyed, since a) money isn't wealth and, more importantly, b) money is only a medium of exchange and its value is only lost via price inflation.

See Fractional Reserve Banking. Observe the example whereby deposit of $100 yields is able to yield a total amount deposited of $457.05 across the entire financial system. Now imagine that on the global scale.
posted by prunes at 1:43 PM on November 21, 2008

hexxed:
Am I reading this right, the 700bil bailout part of it going to Citi, will be used by the bank to pay on international accounts? That can't be right can it?

of course it will, and yes its right. who do you think the US govt has borrowed 10 trillion dollars from? its a global economy, get used to it.
posted by mano at 1:54 PM on November 21, 2008

prunee: yeah, I know that M3 has risen from ~$7T in 2001 to $14T+ today.

But AFAICT once banks lend out money that money is "live" in the economy and can only be destroyed by the Fed buying more government securities than it is selling. This is not the economic climate for the gov't to be retiring its debt, so I just wonder where the money is since it is leaving the global bonds, equities, and commodities markets.
posted by troy at 1:56 PM on November 21, 2008

who do you think the US govt has borrowed 10 trillion dollars from?

Actually $4,261,530,336,304.52 of the total $10,655,457,229,922.34 the gov't has issued is the various trust fund debts that are largely owed to FICA payers over the past 25 years.

This chart shows who is holding treasuries:

The major players in billions:

China, Mainland 585.0
Japan 573.2
United Kingdom 338.4
Carib Bnkng Ctrs 185.3
Oil Exporters 182.2
Brazil 141.9
Luxembourg 91.8
Russia 69.7
Hong Kong 60.9
Norway 52.2
Switzerland 49.0

Except for China and Japan, they are all major oil producers or tax havens.
posted by troy at 2:08 PM on November 21, 2008 [1 favorite]

can only be destroyed by the Fed buying more government securities than it is selling

oops, selling more debt than it is buying. I'm confused. Never mind. I need to work now. Good day!
posted by troy at 2:14 PM on November 21, 2008

...

By the time this all comes down... there might not be a "global economy" to speak of.

This house of cards will never be rebuilt again because the levels of trust required to have performed such acts of financial madness will never be given...

Not to the U.S. banking system... not the U.S. government.... not to anyone.

A global economy is okay... just as long as you refrain from smashing it upon the rocks.

If you haven't already, start learning basic skills : sewing, gardening, cooking, home repair, vehicular maintenance and the like.

Become useful. Grow food. Be kind. Listen. Learn.
posted by PROD_TPSL at 2:20 PM on November 21, 2008 [1 favorite]

There's no shortage of valid criticism of the financial industry these days, but reading this post and clicking through the various links is aggravating. The linked articles are mostly unrelated and are not honestly summarized in the text.

We have...

A single graph posted over a year ago, taken out of its context and lacking any description of methodology or definitions used. It has blue and red lines. ('change' in domestic and foreign deposits : How was this effected by dollar's drop in value at that time versus foreign currency? What are the total amounts these changes were taking place to? What percentage of change does a bar going all the way to the top of the graph actually represent?)

A link to a Wikipedia article, itself flagged for lacking citations, which is where this imaginary ban on paying interest to checking accounts came from.

A commentary complaining about brokerages sweeping money into FDIC-insured banking accounts instead of money market funds. Some valid criticisms, but actually almost the opposite of what we are supposed to be fuming about here.

A link to a some of Citibank's offerings for foreign currency investments (complete with risk ratings! No, these are not bank deposits! Risk!). Some of those scary words like "foreign" are to be found. This is...related to...not much. This is evidence that they are "Into this (into what?) in a big way".

A link to today's news about how Citigroup's share price has tanked. This means they are "teetering on the edge of collapse". Moving past the headline, most of the article is about how they appear to have sufficient capital and the insiders are buying more stock.

I'm not claiming these are bad or uninteresting articles taken individually. But they are neither tied together the way we are told they are nor are they talking about the things we are told they are.

SCREWED GAME COLLAPSE
OMG IS YOUR MONEY SAFE??!!!!11?/
posted by Bokononist at 2:45 PM on November 21, 2008 [4 favorites]

Prunes said

See Fractional Reserve Banking. Observe the example whereby deposit of $100 yields is able to yield a total amount deposited of $457.05 across the entire financial system. Now imagine that on the global scale.

That doesn't make sense to me. Can anyone actually buy anything with the $457.05? If we were to take those four hundred dollars and try to scoop them up and buy stuff with them, most of it would vanish because they don't exist. The seeming creation of money seems like ignoring the debts of the banks and only counting their assets.

That is, when bank A has $100 from the central bank, it owes $100. For a total of zero. When A gives Bank B $80, yes, bank B has $80 but owes Bank A $80. For a total of zero.

Money is created, but no value. Not in the banks. It all cancels out. Only at the leaves does actual value get created - when stuff people need is dug up out of the dirt. Imagine just creating value! Out of the dirt! At a global scale! Isn't that crazy?
posted by krilli at 3:05 PM on November 21, 2008

What I mean is that I don't see a problem with fractional reserve banking. I see a problem with the failure of regulation of the system, I see a problem of recklessness.

The subprime craziness isn't a failure of the economic mechanisms of the system - the failure is the capacity of immense transactions within the systems to be based on lies.
posted by krilli at 3:08 PM on November 21, 2008

Further thoughs - I didn't mean to imply that you were talking about the subprime mess, prunes. Just thought of it as an example of a failure of obvious and catastrophic proportions that is more important to fix than removing the fractional reserve system.
posted by krilli at 3:10 PM on November 21, 2008

krilli, that $457-odd is already realized -- made into real money -- by being given out as loans or credit. It represents SUVs, TVs, printing presses, and even groceries. Of course, those bills will one day come due themselves, but that's how it recirculates.
posted by dhartung at 3:35 PM on November 21, 2008

Woopsy!
posted by Devils Rancher at 3:50 PM on November 21, 2008

athenian: The same problem has happened in the UK-controlled tax havens of the Isle of Man and Guernsey. Quite rightly, since these places have been living high on the hog by enabling tax avoidance, the UK Government has said it will not bail out the theoretically independent jurisdictions.

Why not do a bit of research first? The Isle of Man is not a tax haven - it has a thorough and robust governance of financial institutions, and complies with the EU information sharing/witholding tax - amongst several different measures which other jurisdictions (Leichtenstein, Bahamas to a degree, Delaware, etc.) are nowhere near to.
The collapse of KSF(IoM) was purely due to the UK Government freezing the assets in such a heavy-handed manner - it wasn't anything to do with bad governance or management in the IoM or Iceland.
UK investors who had investments with KSF weren't avoiding tax - as their tax information was shared openly with the UK HMRC; they would have had to declare the assets on their tax returns just like any other UK-baed investment. The money was held offshore purely to benefit from the gross roll-up of the interest (i.e. the interest is applied gross of tax) - but when they bring money back into the UK, then tax would become due.

It is ignorant statement like yours - and you are in esteemed company, because Alastair Darling and Barack Obama both naively believe the same thing without any true understanding of what's going on, or what the agreements between the countries are - just serves to complicate the issue.

Thanks for your input though; it's always nice to see comments from people who understand things as clearly as you do.
posted by Chunder at 4:01 PM on November 21, 2008

Chunder: You may wish to reflect on the tone of your post.

It's not relevant to the immediate discussion, but the Isle of Man is a tax haven in the common sense of the word - a small jurisdiction that engages in tax competition and actively advertises itself as a good place to keep money on the basis of low tax rates. It had a recent FT investment section on it, was referred to in a paper on tax havens by a US Senator, and has an 18% income tax rate and, at least in 2006, an income tax cap. Governance is immaterial, I'm sure it's excellent, though others disagree. A single link to a local paper quoting the Manx finance minister is not exactly rock solid independent proof, if I'm honest.
posted by athenian at 4:47 PM on November 21, 2008

I just came in here to reiterate what Bokononist has already said. This post is absolutely terrible, and I flagged it as such, but the truth is, unless you're in the know, it's pretty easy to assume that this post is actually telling you something valuable. It's not. And here's why:

The first link goes to the FDIC to discuss how domestic banks are using foreign deposits to fund growth. That's an inherently good thing for the world's banks, as it diversifies their deposit base, and breaks down capital barriers. The fact that foreign held deposits are not FDIC insured is also a good thing, because the US government should not be held accountable for foreign depositors. The FDIC was designed to create bank stability within the US, and is not a global backstop for everyone. By the way, Citi generates 64% of its revenue from Europe, Asia, the Middle East, and Latin and South America. Here is their 3rd quarter presentation link. That is inherently a good thing, because this started as a US financial crisis, and Citi having a geographically diverse revenue stream helps it weather the storm (theoretically).

The second and third links are to a completely different bank (Sovereign, which is in the process of being purchased by Spanish bank Banco Santander) and a description of sweep accounts. There is nothing illegal or wrong with sweep accounts. They help banks allocate capital to where they can make the best ROI. When you give a bank a deposit, you choose the terms (interest rate). If you don't like it, you go someplace else. It's up to the bank to make best use of your cash. That's their job. That's precisely why they exist in the first place. They're intermediators. This is Banking 101. The simplest example of this are Savings and Loans (S&Ls), primarily established to put local depositors together with local debtors (think: It's a Wonderful Life).

The fourth link is interesting. The question is: are banks required to make the most money for you (the client) or their owner (shareholders). Business 101 says shareholders. Personally I'm on the fence about this issue. But the link by itself (and with the completely irrelevant context surrounding it) is not worthy of the kind of editorializing the the OP has done here.

The fifth link is worthless. Citi is a global bank with a universal model (note: the term universal here has a very specific banking context). That's their model. I'm not sure how you can criticize a bank for reaching out to the world's depositors.

The sixth link is a one-line newsfilter. Yes, their stock is crashing. Yippee. You can goto Yahoo finance and see that for yourself.

Finally, the seventh link again denounces global deposits. You know what's fascinating right now? JPMorgan, Citi, and Capital One (among others) are fighting for a tiny bank in Maryland called Chevy Chase. They're fighting because banks are begging for deposits so they can move away from overnight repos, because overnights cost too much. Their counterparties are asking for more and more collateral and no one trusts each other. Deposits are among the safest and cheapest kinds of funding for banks right now and large banks like JPMorgan and Citi, and former investment banks (Morgan Stanley and Goldman Sachs) would pay an arm and a leg for a domestic brick and mortar right now. So the fact that Citi has a GLOBAL deposit base is inherently a good thing (unless their depositors run). And we (US citizens) do NOT want the FDIC to cover foreign deposits because our system is unbelievably strained as is.

Again, really, really bad post. Misleading at best, egregious soap-box rant and truly deletable at worst.
posted by SeizeTheDay at 5:05 PM on November 21, 2008 [1 favorite]

"Misleading at best, egregious soap-box rant and truly deletable at worst."

And as such, completely in line with most discourse on these or related topics, here, in the media, and even by people supposedly 'in the know.'

The poster deserves no special derision.
posted by sfts2 at 5:18 PM on November 21, 2008 [1 favorite]

This house of cards will never be rebuilt again because the levels of trust required to have performed such acts of financial madness will never be given...

Tell it to the Dutch Tulips.

Trust gets shattered, people get fearful, bubbles burst. Trust is rebuilt slowly, people get greedy, bubbles form. Repeat.
posted by Fuzzy Monster at 6:06 PM on November 21, 2008

I have (somewhat) mentally prepared for Zombie attack, peak oil, avian flu, EMP, or civil war. I hadn't even considered The End of the World as We know it (TEOWAWK) being caused by "Debt Swap Derivatives" and basing the economy of the entire planet on $1,000,000 loans made against $100,000 houses.
posted by Megafly at 6:16 PM on November 21, 2008

This is by far the lamest non story I've seen on Metafilter.
You may as well have "People buy stuff cheaper in Mexico" scandal. Countries have different tax rates shocker!

If you want a real story ask your pension fund why they let stocks they own be used for securities lending/short selling? Or ask any government how they plan to pay for public sector pensions? Or when all the securitised credit card debt (LOL thought we forgetz youz!) fun will kick off? Or non-doms in London?
posted by Damienmce at 6:46 PM on November 21, 2008

Yeah, sweep accounts have crap interest rates even with a lot of money in them, but then so does my savings account at my credit union (which is otherwise so much better than dealing with a bank). In fact, my sweep account tied to my brokerage account and my savings account pay just about the same amount. That's why I don't keep a lot of money in either. I never really thought anyone was ripping me off, though. It's easy enough to put the most money where it will do better.
posted by krinklyfig at 7:13 PM on November 21, 2008

I hadn't even considered The End of the World as We know it (TEOWAWK) being caused by "Debt Swap Derivatives" and basing the economy of the entire planet on $1,000,000 loans made against $100,000 houses.

I was living in the SF Bay Area from 2000-2005, and I could see this coming a long way away. My roommate was a real estate agent and a mortgage broker, and I lived in an area with nice but average houses selling for $500K+ by 2003, the kind of house that would cost maybe a third anywhere else, at least until the whole market got really heated up, and in those five years a house in my hometown doubled in price. But there were people living in those $500K houses making, say, $70K. And it got worse. Soon, I knew people who owned houses who didn't have a job or any income to speak of. People who should have known better were trying to convince me to buy, and I was barely making ends meet for years. They said, don't worry, you can just flip it before it resets, and do that a few times and build equity, or even make a profit, because prices just kept going up, up, up, so ride it like everyone else. A profit out of nowhere, playing with half-million dollar properties, people with no money in the bank, and somehow the banks are lending them millions of dollars with no questions asked. I'm no economist, but I know a Ponzi scheme when I see it, and from where I sat at the time, we looked pretty fucked back in 2004. I'm only surprised it took this long to play out. It's definitely been educational.
posted by krinklyfig at 7:30 PM on November 21, 2008 [2 favorites]