Yesterday, I stated that I would speculate on the reasons for the US banking liquidity crisis. Let’s begin by dismissing the ridiculous mainstream media articles that claim no problem exists because the amount of provided liquidity dropped from more than $100 billion on Tuesday to “only” an offering of $75 billion at the end of last week. Sometimes, I wonder if there are any requirements to become a financial journalist for the mass media today other than answering “repeat and write what I am told” when asked what is one’s greatest strength as a journalist, due to the complete absence of any investigative work in mainstream financial journalism today. In fact, the last offering of $75 billion of liquidity, through a market called overnight repurchase (repo) agreements, compelled a mass media journalist to state, quite foolishly and deceitfully, that the curtailing of the offerings last week from over $100 billion to $75 billion was evidence of no banking liquidity crisis. To begin, the $75 billion offering of overnight repos was oversubscribed and insufficient to meet the demand of $92 billion from US banks, a convenient fact omitted by the journalist that proffered the conclusion that the drop off in offerings could be interpreted that everything was copacetic. In addition, the very act of the US Central Bank offering emergency liquidity to the US banking system means a banking liquidity crisis exists, and that there is something seriously and operationally deficient within the US banking system. Finally, US Central Bank Jerome Powell stated they will sell at least $75 billion worth of overnight repos every business day until October 30, with some days auctioning as much as $60 billion worth of 14-day repos, if not longer, indicative of a serious banking liquidity crisis problem lurking underneath the surface. From Tuesday to Friday of last week, the US Central Bank pumped $278 billion of liquidity into the US banking system and this week, with a minimum of $75 billion provided daily, this means that a minimum of $653 billion of liquidity has already been pumped into US banks. Obviously, where there is smoke, there is fire, and if there indeed were no banking liquidity crisis, these operations would not have taken place.
Simply explained, an overnight repo trade is executed when Wall Street firms and US banks offer U.S. Treasuries and other high-quality securities to the US Central Bank in exchange for cash needed to meet every day operational transactions, including the maintenance of necessary reserves. Then, the banks will repay the US Central Bank the borrowings the next day, at the mandated interest rate, and receive their short-term securities back. Thus, the reason why these transactions are called repurchase, or “repo” agreements. The writing of mass media financial journalists, in its lack of competency, often reminds me of a psychology experiment I learned about while in university, regarding a study of herd compliance and obedience. In this study, one test subject was placed in a room with about 10 other subjects, all whom the test subject believed were also volunteers for the social experiment but were not. The test subject was told he or she was part of a study, but lied to about the purpose of the study, and he or she was given an exam to complete, which he or she was led to believe was the study’s mission. During the written exam, smoke was steadily pumped into the room. Since all other 10 study participants were plants, and not test subjects, they were informed ahead of time that there was no danger of a fire and that the mission was to test the level of compliance and obedience of the test subject to social cues. Therefore, the ten planted participants were told to continue taking the exam as smoke poured into the room and to behave like nothing was wrong, in order to assess the effect of their herd behavior on the test subject. The study’s researchers reported that at first, the test subject would look around and observe the behavior of others and incorporate the social cues of his peers regarding how to react to the danger of smoke. Since the planted participants were all instructed to act like nothing was wrong and to continue to take the exam, the test subject often just remained at his or her desk as well. However, much to the surprise of the researchers, they discovered that the test subject would often risk his or her own life in order to avoid exhibiting a behavior that dissented from the herd, such as standing up and discovering the source of the smoke. In fact, in some instances, the researchers reported that the test subject would remain seated at his or her desk until so much smoke was pumped into the room that it became difficult to see and the planted participants started to cough. In many regards, I feel as if many corporate financial journalists behave in the exact same manner as the test subject of this experiment – never deviating from the story they are instructed to relay to the rest of the world and never ever calling rubbish on a narrative they are told to relay, even when the provided narrative is clearly rubbish.
So, the larger question is why are journalists not investigating this matter and why is there nothing but silence regarding the need for these hundreds and hundreds of billions of dollars of liquid capital infusion into US banks last week and this week. In my opinion, the liquidity crunch in the US banking system has been fueled by two factors. The first reason is an obvious and transparent one. US banks today only keep a tiny fraction of the mandated 10% reserve ratio requirement of deposits on hand, as under US President Clinton and US Central Bank Chairman Alan Greenspan, these requirements were destroyed and disabled through provided loopholes in legislation governing US deposit accounts to effectively enable bankers to lend out almost every dollar that comes into the bank in the form of client deposits. Consequently, President Clinton and Alan Greenspan effectively allowed bank CEOs to transform the primary function of banks from safekeeping depositor’s cash into giant hedge funds decades ago, that risked depositor’s cash in seek of enormous profits. And when regulators failed to punish bankers for behaving like a hedge fund and using US taxpayer money to provide trillions of dollars of free money to the banks to help them recapitalize all their losses at their depositors’ expense, no reform of this extremely risky behavior transpired. Thus, the first reason is that banks were woefully short of cash for years and years was due to the loopholes bank lobbyists had provided to bankers, with the complicity of Alan Greenspan and the Clinton administration, that allowed bankers to put client deposits at extreme risk with regularity, which of course, resulted in massive losses that manifested in the 2008 global financial crisis.
The second reason involves speculation on my part, is very opaque, and requires connecting dots among seemingly unrelated items. Former Executive Director of the United Nations Office on Drugs and Crime (UNODC), Antonio Maria Costa, stated that during the last global banking liquidity crisis that was also kept hush hush from the public by bankers, and that arose during the ongoing 2008 global financial crisis, he discovered that nearly all the liquidity in the banking system was provided by drug cartels. In fact, Mr. Costa stated that his analysis revealed that were it not for high volumes of laundered drug money providing necessary cash to the US banking system, that the existing banking liquidity crisis that manifested in and around 2008 would have resulted in at least several US banks going bankrupt. The same problems occurring today occurred back then as well. But this time, enormous amounts of laundered drug cartel money will likely not solve the US banking system liquidity crisis, and in fact, the drop off in the amount of laundered cash entering the global banking system is likely a source of the current banking liquidity crisis.
Furthermore, during the last banking liquidity crisis, bankers refused to lend money to each other because they did not trust the robustness of other banks to return the lent-out funds as they understood the fragility of their banking peers much better than the average Joe. This time, the same distrust exists among US bankers in lending to one another. In fact, US interbank overnight lending rates skyrocketed to 5% last Monday and doubled to a near inconceivable 10% the next day, again reflecting that US banks do not trust each other to lend to one another. The comparable analogy would be a 23% interest rate charged by Visa to a consumer because of that consumer’s poor credit score due to a history of borrowing and failing to repay. Interbank lending rates soar in the US when banks demand compensation from their customers (other banks) when they deem a borrowing bank as having a high risk of default for the monies lent. The fact that overnight repurchase agreements usually close within a day’s time demonstrates the extreme level of risk that exists as this means that bankers do not even trust that monies lent for a single day on a very short term to another bank will be promptly repaid. Even though last week was the first time the US Central Bank activated the overnight repo program to provide liquidity to the US banking system in more than a decade, the size of the repo offerings pointed to the existence of a banking liquidity crisis.
Thus, I believe that there has been some type of fracture in the historically close relationship of banks with drug cartels that has given rise to this liquidity crunch. I don’t believe the fracture happened necessarily this year, but that it has been one that has fractured over years and has led to the open spigot of drug cartel money to the global banking industry being increasingly squeezed shut. Historically, the global banking system has laundered billions of dollars by drug cartels and other criminal enterprises, including the notoriously and horrifically violent Mexican Sinaloa drug cartel, providing tremendous amounts of needed liquidity. In fact, testimony in the HSBC drug laundering case revealed that HSBC bankers had developed special cash drop boxes for the Sinaloa cartel to aid their money laundering operations and HSBC eventually paid a $1.92B fine in 2012 for their role in the global banking and drug money laundering scheme. It is my belief that this was an operation approved of not just on an individual bank basis but on a global banking basis, as the top money laundering experts in the world stated that they did not believe HSBC CEO Stuart Gulliver’s denials of not knowing about this operation. In fact, Martin Woods, an anti-money laundering compliance officer in the London office of HSBC was fired by HSBC bankers when he revealed to authorities that HSBC was laundering Sinaloa drug cartel money. To this day, the entire global banking industry relies on criminally laundered money to provide liquidity to their system, as has been well documented by Catherine Austin Fitts, President of Solari Inc., in addition to similar claims levied by former UN drug czar Antonio Maria Costa.
So why is the US banking system experiencing such liquidity problems right now? I believe at some point in 2017, El Chapo Guzman, the head of the Sinaloa drug cartel, stopped cooperating with providing billions of dollars of liquidity to the US banking system that was necessary for the US banking system to function. The date of El Chapo’s arrest history of being arrested in 1993 and escaping in 2001, arrested again in 2014 and escaping once again in 2015, and of being arrested a third time in 2016, are all irrelevant to my theory, simply because it has been proven that prison does not impede drug lords and other criminals from still running their criminal enterprises. The real important event in regard to El Chapo’s timeline of arrests, however, was his pursuit by the US Justice Department that resulted in his eventual extradition to the United States in 2017. That extradition likely critically altered the willingness not just of Mexican drug cartels but of all drug cartels around the world to launder their profits through the global banking system. If drug lords were arrested and spent time in Mexican or Colombian prisons, though this acted as a deterrent to their activities, due to monetary bribes that could be paid to members of the prison system that would enable their escape or the construction of luxurious living conditions, as evidenced by multiple escapes of El Chapo from the Mexican prison system and the personal chef Colombian drug lord Pablo Esobar hired to cook his meals while serving time in a Colombian “prison”. However, the possibility of serving time within the US federal penitentiary system changed the drug game completely, and likely severely altered the historical drug cartel, banking money laundering relationship forever. Given that El Chapo was sentenced to life within the US maximum security prison system, and likely frequently moved among different maximum-security prison locations every year, his chances for escape, as opposed to his chances when imprisoned in Mexico, likely decreased a thousand-fold. News of El Chapo’s extradition to the US also probably dried up the liquidity channel for US banks as other global drug cartels sought other channels by which to launder their money other than the global banking system, ever since El Chapo’s extradition in 2017. For example, you can reference this report about a raid of the Los Angeles fashion district that yielded $90M of cash that was being laundered through the purchases of wholesale clothes and then shipped back and resold in Mexico. Though this report preceded El Chapo’s extradition by a couple of years, no doubt, drug cartels started to seek other means outside of the banking system to launder their money after his extradition and subsequently forced drug cartels to consider alternate means outside of the banking system to launder their cash.
However, since we are already 21-months past El Chapo’s extradition, if his extradition is a primary reason why cash has dried up in the US banking system, why is the banking liquidity crisis manifesting now? This could be explained by a number of reasons. Firstly, a lack of recovery in bank reserves and continuing depletion in their reserves would take time. Secondly, as I suggested above, drug cartels likely did not turn the spigot of cash flow into the global banking system in one fell swoop after El Chapo’s extradition, but likely turned down the flow increasingly more over time as they sourced alternative means to launder their cash. In fact, when the very close and well documented ties was revealed in 2013. of the global banking industry with criminally sourced gold that may have very well led to illegally sourced South American gold finding its way into the New York COMEX and London vaults that backed gold futures and gold derivative trading, drug cartels likely studied this case as a viable alternate mechanism to launder their cash. In fact, there is plenty of evidence that this is exactly what has happened, ever since the HSBC drug money laundering fiasco and subsequent extradition of Sinaloa drug lord El Chapo Guzman to the US spooked drug cartels into severing some of their relationships with banks. Besides diversifying into stealing unrefined gold doré and concentrate in transit from mines to refineries, of which the Sinaloa cartel was suspected of robbing 7,000 ounces of gold worth about $10.5M today, I further suspect that drug cartels started to convert their cash into physical gold for storage, a decision that would severely restrict the amount of drug cartel cash eligible to be laundered through the global banking system.
A 2018 Miami Herald news story confirmed my suspicions by revealing that drug cartel members had not only poured drug profits into illegal mining operations in Peru and Colombia and gold smuggling operations in Ecuador and Bolivia, but it also confirmed that drug cartels were subsequently selling physical gold in the Unites States as an alternate way to launder and clean their drug money. Unsurprisingly, this story also revealed that these drug cartel operations were aided by former HSBC bankers. Consequently, the increasing role of the illegal gold trade in laundering drug cartel cash, no doubt inspired by revelations of global bankers’ relationships with the illegal gold trade, has also likely contributed to current liquidity problems the US banking system faces today, as the use of illegally mined gold to launder drug cartel cash circumvents the need to launder cash through the global banking system. In order to support the continuation of our free content, please consider becoming a patron today.