The Howard Group

Money At The Speed Of Light

2012-02-06T21:18:00.000-08:00

FAST MONEY

By Melvin J. Howard

Not many people understand the financial system including sometimes yourlocal bank manager surprised? Don’t be a lot of the retail bankers have limited knowledge of what happens upstairs in the corner office oftheir institution. The real action goes on behind the scenes on the bank’strading floor these group of individuals are type A personalities and verycreative. With a couple of key strokes billionsof dollars fly around the world in minutes if they can package it they willtrade it.

The first goal of the financial system is to facilitate the flowof funds from savers (entities with a surplus of funds) to investors (entitieswith a deficit of funds). What is the distinction between real assets andfinancial assets.

A real asset is an entity that generates a flow of goods orservices over time. Examples include land, people, factories, inventions,business plans, goodwill with consumers, reputation. Anything that generates aflow of goods or services counts real assets need not be tangible.

A financial asset is a piece of paper, or, in the modern world, anaccount on a computer, that gives the owner of that piece of paper or account aclaim to flow of goods or services generated by a real asset. Examples includecurrency ($), stocks, bonds, bank deposit, bank loans, options, futures, etc. Ultimateinvestors sell financial assets to savers; they use the proceeds to buy realassets (buying real assets is the same thing as investment). Sometimes peoplesell financial assets to finance consumption too.

Given this first role, the financial system is the place wheresavers (or, more generally, economic agents with a surplus of funds relative totheir immediate need for those funds) meet investors (or, more generally,economic agents with a deficit of funds relative to their immediate need forthose funds). The financial system channels funds from savers to investors. Inequilibrium, savings = investment.

Important to note the term “investors” is often used loosely. Whena firm builds a factory or when a person buys a house that is investment. Whena person buys stock, that is, strictly speaking, savings. However, the purchaseof a share of stock is commonly called investment, and stockholders are calledinvestors. Agents can invest using their own money, using indirect finance,or using direct finance. When agents invest out of their own funds (i.e. byspending past accumulated savings), they bypass the financial system entirely.

When agents use indirect finance, funds come from a financialintermediary, which are then invested (or spent on consumption goods). Afinancial intermediary is a firm that pools the savings of many agents and thenpasses those funds through to agents that want to spend them. The intermediaryis the middleman, not the ultimate source of funds. When an agent uses directfinance, funds are provided to the investors directly, without the use of anintermediary. For example, firms sometimes sell share of stock directly to thepublic in an IPO.

Flow of funds through thefinancial system

Indirect Finance

Financial Intermediaries

The line between direct and indirect finance has becomeincreasingly blurry as banks and other financial intermediaries have begun tosecuritize their assets. Securitization involves removing an asset (or often apool of assets) from the balance sheet of an intermediary by selling the assetto a “conduit” firm, known as a Special-Purpose Vehicle (SPV), that in turnpays for these assets by issuing securities (bonds) into the capital market.The SPV typically issues senior and subordinated bonds. The most junior bondsabsorb all of the losses on the assets (or pool of assets); if there are morelosses than can be absorbed by the most junior loans, then the next most juniorbonds begin to absorb losses, etc.

The six steps toward securitization:

1. Set up a legally separate trust (SPV) to serve as a conduit forcash flows;

2. Sell designated loan or pool of loans to the trust (SPV);

3. Have the trust (SPV) issue securities that represent claims tothe cash flows generated from the pool of loans, and sell those securities tothe public;

4. Contract with a servicing organization to collect the loanpayments and forward those to securities owner (this outsourcing feature isoptional);

5. To improve the price received for the securities, twoapproaches can be taken:

a). arrange for credit enhancement by the bank or anotherreputable third party so that the securities can be highly rated;

b). strip and reassemble the cash flows from the loan pool basedon either timing (as in mortgage-backed securities), or seniority (as incollateralized loan obligations).

6. Make sure a liquid secondary market exists for the securities,or convey to the purchaser the right the put (re-sell) the securities back tothe bank on good terms.

Typically, the bank that originated the assets continues toservice those assets (i.e. collect payments, effect workouts if the borrowerdefaults). In some cases, such as securitization of loans to businesses, a bankwill purchase the lowest rated bonds issued by the SPV. Now how doall of the funds get transferred into my account if you ever had a bank orbrokerage account chances are SWIFT was involved.

WHAT IS S.W.I.F.T.

S.W.I.F.T. (the Society for Worldwide Interbank FinancialTelecommunication) provides financial data communication and processingservices to support the business activities of worldwide financial institutionsfor securities, payments, foreign exchange and money markets, as well as tradefinance. As of January 2010, over9,700 institutions use S.W.I.F.T. to communicate with each other 24 hours aday. S.W.I.F.T. operates in 209 countries. When brokers were admitted in 1987,the members created and began using the Category 5 (CAT 5) message standards tostructure settlement instructions, confirmations and safekeeping informationfor securities transactions. Owned by nearly 4,000 of its user banks,S.W.I.F.T. also connects other categories of non-bank financial institutionsengaged in the securities industry, including:

· Securities broker/dealers

· Investment managers

· Securities exchanges

· Central domestic securities depositories and clearingorganizations

· Central cross-border securities depositories and clearingorganizations such as Cedel and Euroclear

· Trust Companies and Fiduciary Service Providers

· Custody and Nominee Services Providers

· Registrars

· Transfer Agents

· Investment managers were granted full participant privileges inJune 1992, S.W.I.F. As participants, investment managers have the right to usethe S.W.I.F.T. standards, access the S.W.I.F.T. network, and indirectlyparticipate in setting the future direction of S.W.I.F.T.

Economic Plans Will Not Work With Out One Key Ingredient TRUST

2012-01-17T21:35:00.000-08:00

IN THE MARKET WE TRUST

BY MELVIN J. HOWARD

Economics has a reputation by pretending to be an exact sciencerather than what it really is global psychology. The truth is economics leavesout the aggregate behaviour of humans. It seeks to cloak its uncertainties andshifting fashions with mathematical formulae and elaborate econometriccomputerized models. This much is certain; people operate within markets, freeor regulated, patchy or organized. They attach numerical (and emotional) valuesto their inputs (work, capital) and to their possessions (assets, naturalendowments). They communicate these values to each other by sending out signalsknown as prices. The market is people many of them and there is no calculationfor how individuals will behave to an exact science. But scientists are workingon it but until that day comes we have to rely on good old fashion trust.

Yet, this entire edifice the market and its price mechanismcritically depends on trust. If people do not trust each other, or the economic"envelope" within which they interact - economic activity graduallygrinds to a halt like the credit markets. Banks will not lend to Banks orcorporations or the retail section. There is a strong correlation between thegeneral level of trust and the extent and intensity of economic activity.Francis Fukuyama, the political scientist, distinguishes between high-trust andprosperous societies and low-trust and, therefore, impoverished collectives.Trust underlies economic success, he argued in a 1995 tome. Trust is not amonolithic quantity. There are a few categories of economic trust. Some formsof trust are akin to a public good and are closely related to governmentalaction or inaction, the reputation of the state and its institutions, and itspronounced agenda. Other types of trust are the outcomes of kinship, ethnicorigin, personal standing and goodwill, corporate brands and other datagenerated by individuals, households, and firms.

Trust in the market

To transact, people have to maintain faith in a relevant economichorizon and in the immutability of the economic playing field or"envelope". Put less obscurely, a few hidden assumptions underlie thecontinued economic activity of market players. They assume, for instance, that the market will continue to existfor the foreseeable future in its current form. That it will remain inert -unhindered by externalities like government intervention, geopoliticalupheavals, crises, abrupt changes in accounting policies and tax laws,hyperinflation, institutional and structural reform and other market-deflectingevents and processes. They further assume that their price signals will not bedistorted or thwarted on a consistent basis thus skewing the efficient andrational allocation of risks and rewards. Insider trading, stock manipulation,monopolies, hoarding - all tend to consistently but unpredictably distort pricesignals and, thus, deter market participation.

Market players take for granted the existence and continuousoperation of institutions - financial intermediaries, law enforcement agencies,courts. It is important to note that market players prefer continuity andcertainty to evolution, however gradual and ultimately beneficial. A venalbureaucrat is a known quantity and can be tackled effectively. A period oftransition to good and equitable governance can be more stifling than any levelof corruption and malfeasance. This is why economic activity drops sharplywhenever institutions are reformed.

Trust in other players most important

Market players assume that other players are (generally) rational,that they have intentions, that they intend to maximize their benefits and thatthey are likely to act on their intentions in a legal (or rule-based), rationalmanner.

Trust in market liquidity

Market players assume that other players possess or have access tothe liquid means they need in order to act on their intentions and obligations.They know, from personal experience, that idle capital tends to dwindle andthat the only way to, perhaps, maintain or increase it is to transact withothers, directly or through intermediaries, such as banks.

Trust in others' knowledge and ability

Market players assume that other players possess or have access tothe intellectual property, technology, and knowledge they need in order torealize their intentions and obligations. This implicitly presupposes that allother market players are physically, mentally, legally and financially able andwilling to act their parts as stipulated, for instance, in contracts they sign.The emotional dimensions of contracting are often neglected in economics.Players assume that their counterparts maintain a realistic and stable sense ofself-worth based on intimate knowledge of their own strengths and weaknesses.Market participants are presumed to harbor realistic expectations, commensuratewith their skills and accomplishments. Allowance is made for exaggeration,disinformation, even outright deception - but these are supposed to be marginalphenomena.

When trust breaks down like now it is often the result of anexternal or internal systemic shock - people react expectedly. The number ofvoluntary interactions and transactions decreases sharply. With a collapsedinvestment horizon, individuals and firms become corrupt in an effort toshortcut their way into economic benefits, not knowing how long will the systemsurvive. Criminal activity increases.

People compensate with fantasies and grandiose delusions for theirgrowing sense of uncertainty, helplessness, and fears. This is aself-reinforcing mechanism, a vicious cycle which results in under-confidenceand a fluctuating self-esteem. They develop psychological defense mechanisms.Cognitive dissonance ("I really choose to be poor rather thanheartless"), pathological envy (seeks to deprive others and thus gainemotional reward), rigidity ("I am like that, my family or ethnic grouphas been like that for generations, there is nothing I can do"),passive-aggressive behavior (obstructing the work flow, absenteeism, stealingfrom the employer, adhering strictly to arcane regulations) - are all reactionsto a breakdown in one or more of the four aforementioned types of trust.Furthermore, people in a trust crisis are unable to postpone gratification.They often become frustrated, aggressive, and deceitful if denied. They resortto reckless behavior and stopgap economic activities. In economic environmentswith compromised and impaired trust, loyalty decreases and mobility increases.People switch jobs, renege on obligations, fail to repay debts, relocate often.Concepts like exclusivity, the sanctity of contracts, workplace loyalty, or acareer path - all get eroded. As a result, little is invested in the future, inthe acquisition of skills, in long term savings. Short-termism and bottom linementality rule. The outcomes of a crisis of trust are, usually, catastrophic.Economic activity is much reduced, human capital is corroded and wasted, braindrain increases, illegal and extra-legal activities rise, society is polarizedbetween haves and haves-not, interethnic and inter-racial tensions increase. Torebuild trust in such circumstances is a daunting task. The loss of trust iscontagious and, finally, it infects every institution and profession in theland. It is what brings down great empires. It is my summation no matter whatgovernment is in power, nor matter new rules, new people and procedures. Trustis the key ingredient of market stability and our Quantumnomic future.

QUANTUMNOMICS

2012-01-12T08:27:00.000-08:00

The missing equation of economics the human condition

By Melvin J. Howard

The boom bust cycle of the markets have got me thinking that theclassical economic models have got built in flaws and there needs to be a newparadigm of change on how we look at global markets. What if we say forinstance that science and physics played a major part in how we interact withthe world and financial markets? I have termed this new theory of mine(QUANTUMNOMICS) combining quantum theory mechanics with economic analysis. Ihave been thinking about this theory for some time and studying everything Ican about physics especially at the sub atomic level in order to refine mytheory. Classical logic or the classical view of logic demands that everystatement be either true or false. Questions on whether a statement can bejudged to be true or false is something absolute. It depends only on thestatement and not the observer doing the judging. I argue when humaninteraction is involved that their perception or their understanding of astatement becomes their reality. Now take this and multiply it by thousands interms of market participants you have now set off a chain reaction of oneperson’s reality becoming others reality. Now the founders of quantum theorysuch as Einstein and Bohr, Heisenberg and Schrodinger did not always agreeabout reality and its relationship to the observer. Since their time morestudies have been made to bring all their theories together in what is calledthe unified field theory encompassing classical physics and quantum mechanics.

Quantum theory gets even more puzzling because it challenges ourview about relationships in terms of connectivity and separation. The idea thatwe are not separate but are all connected. At the time I was unaware of anyonetaking this approach to economics except George Soros the famed founder of theQuantum Fund. He called his theory reflexivity when I found out about his bookthe Alchemy of Finance I felt that I finally found a home he was before histime in terms of his theory but to me right on the mark. He hypothesizes thatboom and bust patterns has an asymmetrical shape. It starts slowly andaccelerates gradually to a wild excess that is followed by a twilight periodand then by a catastrophic collapse. When the process is complete, neither thetrend nor the bias remains the same. The process does not repeat itself, andthen there is a regime change. That’s where we find ourselves today in thispast global credit crisis. Economics seeks to be an analytical science butfinancial markets are complex and cannot be understood on the basis of ananalytical approach on its own. There are many dynamics going on at the sametime. There is something incomplete about how we now look at economicsglobally. Imagine if we had two kinds of currency, the first of which wasexchangeable into a concrete entity such as gold, while the other had no worthin terms other than paper. What if we were allowed to mix the two kinds ofmoney in our bank accounts? The economy would be based on a contradiction, andcould not survive for very long, does this sound ridiculous? In fact thecommunist government experimented with such a currency, one convertible intoother currencies and one not. They discovered that the system is unstable inthe absence of complicated and artificial restrictions on the use of two kindsof money. My world view has always been different from the collective. I havealways challenged the status quo I have never been satisfied with that is justthe way things are line. I like to know why they are that way and how do youcome to that conclusion. I am constantly challenging myself with theories totake what science and physics have given us thus far and to shape it in a modelthat can be explored by others for their input. Quantum theory is not perfectbut it is the best science that has come out in the last 100 years.

THE FED CONTROLS THE MOST POWERFUL TRUST

2012-01-07T10:09:00.000-08:00

The Depository Trust the most powerful Trust in the world

By Melvin J. Howard

There are Trusts and then there is the Depository Trust Company.The DTC is one of the best kept secrets. The average person has no clue thatthis financial institution is the most powerful banking corporation in theworld. The general public has no knowledge of what the DTC is or what they doand why would they? How can a private banking trust company hold assets closeto $40 trillion and be unknown? TheDepository Trust Company (DTC) is the world's largest securities depository. In 2009, DTC settled transactions worth more than $299 trillion,and processed 299.5 million book-entry deliveries it retains custody of morethan 3.5 million securities issues worth almost $34 trillion, includingsecurities issued in the US and more than 120 foreign countries and territories.The DTC is the largest limited trust company in the world. The DTC is abrokerage clearing firm and transfer center. It’s a private bank forsecurities. They handle the book entry transactions for all banks and brokers.Every bank and brokerage firm must secure their membership with the DTC. Yes,you read that correctly. The DTC is a private bank that processes every stockand bond (paper securities) for all U.S. banks and brokerage houses. Just howdid this private bank and trust company get such a broad range of financialpower and clout? The DTC is a privately owned depository bank for institutionaland brokerage firms only. They process all of their book entry settlementtransactions. It's required by the Federal Reserve that DTC handle alltransactions". The Federal Reserve. The FED, as they are more commonlycalled, mandates that the DTC process every securities transaction in the US.It's no wonder that the DTC (including the Participants Trust Company, now theMortgage-Backed Securities Division of the DTC) can lend out a couple ofhundred billion here and there. The "DTC is partly owned by the New YorkStock Exchange on behalf of the Exchange's members. It is operated by aseparate management and has an independent board of directors. It is a limitedpurpose trust company and is a unit of the Federal Reserve.

Now let’s see how the system works, you visit or call a stockbroker or bank and instruct them you want to purchase some shares of commonstock or a small municipal bond, for example. They will set up a brokerageaccount for you and act as your agent with full durable power of attorney(which you must legally sign over to them) to conduct business on your behalf,upon your buy or sell instructions. The broker will place your stock or bondpurchase into their safekeeping under a "street name". The broker orbank must then send the transaction to the DTC for ledger posting or book entrysettlement under mandate by the Federal Reserve System. Simply put, theDepository Trust Company absolutely controls every paper asset transaction inthe United States as well as the majority of overseas transactions, and theynow physically hold ( as of 2009) 99% of all stock and bond book-entrys intheir street name. The DTC was created in 1973 as a user-owned cooperative forpost-trade settlement. Their members are banks and broker/dealers, whom I referto as participants. They handle listed and unlisted equities, including 60,000equity issues and 270,000 corporate debt issues, equating to more than 78% ofshares outstanding on the New York Stock Exchange (NYSE). They also have morethan 95% of all municipals on deposit. All pension funds and otherinstitutional 'managed funds' are comprised of paper asset investments such asstocks, bonds, and mutual funds. These certificates are technically in the nameof DTC's private holding company. The FED carries tremendous clout globally. FedFunds, or Fedwire, is a mighty weapon when it comes to smoothing out globalmarkets.

Without Common Wealth Private Wealth Could Not Happen

2012-01-02T08:42:00.000-08:00

The Self Made delusion

By Melvin J. Howard

If someone startswith modest resources, does well in business, and makes a fortune, isn't itfair to attribute that wealth to individual merit? Not really. Here is anotherquestion why do some people succeed and others don't? Is it luck? Is it talent?That's the question Malcolm Gladwell sets himself to in his book Outliers. The answer he finds is, often, none of these. To makehis point, Gladwell compares Christopher Langan to Robert Oppenheimer.

Langan has anastronomical IQ of 195 but he has not been able to parlay that into significantacademic or business success. On the other hand is J. Robert Oppenheimer, thetheoretical physicist who headed up the Manhattan Project, America's effort tocreate an atomic bomb. Yet here was a man who had to talk his way out of anapparent murder attempt while at Cambridge in his twenties. Langham, on theother hand, couldn't even talk his college adviser into letting him transferclasses. Why?Oppenheimer's family and cultural background allowed him to absorb as if byosmosis not only a sense of entitlement but the instincts needed to move successfullyamong powerful, rich, talented people. Langan had none of that. Some argue forless government intervention in the market economy seem to overlook the factthat the government creates the infrastructure for the markets to function inthe first place. Without government created legal and judicial infrastructure,even the most basic contract would not be enforceable, except at gunpoint.Since our whole monetary and trade systems are built primarily on contracts ofagreement, modern markets would not exist, and economic development could nothappen, without significant government intervention.

How "Self-Made" are you? Take the test

Where youaided by the following on your way to wealth:

ñLaws concerning property orcontracts, and the public agencies that enforce such laws

ñPublic schools or employeeseducated in public schools

ñEmployees or customers who relyon public transportation

ñRoads, bridges, airports,sewers, water treatment plants, harbors, or other utilities built andmaintained at public expense

ñMail systems built and operatedat public expense

ñPublic hospitals andgovernment-licensed physicians

ñHealth and safety regulationscreated and enforced at public expense

ñPolice and fire protectionprovided at public expense

ñPublic libraries and parks

ñAny public amenities that addvalue to commercial or residential real estate

ñGovernment contracts

ñGovernment-provided businessincentives

ñRegulatory agencies, such as theFederal Trade Commission or the Securities and Exchange Commission, thatsustain trust in the stock market

ñA government-granted licensepermitting the exclusive use of a broadcast channel

ñThe Internet

ñA form of currency legitimatedand backed by a stable government

ñSocialwelfare programs that keep the poor from rebelling

ñTheU.S. military

If we usethese criteria to determine who can legitimately claim to be "entirelyself-made," the number is in fact, precisely zero. If not for the legaland political arrangements that we create and maintain as a society withcontributions from us all, costs to us all, and benefits to us all and if not for what we call "the publicinfrastructure," nobody could accumulate wealth. In short, there can be noprivate wealth without common wealth.

The Truth

Wealthalways depends on collective effort. Why? Because of what the "entirelyself-made" myth implies: If I have amassed a fortune solely through myindividual talent and hard work, then it is wrong for the government to takeany of it away. By further implication, taxation is wrong, and progressivetaxation is really wrong. Casting "the government" as an evil empirethat confiscates the fruits of one's labors also serves the interests of the divisionclass. Working-class and middle-class people who embrace this view are lesslikely to take an interest in government as a means to build, protect, andfairly employ the nation's common wealth. By helping to portray government asthe enemy of individual initiative and prosperity, further plays to theinsecurities of the middle and lower class.

Class difference

In acompetitive, individualistic society like the U.S., the "entirely self-made"illusion is seductive. It gives us the pleasure of taking credit for oursuccesses. It also mitigates the guilt that can come from recognizing our ownclass privilege. The "entirely self-made" myth is handy for bothself-congratulation and self-absolution. But weshould reject the mythology not just because it's wrong, but because, unlikemany other comforting myths about American society, this one has especiallypernicious consequences for democracy and community. At worst, it can make usfeel that we have no right to democratic control of our common wealth.

If werecognize that all private wealth depends on our common wealth, then we incurtwo obligations. One is to contribute our fair share and the bigger the rewardswe derive from society, the bigger that share should be. The other obligationis to participate in protecting our common wealth and determining how it isused. We should not let those decisions be made only by a few self-servingpeople and then laugh all the way to the bank.

Why does oneperson get not only much higher pay but also health benefits, greaterauthority, flexible work hours, higher social status and a more comfortablework environment while doing interesting work, yet the other person does theleast desirable work for less pay, no benefits, virtually no authority, withvery low status, often in a brutal work environment? None of thereasons we often give to justify this hierarchy hold up when scrutinized. Forexample, we may say that the professional went to school to earn a higherpaying, higher status job. But that does not take into account the differentopportunities that people have for education nor that academic ability may be the result of upbringing,conditioning or heredity none of which the individual has anycontrol over. And none of thisexplains why people who spend all of their time moving money aroundelectronically do not really produce anything and in fact may actually bedestroying the work of others yet they get compensated at astronomical levels.Neither the Wall Streeters, the professionals nor the immigrant workers got towhere they are all by themselves. Each was helped, or hurt, by others,including others far removed from them in the economic system.

The wealthier weare, the higher our status in the system, the easier it is to delude ourselvesthat we got there all by our own effort. In the modern world, where everyone isconnected to each other, being entirely self-dependent cannot be the road tosuccess. We must be able to depend on each other to be successful both asindividuals and as a society.

Many point to thegreat inventors throughout history, like Henry Ford, as examples of self-mademen being wildly successful without others’ help. While it is true that manyrise from humble beginning, they need help from others to rise to the top. Fordwas a great innovator, but he needed outside investments to allow him to createFord. He even benefited greatly, both directly and indirectly, from the federalgovernment. He was awarded 161 patents that allowed him to profit from hisinventions, and transportation investments from various levels of government tobuild roads and highways throughout America helped fuel demand for his cars fordecades. This myth is popular with the unenlightened for many reasons.Small-government advocates like the concept because it fits nicely with theirnarrative. A country where any individual can flourish without any outside helprequires no government spending on medicine for the poor and elderly. No needfor public education; they can educate themselves. No need for scientificresearch grants; if the free market wanted a cure for polio so badly, it couldfund the needed research.

There is nobody in this country who got rich on his own. Nobody.You built a factory out there — good for you. But I want to be clear. You movedyour goods to market on the roads the rest of us paid for. You hired workersthe rest of us paid to educate. You were safe in your factory because of policeforces and fire forces that the rest of us paid for. You didn’t have to worrythat marauding bands would come and seize everything at your factory. … Nowlook. You built a factory and it turned into something terrific or a great idea— God bless! Keep a big hunk of it. But part of the underlying social contractis you take a hunk of that and pay forward for the next kid who comes along.”Elizabeth Warren, candidate for US Senator.

The Secret Beginnings Of The World Bank And The IMF

2011-12-19T08:07:00.000-08:00

The invisible hand of influence

By Melvin J. Howard

The U.S. Treasury's $12 billion loan to Mexico back inJanuary 1995 brought to public a fund many new little about since itsauthorization by the Gold Reserve Act of January 31, 1934. The design of theESF, as set forth in the statute, contributed to its secrecy and obscurity THEEXCHANGE STABILIZATION FUND. Its stated mission was to stabilize the exchangevalue of the dollar, but it has also assumed other roles that had no mandate,like lender to favored countries it has since become a unlimited power of purchase over anything. A statistical profile of the ESF accounts forthe growth of its working balance from $200 million in 1934 to $105 billion in assetsin 2009 including $58.1 billion in Special DrawingRights (SDR)from the InternationalMonetary Fund. Harry Dexter White head of the fund at the time was amajor architect of the InternationalMonetary Fund and World Bank. White was entrusted with themanagement of the U. S. Treasury’s $2 billion stabilization fund. Herepresented the Treasury onthe Economic Defense Board, was a trustee of the Export-Import Bank in Washington, D.C. and was a member of thegovernment’s Committee for Reciprocity Information, which was involved inreciprocal trade agreements with foreign countries. Istumbled on this fund when I was in the middle of my NAFTA challenge. What I noticed was that Naftaincluded a provision for the North American Financial Group, a consultative group to "stabilize"exchange rates between signatory countries. Formed as a side agreement to Nafta in early 1994, the NAFG supported the peso's exchange rate with a $6 billion line of credit. That kept the peso massively overvalued and enabled the Mexican central bank to rapidly inflate the money supply.

NAFTA’S TO BIG TO FAIL BAIL-OUT

Nafta made the bailoutinevitable just like the to big to fail banks there was too much at stakeeconomically, politically, and financially after the treaty's passage in 1994.The collapse of Mexico’s peso would have meant NAFTA was dead on arrival. Inthe end there was no choice the two economies were intertwined in trade, incommerce, in the movement of people. What made the loan to Mexico sounique was that it did not require Congressional authorization but could bemade at the discretion of the Secretary of the Treasury, with the approval ofthe President. In February 1996, the Treasury Department announced that it wassuspending payment of interest on government securities in the ESF's portfolioin order to create additional borrowing power for the government under the debtceiling that Congress was refusing to raise history has a way of repeatingitself. These actions brought the fund to public notice after it had remainedso long in obscurity. The fund began operations as of April 27, 1934, financedby $2 billion of the $2.8 billion paper profit that the government realizedfrom devaluation, that is, from raising the price of gold to $35 an ounce from$20.67. This sum was deposited to its account with the Treasurer of the UnitedStates (Treasury AR 1935, Exhibit 40, p. 265). The fund was authorized to dealin gold and foreign exchange in order to stabilize the exchange value of thedollar, to invest any portion of the fund not currently required for stabilizationpurposes in direct obligations of the United States, and to add any earningsfrom sales and interest on its investments to the sum available for its use.

Of the $2 billion set aside for ESF capital, only $200million was made available for its working fund. The $1.8 billion was shown in the goldasset and liability statement of the Treasurer of the United States as gold credited tothe ESF. The residual $200 million was presumably initially deposited in a specialaccount at the NewYork Federal Reserve Bank, but by June 1934 the ESF hadreduced the deposit by investing $38 million in U.S. Treasury bonds, $20 million ingold (the bulk held at the U.S. Assay Office), and $30 million in silver.

The act creating the ESF excluded it from the congressionalappropriation process once its initial capitalization was in place. It wasintended to be self-financing, and was not required to seek annual congressional funding forits operations. The self-financing arrangement contributed to the secrecy of ESFactions, since the fund did not have to justify its expenditures during annual appealsto Congress for appropriations.The fund was conceived to operate in secrecy under theexclusive control of the Secretary of the Treasury, with the approval of the President,"whose decisions shall be final and not subject to review by any other officer ofthe United States. The intention was to cloak foreign exchange marketintervention. However, the Secretary of the Treasury was willing to revealinformation on stabilization loans to favored countries that the ESF negotiatedloans that had no mandate in the statute yet essentially created a foreignaffairs role for the Treasury.

Her Majesty's Treasury

If you have secrete fund we will match that secrete fundwith our own. The British was the first to start their cloaked fund. So the ESFcould base the secrecy of its operations on the British Exchange EqualisationAccount (EEA), formally initiated July 1, 1932. It was described as "ananonymous and secret body whose actions are not open to continuous scrutiny andcriticism. The House of Commons did not know and could not be told what the EEAwas doing. Suspicion of the purpose of the EEA was a motive for theestablishment of the ESF. U.S. officials believed that the EEA was used todepreciate the pound, not to smooth fluctuations in its exchange rates, itsofficial purpose. Each fund would have liked to know what the other'sintentions and actions were.

Since 1979 the ESF's administrative expenses have beensubject to the budget process. In addition, the ESF is audited annually, withthe report originally submitted to the President, not to Congress. That laterchanged so that Congress could also receive reports of the ESF's operations.Although Congress has required the President to give it information about ESFtransactions, the constitutionality of the ESF has not been challenged. The ESFin its original design belongs and rest with the Executive Branch, of theUnited States (The President).

Your Problem Is My Problem

In September 1936 the United States, United Kingdom, andFrench governments simultaneously issued declarations accepting a devaluationof the French franc and agreeing to use appropriate available resources toavoid disturbance of international exchanges resulting from the readjustment.The three governments agreed to guarantee exchange rates for twenty-four hoursat a time, authorities of the stabilization funds announcing each morning theprice at which they would convert into gold at the end of the day on areciprocal basis the foreign currency balances the others had acquired. The United States, which had previously sold gold at $35 anounce, plus handling charges, only to gold-standard countries, announced it wouldsell gold to stabilization funds. The arrangement eliminated exchange risk for theauthorities while preserving exchange-rate flexibility. Belgium, the Netherlands, andSwitzerland were soon added to the nations complying with the Agreement andeligible to buy gold from the United States. Examination of the list ofcountries that have been granted loans over the years, leads doubt that they have resulted in stabilization. Thelegacy of the ESF is that lending programs dominate the operation of the IMF.Support for weak currencies that the IMF provides raises concerns of moralhazard. Whether IMF lending has good or bad consequences is up for debate orwhether ESF is used as a black ops slush fund or war chest you be the judge Ihereby issue this executive order.

Memorandum on Use of the Department of the Treasury’sExchange Stabilization Fund To Support a Guaranty Facility for Certain MoneyMarket Mutual Funds

December 12, 2011

Memorandum for the Secretary of the Treasury

Subject: Use of the Department of the Treasury’s ExchangeStabilization Fund To

Support a Guaranty Facility for Certain Money MarketMutual Funds

Pursuant to section 10(b) of the Gold Reserve Act of 1934,as amended, 31 U.S.C.

5302(b), I approve the use of funds from the ExchangeStabilization Fund to provide up

to $50 billion as a guaranty facility for certain moneymarket mutual funds, consistent with your recommendation to me and the termsand conditions set out in your memorandum to me dated October 16, 2011.

Melvin J. Howard

Question do you know what I just authorized to be funded?

The President Of The United States Of America

2011-12-11T20:42:00.001-08:00

Ladies And Gentlemen The President

By Melvin J. Howard

How many laws do you live under? Thousands. We all live under thousands of laws. Now, in your lifetime, how many of those laws have you written, proposed, voted on, or been consulted upon? For the vast majority of people, the answer is none. None. And do you have any friends or relatives that have written any of those laws, or proposed them, been consulted, or voted on them? Most people would say no. So in a system of majority rule (democracy), how is it that you are living under laws you never wrote or voted for? And if they are being written, someone must be writing them. And if it isn’t the majority participating in those law-making stages, it is the minority. Which minority? Well, in the U.S. it is the senate, house, president, and advisors. Are there any legitimate laws proposed by majority groups and brought to senate? Yes, of course there are laws made that truly represent the majority view. Are there any that are manipulated in by special interest groups and passed as law for the masses? Yes, there are plenty of laws passed that in no way serve the majority and only serve a powerful minority (that is part of the whole point of spending vast amounts of money for a candidate). Enter President Obama he is doing something different then any other President he is actually making ordinary citizens apart of the process. Let’s face it until he came a long we didn’t know what the heck was going on in the white house. The fact is President Obama is intellectual and has charisma irks some.

Never the less for whatever critics that the President might have I for one love the transparency. It’s unprecedented the white house is open to the public. It’s refreshing to get information direct from the President. So whether it’s on Leno or 60 minutes I will take it. What I am trying to say we live in a system. The system has defaults and exceptions. If you live by default, you will experience the default states of the system. If you live by your own code, you will experience your own results. In this system, there are laws and structures that put everyone ‘in their place’ within the system. This is the default of the system.

We are under thousands of laws, of which you had nothing to do with the creation of most. You just wake up every day and get your new laws issued to you on TV during news. You accept them as the truth about the way things are – not realizing that your acceptance is what makes them come alive. Millions of people do that simultaneously across the country, all watching the same TV news program, and a new law comes into effect because each one of you just didn’t question it. This works almost all the time. You are predictable in your response. You just believe it is for your own good, or that you can't change it, and you do as told, becoming the default. You have given away your power to experience your own truth and make up your own mind. Original thought is replaced by rehashing what you have been told. We have done that for the last 20 years. Once you make a habit out of this, you become predictable. You even forget how to have original thought that is not tainted by your past experience (which was also tainted by other people’s past experiences). Advertising works and it works because of this reason – predictable, trained response to certain scenarios. Companies spend millions of dollars on one 30-second appearance of an ad during the Super Bowl because they know it works. As an individual, you don’t want to admit that adverts and media influence your behavior strongly, yet you can admit that the population is influenced. Nobody wants to admit that they are influenced. But don’t you make up part of the population?

In this system, you have a government. This government also decides on who prints your money. Your government also sets your education curriculum up. You cannot legally study outside of the education system framework set up. You must follow the system. Even the corporations where you get your ‘jobs’ force you to have followed the education system. Who writes the education system? The government (which is elected through corporate power). This education system tells you how to live your life, how to get jobs, what you are worth, what you should do and think. It prepares most people for jobs – for dependence. Few walk out of it and start self-reliant enterprises. Which is odd when you consider that each human being has a unique thumb print, unique mind, and unique everything. So each being would, if he or she followed their hearts, produce in a unique and thus self-reliant way. As long as they don’t try to conform to one way of doing things for everybody, logic tells you they would be able to do what they love and be self-reliant in it because no one else would be able to duplicate them. If fact, we all know of someone who succeeded wildly by doing what they love and doing it they’re way with persistence. Americans can come out of this loss of confidence if they just look inside themselves and not on outside forces.

Everything in nature is unique and self-reliant. Only we human beings require employment to live! Don’t you find that strange? No other creature in nature requires employment to live. Self-reliance is the natural state of all beings for they are extensions of the Almighty Creator, all part of the One. So, your education system is written and maintained as is by the government. Its effects as we see them are the majority walking out programmed to look for jobs and scared to death of being self-reliant. Correlate this with the fact that 2% of the world’s most powerful people own, influence or control about 75% of the resources in use, resources that need people to work them, and you may see a pattern there. And correlate this with the fact that they also have a hand at the government set up and the money supply and printing, and you may see another pattern there. This is not an attempt to point to any one conspiracy or anything. This is not a conspiracy theory far from it. But the facts as they are showing us that there are people who are aware and those who are not. And those who are aware have goals, some with very large global goals, which they pursue. Some goals may be noble and some not. And nothing is impossible. And the laws of cause and effect always work. No matter how ridiculous the situation itself sounds, they work. What is amazing about the education system is that everybody knows that it trains people to know certain facts but leaves them unprepared for the world. Everybody says, “Why don’t they teach us how to make money, how to live with other people, basics of humanity?” And everybody knows that the leaders of the nation read self-development books and materials, because they work. For example, the book Think and Grow Rich has been a classic must-read for the most powerful people ever since the 1930s. Yet none of its principles ever made it into the education system, even though the leaders know the principles very well because they read that book and apply it. The knowledge you would pay thousands of dollars for in a weekend seminar is so simple yet empowering, but no one ever puts it into the education curriculum.

Why? Did you know that, for all of humanity’s history, powerful civilizations have always been led by a small group of people, families or dynasties? All over the world, this same pattern has been in place since 8,000 B.C. Always, the one thing that differentiated the masses under control with the controllers was always a lack of awareness, a withholding of knowledge there is no excuse for that today. Has this pattern stopped, or are we in delusion? As you can see, there is never anyone to blame as such. The masses have to accept the delusion for it to work. So the idea of victim and victimizer is inaccurate, although fairness, in human terms, may not be present.

The whole point I am making of all this is to show you that if you live by default, within the system, you will get the default results of the system. Awareness and making your own choices is the only way you can have your own results. But there is more. You can extend your own wealth and freedom by helping others see theirs, and by adjusting your system to make it more efficient and easier for you. The U.S. spends $1.03 billion on military expenditure per day! The whole world including the U.S. spends $3 billion per day on the military. The U.S. makes a handgun every 20 seconds (and guess who owns the gun factories). All this is done in the name of peace. The means of war are the means of war, and the means of peace the means of peace. You cannot confuse the two and think one will create the other. You cannot use the means of war to make peace. Cause and effect dictate it to be impossible. Peace is only achieved when people choose peace, truly, in their hearts and mind. The more weapons you make, the cheaper they get and the more available they become. Just like faxes and mobile phones. At one time, very few people had nuclear weapons. Now anyone with $100,000 can get a small one in the black market. You can buy an AK47 assault rifle in Afghanistan for $15. The more you make of anything, the cheaper and more available it becomes. You cannot increase peace by spending more on the military – you simply guarantee conflict that way. Simple economics. (By the way, every time there is a war, the national debt increases and the Federal Reserve Bank are owed more by the taxpayer.

What people have yet to realize is that democracy is not necessarily freedom. Democracy simply means majority wins. Even the dictionary defines it as that. Majority rules. Majority of what? People? Money? Right now, it is money. So the one with the most money rules. The golden rule, right now, is that the one with the most gold rules. You find this applying in almost all democracies. Even in ‘poor third-world countries’, money is always used to ensure the results of elections. Majority rules. Democracy. Interesting concept.

Freedom, each being recognizes the sovereign divinity within other beings. Within that simple boundary, each being is free to do, as they like. In other words, you are free to be free, to deal with your own consciousness, to live and let live.

And so is everyone else. The idea that one is free because they live in a democracy is a contradiction. Look up the words freedom and democracy in a dictionary:

· Freedom: The condition of being free; the power to act, speak, or think without externally imposed restraints.

· Democracy: The doctrine that the numerical majority of an organized group can make decisions binding on the whole group.

Find your freedom within you. You are built with it. Just like, as all of life, you are built with self-reliance capabilities. You can be wealthy and free through many means and for varying periods of time, but you most easily and effectively do so with your own inner power, wealth and freedom. Everyone has that. You cannot blindly rely on the system – you can't wait for the government to do it all for you get up off that couch. President Obama is doing his part now its time to do yours. You will simply become a default output if you do anything. The government has pluses and minuses. There are parts of it that can help you on your path and parts that can hinder you. But at the end of the day, you have to stand up for yourself. You have the inherent uniqueness and capability to! Humans are still evolving. We are not even civilized yet (can you imagine a civilized society that somehow gets innocent children at birth and manages to turn them into people full of fears, children who shoot each other?); we are only just learning to use our reasoning capabilities; we are a race at the adolescent stage of evolution. Democracy is not the end stage – it was simply a stepping-stone to something bigger.

What We Need Is More Trusts In Banks

2011-11-29T16:20:00.001-08:00

Not more banks that say trust us.

By Melvin J. Howard

After reading Bloomberg article Secret Fed Loans Gave Banks $13Billion

Only backs up my long heldsuspicion that in this day and age robber barons still exits and monopoly isnot just a board game. And that maybe the solution lies in the people creatingtheir own monetary and trade systems and weaning themselves away fromdependence on the very risky, and destructive global financial system we havetoday. Really why continue to trust in, and be a part of, a system that worksagainst us? Should the current global financial system collapse tomorrow theworld would have no back-up mechanism for continuing trade, and in alllikelihood the resulting confusion and collapse of order would result inmassive catastrophe, maybe worse than Germany in the 1930s, and on a globalscale. The risk of global financial collapse continues to increase withincreasing income inequality. This leads to an increasing amount of financialactivity being driven by those who have so much excess money that the bulk oftheir transactions are speculative. This inequality and these risks increasewith each publicly funded bailout, which then further increases income andwealth gaps. And so the cycle continues, with this positive feedback built into make the whole system more and more unstable. Those who are currentlyactively involved in setting up alternative economies are in a way activelyhedging their bets that the dominant system will eventually fail.

However that being said, settingup alternative financial and economic systems in a meaningful way will take alot of time and effort. The existing global financial order will be with usuntil it either collapses or people come up with an alternative, or both. Inthis time it's important for activists to challenge the financial world ontheir trend towards increasing speculation and reliance on cures for financialcrises. Along this line of thinking it might be more fruitful to work towardsreducing the need for IMF bailouts, rather than just worry about them once theyalready exists. That is maybe people should also be focused on prevention aswell as the specific nature of the cure. Otherwise increasing speculativeactivity may end up increasing the frequency and severity of IMF bailouts.

One of the best means of preventionof financial crises (and therefore IMF bailouts) is stricter supervision ofbanks and other financial services companies, so that they don’t make too manyrisky bets that destabilize the markets. This is in the best public interestsof a public that depends on stability of the banking system, and doesn’t havean alternative monetary system to fall back on. One would think that banksupervision would be done under the guise of a government body so that therecould be some democratic accountability of the supervisor, and somerepresentation of the public’s interests. Think again Under theGramm-Leach-Bliley Financial Services Reform Act of 1999 the regulator of allbank holding companies in the U.S. is the Federal Reserve. They are also thesupervisory body, which will monitor banks risk taking activities and theirassociated capital buffers under the new Basel Capital Accord. As we know theFederal Reserve is 100% owned by the private banking industry. So the banksseem to be supervising themselves!

This doesn’t bode well for the ideaof getting banks to behave better with respect to risk taking. Apart from theissue of ownership, the conflicts of interest with respect to the "centralbank" of a country also supervising the banks are so profound that noother major industrialized nation has dared to do it. In most other countriesthe central bank the driver of monetary policy - and the bank supervisor -trying to make sure the financial system is safe - are two entirely differentbodies.

One the one hand, the Fed, when itwants to increase the money supply would encourage banks to take more risks toachieve this monetary goal. For example , the president of the Federal ReserveBank in New York let’s call him Mr. XXXX might comment in the midst of theworry about the European crisis, "The Fed": "If you’re a banker,go out and lend you don’t have to cross every i and dot every t. If you’re abank supervisor, don’t criticize your banks for making loans, even if they’reloans you might not have approved just a little while ago." He would bespeaking there as a key player in monetary policy, not as a supervisor whoshould be concerned about risks in the financial system. Mr XXXX, as the headof the New York Fed is also vice-chair of the Fed's Open Market Committee,responsible for the creation of base money you know magic money out of thinair, not only is Mr. XXXX now responsible for supervising the activities andcapital levels of the New York area banks, he is now also the chair of theBasel Committee on Bank Capital requirements! In many cases his role as centralbanker (and driver of monetary policy) will conflict with his role as bothsupervisor of banks and chair of this capital committee both of which SHOULD berepresenting the publics interests in bank risk taking.

When Alan Greenspan was, theGovernor of the Federal Reserve Board, that overseas all the Federal ReserveBanks, said in his bid for being the bank regulator of choice, that regulationby a separate government body (such as the Office of the Comptroller of theCurrency) devoted only to managing safety and soundness of the banking systemwould "inevitably have a long term bias against risk taking andinnovation". He forgot to mention that these risks are usually born by thepublic, so that such a focus of a supervisor would be quite appropriate.Unfortunately, often masters of the universe forget that there is a public toworry about. That is, until a public bailout is needed of course.

The conflicts of interest andevidence of the "fox guarding the hen house" does not stop there. TheBoard of the Federal Reserve Bank of New York always has the biggest New Yorkbankers on it. So it is not surprising that the, past CEO’s of Citgroup is onthe Board of the Federal Reserve Bank of New York. The Federal Reserve Bank ofNew York is the Supervisor of CitiGroup! As noted, the president of the NY Fedis also the chair of the Basel Committee setting capital requirements that aresupposed to protect the public from banks taking excessive risks for excessiveprofits. So the supervisors and the supervised are pretty much one and thesame.

The latest draft of the BaselAccord in coming up with capital (i.e. safety) requirements. Evidently tickedoff the American bankers and they were starting to get pissed-off at some ofthe conservatism and safety margins proposed by the European supervisors. Sothey thought they better step in and take over.

The change at the helm willprobably bode well for the big bankers whose comments on the proposed accordscan be pretty much summed up as tantrums about how the proposed capital (or safety) levels were just too high andhow this would eat into their profit margins. It is especially illustrative tolook at Citigroups comments in the past since, as noted, the Federal ReserveBank of NY, whose president once chaired Basel, supervises Citigroup and onwhose board CitiGroup has representation. In this way it could be construedthat, unless pressure is applied otherwise, CitiGroups desire for holding lesscapital, and making the financial system more volatile and risky will become areality. The following is a quote from the response by Jay Fishman, past COO ofCitigroup at the time to the new proposed Basel Capital requirements for banks:

"We urge the Committee to keepin mind that although capital has an important role to play in assuring safetyand soundness by supporting a banking organizations assets, it has asignificant opportunity cost". This means lower profits. This "wouldeffectively translate into higher costs to users of funds and/or lower returnsto investors in organizations subject to the New Accord". He goes on tosay that this would end up "reducing competition and choice for customersof banks". This is rather laughable now given that the multitude of recentacquisitions of banks that have gotten bigger since the crisis. All across theworld this has done more to reduce competition and choice that any capitalrequirement could.

Furthermore in appealing tocompetition, that bastion of the free markets, Mr Fishman forgets to point outthat his organization is a primary beneficiary of the IMF bailout mechanism,which is more of a threat to competition and free markets than any supervisorcould dream up.

Mr. Fishman, in his letter, callsfor capital requirements to be primarily set by the banks themselves,especially those "sophisticated banks" with "sophisticated riskmanagement techniques". Fishman forgets to point out that these fancy riskmanagement models failed completely to manage the risks of their bets inMexico, Asia, Latin America and Russia during the 1990s. Finally he argues thatthe increased disclosure requirements of the proposed new Basel Accord willincrease the costs to banks, and only serve to confuse everybody.

The comments of a bank that has thehighest degree of moral hazard posed by the Bretton Woods institutions, andhence the biggest incentive to take excessive financial risk, must surely betaken with a grain of salt. However without the involvement of the NGOs andother organizations fighting these institutions the new Basel Accords andassociated capital requirements will go through with exactly what the bankswant. That is - more profits through higher financial risk taking that willonly serve to increase the frequency and severity of publicly funded bailoutsand further compound the transfer of wealth from the poor to the rich. If youlook at history this has always led to the destruction of empires society canno longer afford to ignore income and wealth inequalities for if we do we do soat our own peril.

S&P Got It Wrong Again

2011-08-23T14:17:00.000-07:00

Never mind that S&P gave their triple AAA rating to all that toxic sub-prime debt that got us into mess in the first place. Why should we trust their opinion now?

By Melvin J. Howard

S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn't do enough to address the gloomy outlook for America's finances. It downgraded long-term U.S. debt to AA+. S&P said the downgrade "reflects their opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in their view, would be necessary to stabilize the government's medium-term debt dynamics." It also blamed the weakened "effectiveness, stability, and predictability" of U.S. policymaking and political institutions at a time when challenges are mounting. A judgment flawed by a $2 trillion error speaks for itself," a Treasury representative said.

Before September 11 the firm of Cantor Fitzgerald was commonly viewed as the core of liquidity for U.S. financial markets", for the world's monetary system "Cantor Fitzgerald lost hundreds of traders and other professionals in the disaster. These individuals represented an enormous amount of intellectual capital with respect to issues affecting liquidity. Many believe that such talent cannot be easily replaced and that the United States may soon experience liquidity challenges." "Whatever happens with U.S. liquidity could have a rippling impact around the world." Cantor Fitzergald was reputedly responsible for 70% of the U.S. Bond market, at the time. It is also a key component of the 25 primary bond dealers who act as counter-parties to the Federal Reserve during its Open Market Operations. And it's one of the three of those 25 who lost many employees during the September 11th attacks. This is what the Federal Reserve does when it creates or extinguishes money by buying or selling government securities or bonds. The counter-parties to these transactions thus play a fundamental role in the monetary system. The concerns about liquidity just mentioned refer to the concern about the "flow of money" or the "accessibility of money" to conduct "business as usual" throughout the economy. The amazing feat of the remaining Cantor-Fitzgerald bond-traders to return to work within days of the tragedy is a tribute to the extraordinary resilience of the American people, and helps one understand the spirit that created such a great empire in the first place. The return to "business as usual" was also marked by the reopening of the various NY based stocked exchanges, accompanied by the speculative attacks against all those operations already critically wounded by the attacks. Free markets were back at work for the speculators who seemed to have no moral dilemmas about profiteering from the crisis. Nobody got upset about his or her lack of patriotism. But the markets are not really free for all, because when big players get in trouble the public will bail them out. But what this demonstrates is the overwhelming and disproportionate power of the shareholders, who are able to absolve themselves of the cost of this catastrophe by dropping their shares like hot potatoes, while the public steps in to pick up the tab.

They get mostly upside gain and limited downside risk. In this case it is shareholders who do not bear the responsibility of the risks they assume. With the public always standing by to fund bailouts nobody should pretend that the markets are free and fair. There is, however, one thing that the public cannot bailout, or otherwise be called upon to take responsibility for. I am talking about the value of the U.S. Dollar. If market speculators had attacked the U.S. dollar to any great extent, serious world wide financial economic troubles would have developed immediately. And no taxpayer bailout could have fixed this. We already saw from the opening of the stock markets right after the that speculators were more than willing to not let human tragedy get in the way of maximizing return on capital. So, if we have a free market for speculators, how come no speculator attack materialized on the U.S. Dollar?

I’ll tell you why a gentlemen's agreement had been reached by the world's major financial institutions to not attack the currency of the U.S. (HANDS OFF). Actually this was a good thing because it would have added massive instability to an already tense situation. However what we learn from this is a bit frightening - that the control of the lynchpin of the international monetary system is in so few hands that such a "gentlemen's agreement" can be pulled off with extraordinary success. September 11 was certainly an attack on at the heart of America and the monetary and financial systems that dominate the modern world. The fact that both the financial system and the military system were targeted on September 11th is not without significance. The two are intimately related, and key components of America’s might.

WALLSTREET THE OTHER U. S. MILITARY FORCE

But let me tell you why S&P still got it wrong yes Washington argued and waited to the last minute to get a deal done to lift the debt ceiling. Did anybody in the know think that was not going to happen? So while the world's eyes were focused on the so-called debt debate. I was looking at a spreading and global fact the dollarization of the world markets. The dollarizations have far more effect than any trade agreement. Dollarization, means making the U.S. dollar the official currency of that nation. Not only is Latin America already there, but also other lesser-known nations, are being persuaded to dollarize. At the international level dollarization take credit creation power completely out of the hands of that nation and places it entirely with the United States. With dollarization, you don’t really need the highly sometimes-controversial free trade agreements I know this first hand. Dollarization will do the job of such agreements without all the hassles and public outcries associated with these documents that have to go through a process. Such is the mystery surrounding money and monetary policy that lengthy trade agreements get more attention than the simple move to formally adopt the currency of the United States.

Dollarization gets little attention because it can happen in foreign countries without any approval of the United States government as is required for the international trade agreements. Countries that do not comply with the monetary regime will soon be attacked in their currency. In this way speculators act like a military force, going to war against foreign currencies or monetary systems, and pounding them with their might until they win. Just like the U.S. backed military forces before them they have more and mightier weapons. In the case of a military action during the cold war U.S. backed military forces could often physically attack until they gave up because the former had the most access to the most powerful weapons. The same is true of currency attacks by Wall Street firms (and their European counterparts). The major firms that instigate the speculative attacks have access to more U.S. dollars (or other hard currency such as the Euro) than the central banks of many countries. Remember that the U.S. Dollar is the linchpin of the international monetary system and forms the "reserve" backing of most foreign currencies. By having easy access to tremendous amounts of the mightiest monetary weapon in the world hard dollars. Currency speculators act like U.S. Navy Seals going behind enemy lines taking out a target undetected until it’s to late. To understand this you just have to look back into the history of the international monetary system over the past century. That’s why I rate the U.S. AAA for a long, long time to come.

WHY U.S. GOVERNMENT BONDS ARE CONSIDERED THE SAFEST ASSET IN THE WORLD

2011-07-10T16:45:00.000-07:00

That could change August 2, 2011 if Congress doesn't act!

By Melvin J. Howard

The role of the Treasury Department or Treasurer of any body is to deal with financial issues - to collect income, to disperse expenditures, to maintain the books, see to the investment of surpluses and the borrowing necessary to cover shortfalls. So to with the US Department of Treasury that oversees the management of the biggest account in the world, that of the US Government. The US Treasury Department overseas the main governmental revenue collector, the IRS or Internal Revenue Service, the Bureau of Public Debt that manages government debt issuance, and the US Financial Management Service, who manages "The Books".

It is important to appreciate that the accounts of a government do not look at all like the accounts of any body in the private sector, be it a for-profit or a non-profit organization, or even an individual. Indeed if you viewed the U.S. government balance sheet through a private sector lens you would immediately declare it bankrupt and wonder why U.S. Government Bonds are considered the safest assets in the world!

However the reason a government's balance sheet doesn't tell you what you need to know about the safety of a government obligation is because it doesn't place a value on the right of a sovereign to tax its residents. This right of the sovereign, held only by the sovereign, generally makes obligations of the sovereign a safer investment than any private sector body licensed by, or domiciled in, that same sovereign nation. Then, the higher the national income (or the tax-base) in that country the higher the expected revenue to the sovereign body, and the more likely it will be able to meet its own obligations (provided its debt levels stays within certain bounds). Thus it comes as no surprise that the country with the largest economy and national income also issues the least risky type of debt security and in today's world that is the US Government.

The resulting easy ability for the government to both tax and to borrow facilitates the type of military expenditure and infrastructure spending necessary for America to continue building further economic growth. Economic growth spurs further access to capital for military and infrastructure expansion, and so the cycle continues. So America would then be very concerned about the following two primary threats to this pattern:

Growing expenditures that increasingly take money away from the primary building and maintenance expenditures (military and infrastructure investment). Emerging empires with fast economic growth that could take their place. And so it would be that some of the main concerns of Financial Management today are:

In the first category of competition for empire building funds are two main things:

1. First are terrorist actions that make economic infrastructure more expensive to maintain. The other is the aging of the US population and increasing healthcare costs.

2. In the second category of emerging empires China and India are the most frequently used.

Role of Taxation

Of course one cannot talk about the role of tax without talking about the role of government since tax is what funds everything a government decides to do. Regardless of what kind of society you live in - dictatorship, communist, capitalist, democracy, semi-democracy - a government will spend money on the following in various orders of priority:

ü Militaries for self defense of the home country and possibly for control over other countries,

ü Some type of system of law and order in the home country,

ü Infrastructure for economic development,

ü Human development - education, healthcare, and so forth,

ü Foreign relations with other countries

Redistribution and economic insurance, or "safety net", for individual residents. In the U.S. the main redistribution function and associated safety nets look a bit more like a type of "insurance" against personal economic disasters, whereby the risks of such events are spread across the society as a whole. For example, the risks of no longer having access to money due to retirement or disability which is what Social Security covers are borne by society as a whole, which has a much larger capacity to bear that risk, than do the individuals likely to experience such events. Placing these risks on individuals to bear became intolerable during the Great Depression, leading to the establishment of the Social Security system.

The purpose of any insurance is to pool risks so that each individual in the pool lowers their own risk of some crippling disaster for a small annual fee paid to the pool. Therefore any insurance mechanism is necessarily re-distributive. "Insurance like" federal taxes such as Social Security are more re-distributive than any private sector insurance because those with the highest ability to bear the related risks (those with high incomes) get the lowest expected return on their contributions to the system. In addition what is really happening, is that current workers contributions are always paying for current retirees in the system and there really isn't any "saving for the future" going on, as is so often presented. Such a progressive risk sharing mechanism could not work in the private sector, which is why it was founded as a public system in the first place.

Some argue for less government intervention in the market economy seem to overlook the fact that the government creates the infrastructure for the markets to function in the first place. Without government created legal and judicial infrastructure, even the most basic contract would not be enforceable, except at gunpoint. Since our whole monetary and trade systems are built primarily on contracts of agreement, modern markets would not exist, and economic development could not happen, without significant government intervention.

Those who also argue for an end to government sponsored re-distributive mechanisms either overlook or dismiss the role of periodic redistribution in sustaining economic prosperity. Without government intervention in redistributing wealth in suitable amounts you step on to a spiral of increasing inequality. "Nothing can preserve the integrity of contract between individuals except a discretionary authority in the State to revise what has become intolerable. The powers of uninterrupted usury are too great. If the accretions of vested interest were to grow without mitigation for many generations, half the population would be no better than slaves to the other half. Those who insist that the State is in exactly the same position as the individual, will, if they have their way, render impossible the continuance of an individualist society, which depends for its existence on moderation." (Keynes)

MONOPOLY MONEY

2011-03-27T15:22:00.000-07:00

The Constitution of the United States clearly states that only Congress shall have the power to create money and regulate the value thereof:

BY MELVIN J. HOWARD

But that is really not the case today, it is actually created and regulated by a privately owned company that controls and profits by printing money through the Treasury, and regulating its value. What is the private company that prints U.S. dollars? It is the Federal Reserve Bank (the Fed). Most people think the Fed is a government arm. Its name is misleading. It says ‘Federal’ yet it is not federal at all. It is a fully private corporation. It also says ‘Reserve’, yet it has no reserves. The money is printed literally and completely out of nothing, not backed by any value or gold. It is one of the most secretive and controversial institutions today, the truth behind it becoming only recently clear to an increasing number of people. The Fed began when, in 1914 and after trying to do so unsuccessfully several times before due to opposition, about 300 people and banks put together just $100 each and formed the Federal Reserve Banking System. These people and bankers formed and still form part of the top 2% of the world’s wealthiest and powerful people. The Fed is one of the most profitable companies in the world. It also collects billions of dollars in interest annually, interest charged to the U.S. government. The history of its formation is filled with controversy, with many experts having the opinion that Congress gave the Fed the right to print money in ways contrary to the Constitution. This is how, the Fed works: The Fed prints money, and loans it back to the U.S. and other governments, and charges interest on the currency. It buys government debt with money it simply creates, and charges interest to U.S. taxpayers. The ownership of the Fed has always been kept a closely guarded secret. In fact, even their books and detailed accounts are kept secret. My interest in the Fed or the monetary system in general is more curiosity and the study to find out why there are so many disparities among the haves and have-nots. Whether people care to admit or not racism played a big role in those disparities in early America that has had a profound effect on the outcomes of families today. The end of the civil war marked the time when the fight for equality took full swing. After the war southern state legislators, dominated by former confederates, passed laws known as black codes that severely limited the rights of blacks. The codes known as the Jim Crow laws were slightly different from state to state but they usually contained limitations on black occupations and property owning.

From the Servicemen’s Readjustment Act, known as the G.I. Bill of Rights, Voting Rights Act, and Homestead Act etc. Most would be surprised today that it was the Republicans in response to these laws, that Congress, in 1866 seized the initiative of the remaking of the south. The Republican Congress at that time, wanted to ensure that the south was correctly rebuilt with the newly freed blacks as visible members of society. Now lets get back to who owns the Fed. It is not very easy to get information on exactly who or whom owns the Fed (because the Fed doesn’t publish a detailed list of its owners) But this is what I did come up with based on the last time the ownership of the Fed was investigated the following emerged as the main direct or indirect (through cross holdings etc) owners of the Federal Reserve Bank:

Rothschild Bank of London

Warburg Bank of Hamburg

Rothschild Bank of Berlin

Lehman Brothers of New York

Lazard Brothers of Paris

Kuhn Loeb Bank of New York

Israel Moses Seif Banks of Italy

Goldman, Sachs of New York

Warburg Bank of Amsterdam

Chase Manhattan Bank of New York

Citibank

Morgan Guaranty Trust

Chemical Bank

Manufacturers Hanover Trust

Bankers Trust Company

National Bank of North America

Bank of New York

What is interesting is that these big banks work together in various aspects and they are connected to the old and established London Banking Houses ever since the beginning. There is only a small but powerful group of individuals who own significant shares in these banks. This gives them ownership of the Fed through their ownership of the banks that have shares in the Fed (the Fed’s shares are not publicly traded but are sold only to member banks). The Fed system was set up in 1914 after several failed attempts. The people and their leaders throughout the years, by presidents and congressional representatives alike, had always opposed the bankers in favor of this system. But in 1913, Senator Nelson Aldrich, the maternal grandfather to the Rockefellers, pushed the Federal Reserve Act through Congress just before Christmas during which time much of Congress was on vacation.

According to some historians, the bankers also funded Woodrow Wilson’s campaign and when he became president, he passed the Federal Reserve Act in 1914, an act he is later on record as having regretted its passing. A few Presidents, such as Lincoln, Jackson, and Kennedy, have tried to change this system but encountered too much opposition from other politicians, banks and corporations. Here is an idea lets give the task of printing U.S. dollars to the government itself, the money can be issued without anyone charging ‘interest’ for it, since it would be the government itself printing the money. To simple you say it is just that simple!

The Fed’s relationship with the government is very loose. As a private company, it is not required to disclose much to the public. It is run by a powerful group of people who are free from the usual restrictions of governmental checks and balances. Its Board of Governors is independent of the government and its governors hold office for far longer than any U.S. President does. It is also self- financing (actually it is one of the most profitable corporations in the world) and so does not rely on the national budget (the primary tool of control that Congress uses to influence agencies and other bodies). It operates outside of the national budget (in fact finances it) and so has monetary autonomy as well. In its task of regulating the money supply, it is completely independent of the government and is only ‘required’ to make decisions that will be in line with the nation’s economic policy.

The Federal Reserve Act was drafted in the Jekyll Island Conference, which was arranged for by powerful banking families, individuals and their corporations (such as J. P. Morgan Co., the Rothschilds, the Rockefellers, and Kuhn, Loeb & Co). The ownership of the Federal Reserve at the top level has not changed much in the years with successive generations within the controlling families simply inheriting that ownership or extending it under a different company name.

The Federal Reserve System is actually ‘split’ up into several components. There are 12 regional Federal Reserve banks, the most powerful one by far being the New York Federal Reserve Bank. Each of these 12 Feds is organized as a private corporation, just like any other private corporation. The Federal Reserve System is controlled by the Board of Governors (the Board) and the Federal Open Market Committee the (FOMC). The Board has seven members who are appointed by the President of the United States and approved by the senate. The Board determines the interest rate for loans, sets the deposits reserve ratio, which significantly affects a bank’s ability to create new credit, and decides how much new currency Federal Reserve Banks will issue annually. The FOMC is made up of members of the Board, the president of the New York Federal Reserve Bank, and four presidents from other regional Federal Reserve Banks. The FOMC sets the open market policy which determines how much in government bonds the 12 Federal Reserve Banks (all private for-profit institutions) may buy or sell (this is the major tool of monetary policy). There is also a Federal Advisory Council that is comprised of 12 representatives, one from each of the 12 Federal Reserve Banks.

This council meets at least 4 times a year with the Board to advise it on and discuss general economic issues. To summarize, every single part of the Fed is private – they are all private for-profit corporations (the Fed is one of the most profitable corporation in the world). The only part of this system that is in any way ‘public’ is the Board, which comprises 7 people appointed by the U.S. President. How neutral is the Board? The Federal Advisory Council that advises the Board in at least 4 meetings a year, despite the use of the word ‘Federal’ in the name, is comprised of 12 bankers representing each of their private Federal Reserve banks. The Federal Reserve Banks themselves despite the use of the word ‘Federal’ in their name are not federal at all in any sense. And they no longer keep any reserves (the gold reserves we abandoned long ago and cash reserves don’t exist because cash is printed anytime anyway).

A considerable amount of effort is made to conceal the power and composition of the Fed. Naturally, considering that the owners of the Fed are private individuals (through banks they own) and also have huge stakes in corporations in all sectors of the economy especially in the media, pharmaceutical, food and defense industries, and considering that great profits can and are made by those who know what will be in the papers months in advance, secrecy is an asset. Even internationally, they will then directly and indirectly, through its influence on organizations such as the IMF, World Bank and U.S. government, set conditions and guarantees for the loans it issues.

Lets look at an example and how this works first they log into their computer terminals, and create $20 billion, and ‘wire’ it to X Country’s bankers. That $20 billion is added to the U.S. expenditure and if, as it usually is, it is out of the budget, it becomes a debt that the U.S. government owes the Fed and which the Fed collects interest on. X Country now owes the U.S. government, which in turn owes the Fed. Now let us see how it is repaid back. X Country will shoulder one part of the debt while the other part is shouldered by the U.S. taxpayers (40% of tax goes towards debt servicing). In the U.S., the debt is held by the government and owed to the Fed. So the U.S. government collects directly from X Country over time. Meanwhile, it has to pay back the Fed using taxpayer’s money.

This doesn’t make sense because the Fed just printed the money anyway they didn’t get gold for it or anything like they used to – but that is the way the system is set up today. So in effect, the Fed makes free money at their discretion, holds none of the risk, does none of the work (the people of X Country and America work and pay), and is in truth one of the most profitable corporations worldwide. Why shouldn’t it be? After all, it is the corporation with the monopoly of making and regulating U.S. dollars!

We Live In A Democracy How Come Our Monetary System Does Not

2011-02-20T14:34:00.000-08:00

Time For A New Monetary System The Old One Is Broken

By Melvin J. Howard

Recent decades have brought with them a growing public awareness of the long-term costs of the short-term profiteering legacy of the industrial revolution. Global Warming, Ozone Depletion, and Acid Rain are now all household names. The current monetary system - the one inherited from this same industrial revolution and the one in which we always "discount the future" for short term gains- has played a large role in such destruction of the environment. Today many are asking the question - Can we design monetary and economic systems that encourage preservation of the environment and sustainable economies? Lets take a look at some of the fundamental flaws of contemporary mainstream economic theory that today has led to such environmental and financial destruction.

A hundred years ago the American citizenry had a much better understanding of their national monetary system and demanded active participation in it. Today, however, for reasons that can only be speculated on, the majority of world citizens have very little understanding of how the international monetary system works. Yet in this day and age our lives are largely determined by our relationship to, and we are highly dependent on, the international monetary system. When you live and work amongst something day in, day out, you take it for granted. Many people seem to have stopped questioning the foundations of the monetary system and go through life unaware that these foundations are on shaky ground.

Additionally those who work in finance have been "trained" to understand economics and finance in a certain way, often blinding them to new ways of looking at money. With near melt down of the global financial system many activists are now requesting reform and more economic fairness within the existing monetary system. However there is evidence to support the position that problems of economic inequity are rooted within the monetary system itself.

Let's take look of the unfairness in the banking system by exploring the undemocratic nature of it. Much of the unfairness to the non-bank public of this money creating process i.e. creating money on computer ledgers comes about because the general public has no input into decisions about money creation. It is only bank managers and the Open Markets Committee of the Federal Reserve Board that decide how much money gets created, and more importantly, FOR WHAT PURPOSES MONEY SHOULD BE CREATED. These decisions are all entirely closed to public input. Decisions on making new money will be based on whether a lender can repay and how much interest the lender can bring in, which is what creates bank profits. This means most money will be created to lend to people that already have lots of previously created money, and lots of advantages in life.

Disadvantaged people will often be denied access to the money creating process, except under exploitative circumstances, which are likely to see high interest rates and/or ultimate possession of their assets and resources by the bank. Alternatively the more disadvantaged will have to seek money from non-bank entities that have already accumulated lots of money, and this often also leads to exploitation.

What this also means is that money is not created for things most desired by society as a whole. In fact it is often created for exactly the things that society does not want at all. This includes projects that involve excessive destruction of natural resources like logging, building power plants, mining, and so forth, because the bank realizes that such projects are likely to bring back the money that will pay off the loans. It is also interesting to note that money is almost NEVER created for the purpose of providing public goods, such as education and healthcare, for such services will not pay the bank back.

Rather these services depend on recycled money through the tax system. Hence it is not surprising that we have reached a situation where monetary value and social value are inversely correlated. By this I mean that a good or service with a high monetary value in the private property markets generally has a low social value. Conversely high social value goods and services generally return a low monetary value. This is illustrated in the example where public goods providers such as teachers are some of the lowest paid workers, yet currency trading is perhaps the most lucrative profession there is, and has also become one of the most socially destructive.

It is reasonable to expect that taking social factors and public input into consideration at the point of money origination would largely reverse this situation. It is clear to the person standing on the outside that origination of money at commercial banks is an undemocratic process and so encourages the creation of money (or loans) for many undesirable activities. But often overlooked is the unchecked power of the creator of Base Money. The FOMC meetings have never been open to public input or scrutiny. While summaries of meetings are posted almost immediately, the full transcripts of FOMC are not even available until 5 YEARS after the event!

It's important to be concerned that the money origination process is not subject to democratic accountability. Many of these problems could be remedied if the public had more input into the decisions surrounding the origination of money. This requires an entirely different paradigm for thinking about money than we have today. It is a very complex problem and there are no simple answers. But at the very least it should be high on the list of topics for public debate. In addition, once you understand the process for creating money out of nothing, you begin to see that what banks and the Federal Reserve do is not so difficult after all. The hope is other alternative monetary systems can be explored and developed. That would not leave such personal, environmental and financial destruction in its wake.

"Black Financial History Month”

2011-02-07T12:20:00.000-08:00

Old Money

By Melvin J. Howard

Out of all the accomplishment that has been written about Black Americans. There are blank spots in the achievements of early Black financial institutions and the part they played in early America. So this being Black History Month I wanted to shed light on the financial system then and now. So take a trip with me I promise you won’t be bored and above all I hope you learn something you didn’t know before and seek inspiration to change your circumstances. By educating yourself on the financial system we live in today.

In December of 2002 there was much celebration in Atlanta over the fact that Georgia had produced two Nobel Peace Prize winners - Martin Luther King Jr and, most recently, former president Jimmy Carter. In fact, the King Center and the Carter Center, dedicated to both the memory and missions of these two Peace Prize winners, lie only about one mile apart and there is a walking path connecting the two. This walk, starting on Auburn Avenue, birthplace of King and home to the King Center, has been described as that from "Civil Rights to Human Rights" in the local Atlanta news and follows a road called "Freedom Parkway".

However, somewhere along the way it will look like you took a wrong turn somewhere. Pretty soon, none of the streets looks very much like a Freedom Parkway to many. Certainly financial freedom was not evident - instead, foreclosure was as it is now, with some streets dotted with several homes in foreclosure. Indeed if you were to end up on the steps of the Fulton County Courthouse in downtown Atlanta in those days. You would have seen lining the steps throughout the day a bunch of lawyers with piles of papers that they were reading, one after the other just like this: Fulton County Courthouse January 2003 Foreclosure Sale. These lawyers were auctioning off the thousands of Atlanta homes in foreclosure that hit their books in the month of December. Most of the homes were going straight back to the banks. Don't be fooled by the location of the auction - just because it takes place outside the courthouse, "outside" is the operative word. There's none of this "getting your day in court stuff” when it comes to foreclosures here.

Statistics from the Atlanta Foreclosure Report had indicated where most of these homes were that were being auctioned off by the collection of lawyers on the courthouse steps. Consistent with studies done on foreclosure in other cities, the data showed the highest rates of foreclosure in predominantly African American neighborhoods. Pondering all this, and my tendency to ask why I started digging to see where this would lead me the result is not pretty.

Black-Owned Financial Institutions

In Atlanta Georgia you might have passed by the modern Atlanta Life Insurance Company building and then, heading east towards the King Center, passed by many buildings in disrepair. You can just make out the words on the signs of some of the buildings, and, if you know your history, you can try and imagine what were going on in and around them years ago - for Auburn Avenue where the hub of black economic activity in Atlanta and a key source of capital for African Americans. Along this stretch of Auburn you pass by the Apex Museum, and you can watch a movie called Sweet Auburn - Street of Pride.

Narrated by Cicely Tyson and Julian Bond, the film includes a short history of some of the major black-owned financial institutions that emerged during the early twentieth century, some of which are still with us today. It's definitely not easy to find and read about the history of black owned financial institutions, for like much of black contributions to America not very much history has been written about them. Professor Alexa Benson Henderson at Clark-Atlanta University wrote a book in 1990 called "Atlanta Life Insurance Company: Guardian of Black Economic Dignity" where she described this hole in American history as follows ... "I was discouraged...by the dearth of sources, printed or otherwise, on many of the significant individuals, groups and organizations that have been associated with black business development in Atlanta and elsewhere. Sadly, many of these inspiring stories are lost forever."

The Atlanta Life book opens a window to a whole branch of US financial history that has been largely ignored. Black-owned financial institutions sprung up in many places following the end of slavery, initially taking the form of community and church-based mutual aid associations. In the late nineteenth and early twentieth centuries there was no federal tax and no such thing as social security, unemployment insurance, Medicaid and so forth. As always, those at the bottom of the economic ladder were the most vulnerable to the contingencies of sickness, accident, job loss, death or imprisonment of a breadwinner.

Out of this environment and out of necessity grew a slew of mutual aid associations in black communities. In such a mutual aid group the cost of these risks is pooled by everyone paying a small weekly or monthly premium. Out of this pool are paid the costs of the few that experience the covered contingencies, such as death benefits to widows and orphans and weekly payments if you get sick and can't work. In this way the community as a whole bears these risks. This arrangement is more conducive to community development than having every member bear risk individually, which would tend to bankrupt whole segments of society.

Out of this collection of mutual aid societies in the South ultimately grew several extremely successful life insurance companies that, despite tremendous obstacles, are still with us today, including Atlanta Life on Auburn Avenue and North Carolina Mutual, born in another hub of black capital accumulation - Durham, North Carolina. These institutions have performed the near impossible - surviving for a whole century and through a period of brutal segregation, discrimination, the Great Depression and through having to win the confidence of their own communities in black owned and operated financial institutions.

Around the time these insurance companies were starting to grow, another key segment of black finance was emerging - the black owned banks. For example, Citizens Trust Bank opened up on Auburn Avenue in 1921 to meet the credit needs of the black community, to promote savings and the old-fashioned principles of "thrift", and to promote homeownership. Through all that happened in the twentieth century, Citizens Trust Bank is also still with us today. These and other black-owned institutions played a significant role in the accumulation and distribution of capital in African American communities throughout the twentieth century. It is no coincidence that the communities around them, such as the Auburn Avenue area, developed into economic hubs. Banks and insurance companies pool deposits and premiums and then invest them in things like home mortgages, office buildings and business loans. To the extent these pooled funds were invested back into local communities, further economic development of the communities was assured.

Financial Segregation

Well, as the years went by and even as segregation continued, white financial institutions began to see that money could indeed be made off black customers and they began to compete fiercely for this business. Ronald H. Bayer's book "Race & the Shaping of Twentieth Century Atlanta" sums up this situation: "The success of these black institutions had proved to the white financial community that blacks were good mortgage, bank and insurance risks. ... The decisive factor has not been the [white] citizenry's quickened sense of charity or prosperity. "Dollars, you see, are not segregated".

Often with deeper pockets, bigger marketing budgets, more experience and privileged access to the legislature, white financial institutions had many advantages in acquiring black customers, to the detriment of the customer base of the black institutions. As the era of state sanctioned segregation was coming to an end in the South in the 1960s and 70s, a different form of segregation was already rampant in both the North and South - financial segregation. The dominance of white institutions providing financial services to black customers soon led to a situation where accumulated capital from premiums and deposits were not being reinvested back into those communities but, rather, flying away to ventures in other areas. In such a situation capital is increasingly drained out of the local communities.

The Death of Dr King and Ginnie Mae's Birth

Social tensions in the aftermath of the assassination of the civil rights leader from Auburn Avenue, Dr Martin Luther King Jr., created the necessary pressure for the passage of the Fair Housing Act (also called the Dr. Martin Luther King Jr. Civil Rights Act) in 1968. This act outlawed most housing discrimination and gave HUD, the US Government Department of Housing and Urban Development, responsibility for enforcement. On a related issue, this year also saw the birth of the government corporation known as Ginnie Mae, the Government National Mortgage Association. Ginnie was charged with a very important task - to facilitate the flow of capital into home loans for low and moderate-income neighborhoods. How does she do this, you ask?

Well in 1934, during the New Deal regulatory of the Great Depression, the National Housing Act came into effect. This act established the Federal Housing Administration or FHA to insure home mortgages. What this means is that the government provides a guarantee to mortgage lenders in low-to-moderate income neighborhoods that they will get their money back if a borrower defaults. These government guaranteed loans, known as FHA loans, encouraged banks to make loans in many low-to-moderate income, and minority, neighborhoods, and this loan program is administered by HUD. Since the current statistics show so many FHA loans in foreclosure, we'll examine what happens when an FHA loan goes into default, and the home is foreclosed on. As things turned out, the FHA loans by themselves still didn't encourage enough capital to flow into home loans in these under-served neighborhoods and so Ginnie Mae was created in 1968.

Ginnie would buy up lots of government insured mortgages, mostly from the FHA program, and pool them together to create new securities known as mortgage backed securities. Then she guaranteed timely payment of principal and interest to the investors in these new securities. These new, pooled securities were very attractive investors with lots of capital invested such as insurance companies and pension funds. And so Ginnie Mae began to facilitate the flow of more and more capital into the FHA loan program serving low-to-middle income and minority communities. Her relatives known as Fannie Mae and Freddie Mac were created as privately owned counterparts to facilitate the flow of capital into conventional loans. Ginnie, Fannie and Freddie started something pretty revolutionary but, unknowingly, they had also created a Monster! Before long the Investment Bankers along Wall Street caught on to the art of doing what Fannie, Freddie and Ginnie had done and began pooling and making new securities out of everything and anything that had cash flows that moved.

Securitization is the process of pooling together lots of individual debts like mortgages or credit card debt or auto loans, and bundling them altogether to create new securities called asset-backed securities. These new securities, backed by the cash flows generated from the pool, are more attractive to investors than investing directly in individual mortgages and credit card debt. The process of securitization had taken the financial world by storm and its rapid development is perhaps the most important development in finance in a century.

Coming into the 21st century, securitization has been responsible for exponential growth in the financing of things that otherwise may have only gotten dribbles of capital - from non-stop credit card offers to predatory mortgages and home equity loans, to FHA loans - the list goes on and on.

To understand how securitization has facilitated predatory lending, we must travel along the securitization pipeline and trace a home loan from the unsuspecting home buyer through the mortgage broker, all the way back to Wall Street, the banking giants, the secret hedge funds, the insurance companies and other investment funds. We start our journey with a borrower in a low to middle income community. There are two types of customers: Those that already have a mortgage and some equity in their homes, and first time home buyers.

The Predators Arrive To The Home Buyer Then Back To Wall Street

Sub-Prime Lending the sub-prime loans we were talking about here should not be confused with FHA loans, which are very different and which I will talk about separately. The home loan process starts with the mortgage originator or broker. Many of these originators are "fly by night" shops, often-smaller operations, or seedy subsidiaries of the big banks.

In cases of fraudulent sales - falsified loan applications and the like - it's these players who are often directly responsible for the fraudulent act. What many of these predatory loans have in common is that the borrower finds an offer of credit attractive but does not understand the mathematics behind the transaction. They mistakenly trust the lender to do the calculations for them and do not realize they are paying too much for credit. When they can't afford their payments a few years down the track, they will lose their home.

The shady originators are generally not well capitalized nor regulated, which is why so much fraud happens at this point. Their primary sources of capital are the mortgage subsidiaries of the big banks that buy the mortgages from these small operators. The mortgage subsidiaries of the big banks, such as Chase Manhattan, Wells Fargo, Citigroup, Deutsche Bank and Bank of America buy up these mortgages in bulk and bundle them together to create pools out of them in things called Securitization Vehicles or Special Purpose Vehicles (SPV). The cash flows from the SPV, or pool, are then used to make new financial instruments called asset-backed securities.

These asset-backed securities issued against a single pool of home loans come in several varieties known as "tranches". The securities known as the senior tranches are the first to get paid out of the home loan payments coming out of the pool. Then there are the most junior tranches that get paid last. Hence the senior tranches are very safe investments and it's really the junior tranches that bear the risk of default by borrowers and losses realized on foreclosure. Because the senior tranches are safer investments they are very attractive to insurance companies and the like. Because the junior or, sometimes called toxic, tranches are very risky and bear most of the risks of default in the pool, they must offer very high returns to attract investors.

Hedge funds at the time were unregulated, managed investment vehicles funded by the capital of the extremely wealthy and designed to earn super returns for them. They were not regulated because of the so-called sophistication and wealth of their investors. Because of this, they have no capital requirements or safety net requirements - like the type of safety net that banks are required to hold to protect depositor’s funds. The role of hedge funds, and other investors who take up the risky tranches of securitizations, is critical. Without them, securitizations would not be as prevalent as they were today because, in order for the banks to reduce their own risks and front their profits on mortgage lending, they have to be able to sell these risky tranches. The fact that both hedge funds and others in this pipeline are not regulated means that safety and soundness of mortgage financing overall is reduced, and that the profitability of it is greatly increased.

This system design, and its extraordinary profitability, have facilitated massive flows of capital into sub-prime and predatory lending in the past decade. Ultimately, the primary reasons for the high profitability of predatory lending are as follows:

1) The information gap between the two ends of the pipeline. At one end you have the borrower who knows little to nothing about the mathematics of finance. At the other extreme, unbeknown to most borrowers, you have the masters of the most sophisticated financial system that has ever existed. Such information gaps mean huge profits. This translates into extra shareholder returns, over and above normal returns.

2) Loan Values Less than Value of Home: This means that the lender really can't lose on default and foreclosure and, again, risks are lower than what's priced into the interest rates on these loans. In many cases the borrowers themselves are the primary bearers of risk, but the pricing of the loans rewards lenders for the risk.

3) Avoidance of Legal Liability and Regulatory Restraints: Because most of the fraud happens with the small mortgage originators, the big suppliers of capital are not held accountable for it, and capital continues to flow to the next dodgy operator. Also, because banks securitize the bulk of these loans they can profit from them up-front and sell the securities to unregulated entities with no capital or "safety net" requirements. This makes the market more profitable.

In recent set of national and local foreclosure statistics it is clear that foreclosures related to sub-prime loans are on the rise. And so are those related to FHA loans. Let's turn our attention to the FHA loan market.

The FHA Pipeline

FHA loans in foreclosure account for about one third of all recent foreclosures. Not only is Chase Manhattan one of the largest issuers of Ginnie Mae securities made from FHA loans, but JP Morgan Chase has been employed by the government for years as the main pooling and banking agent for the whole Ginnie Mae program. I like to show you now how a typical scam using FHA loans were used through out the last 15 years. Where homes were being over-appraised by fraudulent appraisers and ultimately facing foreclosure because people couldn't afford the loans.

The suppliers of capital here claimed no knowledge of what was going on. But over appraising the value of homes lies at the heart of many FHA loan program abuses. You see, in this case, the FHA insurance program guarantees that the lender will get all their money back if they lose money on foreclosure, so over-appraising and over-lending that leads to foreclosure can be very profitable.

Do you see now why there has been such a massive foreclosure process in this country? Not only did the banks get bailed out by the mess they created they also got guaranteed payments on foreclosures. A sort of incentive to take homes across America. I have sat and watched how these games were being played for the last decade and half and wondered when the day of reckoning would come? Let’s face it most people look at mathematics and finance as a humdrum and dreary topic. But it is because of this type of thinking exactly that makes us the prey or predator! If people thought finance was as exciting as last nights super bowl the shadowy sectors of the finance world would dissipate.

I Have A Dream!

How to Securitized or Screw-tinized Your Assets

2010-11-01T09:12:00.001-07:00

Or who owns what?

By Melvin J. Howard

First lets begin with the basics to securitize a pool of consumer loans, lets say credit card debt, follow these steps:

First, a bank, a group of banks and/or other credit card issuers decide they'd like to sell the credit card debts owed to them by their customers. In return they will get some cash that they can use for new financial adventures.

An investment banker packages all this debt together in a nice pool of credit card receivables, using what is known as a Special Purpose Vehicle, and does some risk analysis to price the bundled up debt. Then they sell the neat new packages of credit card backed securities for cash in the markets, with the cash proceeds going back to the banks and issuers, less a handsome cut for the creative investment banker.

Then these new securities are then traded around the world markets. This is what happened with mortgages as well. So whether you're paying of your credit card or your house you actually never know whom you are paying to from one day to the next. There in lies the problem who owns what to who. You are just a little slice of income in a much bigger bigger security. On paper the implications of pooling such risks across many issuers and many different bases of borrowers are quite profound and provide many appealing features for investors in these securities that are basically bundles of receivables or income streams. By putting a vast number of receivables behind a security, risks of default are spread across the pool as a whole and the cost of default is much easier to estimate so that was the idea anyway. In theory even if a handful of borrowers did not end up paying their bills, by virtue being such a large pool there will be enough of the ones who keep paying their bills to make up for it. The high interest rates charged and paid by the larger paying group more than makes up for the defaulters, leaving a handsome profit for the investor in the bundled up security. For awhile the program was working thanks to the handsome profits, capital kept flooding into these securities to fund ever more mortgage back securities and the like. Due to this ability to pool risks via securitization, combined with saturation of credit to the middle class and the profits that come from uncapped interest rates, credit flooded into the poorest of homes, in fact the bottom 20% of income earners. People just at the poverty line are less able to resist such access to credit, and due to limited experience with it, often don’t understand the implications they were signing onto including that the huge interest rate they were paying is a killer. Result massive filing for bankruptcy first the poor, then the backbone of society the middle class.

The Greek philosopher Plato condemned charging interest because he felt that it produced an inequality of wealth and destroyed the harmony between citizens of the state. As commerce expanded and money lending became increasingly important, opinions about usury changed. The Romans were more tolerant of usury and were one of the first societies to recognize interest and set maximum legal rates for various types of loans. Throughout much of recorded history, societies around the world have felt it was important to limit the interest rate that a lender can charge in order to restrain lenders from taking advantage of borrowers."

Some banks are pretty highly leveraged and that these risks of leverage must be controlled since the banks lie at the heart of the financial system. The way this leverage is controlled so that risk of collapse is not too high is to set limits on leverage commensurate with the risks of the loans or investments any bank is making. This is what the Basel Capital Accord was discussing recently at the Bank for International Settlements (the central bank of central bankers) in Basel, Switzerland. These accords specify a certain amount of shareholder or equity capital or "safety net" (from a depositors perspective) that banks hold as a function of the riskiness of their loans or investments. Such a safety net sets a bound on leverage and provides protection for depositors and taxpayers who are ultimately on the hook for massive bank failure.

But these controls are continuously circumvented but how? I am glad you asked enter the Credit Default Swap or Credit Derivatives they were being used to get around these safety nets or caps on leverage. A derivative on an underlying asset basically allows you to make a bet on the future price of that underlying asset by betting just a fraction of the cost of that asset. The leverage comes about because the instrument basically replicates borrowing or lending of the underlying asset, without you ever having to physically own it. Derivatives can help you manage risk if you already trade in the underlying asset. Let's say you are wheat farmer worried about wheat prices. Then derivatives can be used to buy insurance on wheat prices. Say if wheat prices go down, you can get compensated for your loss by buying insurance in the form a futures contract or even a "put option" on wheat. Your outlay for this protection is fixed - the cost of the insurance premium - but it has removed the potentially larger loss of plummeting prices.

But and this is a big but, like all such things with a good use, there is a large downside. That is that the leverage and potential returns available on derivatives attracted speculators from all over the globe to play and to become major dealers of Derivatives. Like Private Equity and Hedge Funds, capitalized by wealthy investors and then often also borrowing many multiples of there capital from federally insured banks. With this highly leveraged capital base they then entered into the highly leveraged and potentially lucrative world of derivatives gambling. Private hedge funds were not regulated on the grounds that their investors are sophisticated, and at the time regulators didn’t seem to understand or be worried about the risks that depositors and taxpayers are exposed to by the largest and most highly leveraged of these bodies. In addition the huge hundreds-of-trillions-sized market known as the Over-The-Counter (or OTC) derivatives market is not regulated. But our banks that are regulated were and are among the major players and dealers.

The unregulated credit default swaps market, the hottest game on the block at the time. Enabled institutions that lend money to high credit risks to buy insurance on those risks. For example, a bank with high loan exposures to certain lenders can pay a premium to a third party for a credit default swap, a form of credit insurance, whereby the bank would get reimbursed by the credit swap seller if the borrower defaulted. The bank is thus able to take this credit risk OFF its balance sheet and thereby is no longer required to hold the regulated amount of equity capital, or "safety net", against the risky credit risk. This means that the bank can further increase its leverage. If the seller of the credit default swap is not a bank, and especially if it is an unregulated hedge fund, then there may be no capital requirements (safety nets, or leverage limits) on such credit exposures. Therefore through the use of credit default swaps the overall financial system safety net shrinks and leverage and associated risks of collapse are increased, as always to be borne by depositors and taxpayers if things get too out of hand.

Add to this the fact that banks and others in need of credit protection are entering into these swaps through off-balance sheet Special Purpose Vehicles to remove the underlying transaction from public and regulator scrutiny. So it's was very difficult to tell what was going on, and where and what the real risks were.

Some would argue that there should not be any regulation in this area. They argue this helps ensure capital and risks get allocated efficiently around the markets, which facilitates our economic prosperity. But these arguments always ignore the larger risks being added to the system as a whole and the unfortunate reality of Quantumnomics you cannot predict the non-event. The U.S. economy was becoming increasingly dependent on abstract concepts rather than on the production of real goods, and then about the risk/return trade-off of derivatives and leverage. So I ask again under oath XXXX financial instiution according to your sworn affidavit you submitted do you own and have the rights of said property. Remember you are under oath and subject to perjury!

IS THIS WHERE I GET ONE OF THOSES BANK BAILOUTS PLEASE

2010-10-26T16:14:00.000-07:00

I promise this will be my last one no really!

By Melvin J. Howard

How do the risks of the big gamblers of the financial system like Wall Street firms and the currency speculators, get transferred to the public who have no say or gain in these gambling adventures? How does this risk transfer work to increase income and wealth gaps globally, which then further increase financial risk, which in turn exacerbate global income inequality, and the cycle starts over again and again. Presently the big financial players are merrily increasing the financial risk to be transferred to the public and the public is now finally noticing. Rather, what many are noticing are the consequences of risk transfers that have happened in the past and materialized through such things as the IMF bailouts. Not too many concerned citizens were noticing the risk transfers that were being set up right in our own backyards now for the public to digest. The financial instruments through which these speculators were to gamble got more and more complex, and layer upon layer of instruments. Things like options, swaps, naked calls, floors, caps and collars. Then they mated and had offspring like - swaptions, captions, knock-out options and roller coaster swaps. I don’t think even the players themselves really knew what going on they were just saying what everybody else was saying. They were there for a quick profit, and have bedazzled the best mathematical minds money can buy to help them do this. Lets not go into the details of how these multiplying and magical instruments work. Rather we note that their growing use in the past that made the economies wobblier everyday, and that the financial markets were becoming too complex to regulate. On top of this, for every regulation curtailing speculator activity a new instrument materializes to circumvent it. Speculator’s instruments multiply like new strains of bacteria, gaining resistance to the old treatments. Now lets take a look at the Basel Capital Accord, this is sponsored by the Bank for International Settlements in Switzerland, to address the issue of bank and speculator risk. The Bank for International Settlements (BIS) might be considered the third arm of the major global financial institutions, the other two being the World Bank and the International Monetary Fund, which have been in the news lately. In comparison the BIS seems to get very little public attention. The BIS is owned by the central banks of the richer countries. Central banks in other countries are like the Federal Reserve in the U.S. That is, they are responsible for monetary policy or, the real activities of the BIS are extremely well guarded in secrecy. I could not find out what they really do and I could not find anyone who knows what they do either. But one thing I do know is that they host the discussions and rule-making about how countries should supervise their banks to make sure they are not getting into too much trouble, which might in turn upset the global financial system. While they host the international bank supervision meetings (closed to the public) the BIS says they are not responsible for the Basel Accords, which set international bank supervision standards. Banks don’t like to be supervised they rather just supervise themselves.

How much money can banks create through the lending process?

For every amount of money there is a corresponding amount of debt owed to the banking system. But how much money can a bank create through the lending process? A lot of that depends on how risky its loans are. Banks can create new loans (or bank money) up to a certain maximum multiple of their shareholder capital that is; the amount shareholders have invested in the bank, which is also the excess of the banks assets over its liabilities. Remember banks assets are its loans to the public, and its liabilities are deposits of the public. Capital for a bank can be thought of as a safety net the more capital a bank has, the safer it is. That multiple of shareholder capital that banks can create, as money will depend on how risky the loans are they choose to make. If they are very risky the multiple will be lower. Put another way, a bank that makes risky loans will have to hold more capital (i.e. more of a safety net) as a percentage of total loans than a bank that makes less risky loans.

Do you like to gamble, if you do when you go to the casino, you don’t bet all of your life savings. You leave some of your money at home or in your bank account so that if you lose all your bets that day, you will be able to tap into your untouched savings the next day to buy food, pay rent i.e. conduct business as usual. This is exactly what banks must do to make sure they can remain viable entities in the long run. The more risks you take with your money the higher a capital buffer you need because more risks mean a higher probability of loss. For many banks these "risk based" capital levels were set under the Basel Capital Accord years back. These capital accords were just revised, the banks complained that they have to hold too much of a capital buffer. You see banks want to hold as little capital as possible, so that they can create a maximum amount of loans (or money) that can bring in higher profits. From their perspective a safety net has an "opportunity cost" which limits the profits they can make. "But aren’t they worried about not having enough of a safety net if their bets go bad?", you might ask. Well, not if they are "too big to fail" and the public will be called upon to bail them out if their bets go bad i.e. look up Moral Hazard. This is what has been happening since the beginning of banking. From a public interest perspective conservative (higher) capital levels are a good thing. They help to prevent banks from taking excessive risks which often lead to publicly funded bailouts to rescue them from insolvency.

Banks took excessive risks, of course, because higher risk investments bring in higher returns. This means more profits for shareholders and higher bonuses for the executive staff and others. The disincentive for higher risks is that a risky investment is more likely to fail and you could lose some or all the money you put in. High risk investing is exactly like gambling in fact it is gambling. Such speculation is of concern to the public because the gamblers are playing with the financial system and currencies upon which all real economies are dependent, and because the public is often called upon to bail out speculators to avert financial and economic crises. As income inequality grows, fewer people have more and more money to play with and so financial activity becomes increasingly about speculation in the markets, speculative financial instruments alluded to earlier, rather than purchase of real goods and services. Hence financial risk increases as income inequality grows. As we have seen, this risk taking then often leads to devaluation of foreign currencies against the US dollar, and publicly funded bailouts, whose costs fall disproportionately on the poor (or those who are not major players in the global financial system). This widens the income and wealth gaps even more, and further increases speculative activity and financial risks that will later trigger another bailout. And so the cycle continues a dangerous path for everyone. Let me ask you something if you knew you would get a free pass or bail out no matter what how much would you risk?

This problem is compounded further because the big players are getting even bigger through global mergers and acquisitions in the wake of global financial deregulation. It is ironic that these beneficiaries were the very same players who instigated so much of the excessive risk taking that caused this past crisis. This shows you just how much the moral hazard of bailouts can distort what is supposed to be a "free market". The public should understand how banks and other gamblers increase the risks in the financial system, since the public always pays the price for excessively risky bets that go wrong through various bailout mechanisms.

The US Economy and Mid -Term Elections

2010-09-26T18:12:00.000-07:00

The Blame Game

By Melvin J. Howard

Well here we are again election time in the U.S. for Congress, let the blame game commence or who was responsible for our financial crisis game? Lets start with the usual suspects the Republicans are blaming the Democrats, the Democrats are blaming the Republicans, others are blaming the banks and corporations heck some are even blaming the ground hog. I just want to say if you fall for any of the finger pointing then you will be casting your vote totally based on emotions and not on critical thinking, which is imperative in these mid-term elections. Ok now that we got that out of the way follow me down the rabbit hole we call our financial system. Did you know that as little as 4% of the money in the world exists as paper cash and coins. To put it in another way, for every $100 or its equivalent in any other currency, only about $4 exists as printed-paper notes or coins, while the remaining $96 exists as (just numbers written on papers and computer disks)! If you walk into most bank branches in the world and ask for more than $5,000 in cash, from your own account, they will politely let you know that you will need to give them a few days advance notice so they can get the money ready for you. If you don’t believe me try it. Unless you live in New York City or some other high finance center, you will be unable to get that much cash in physical form if you just show up unannounced to withdraw your account.. You would think that most banks would have enough cash to pay off a person who walks in to withdraw just $5,000. But most bank branches can't do that in this world. Why? The money, in physical form, does not exist that’s right does not exist you are probably wondering why not? To answer that question, we will first pursue the issue of what money is. So back we go OK, now, when you go to the ATM cash machine and look at your bank balance and it tells you that you have $1,000 left in your account, what is that $1,000? What is it? Yes, what is it? Don’t just say, “It is money”; you need to define it for me what it is? Imagine I was from another planet and asked you this question. What would you tell me your $1,000 on that ATM slip is? Is it a number representing how much value your share of gold deposits in the bank is? No, because you don’t have gold in the bank, and even the banks themselves don’t use gold deposits anymore to guarantee their currency. Even governments no longer have that (yes, not even the U.S. Fort Knox has gold anywhere fractionally close to backing the trillions of dollars in money we use). So what is it? Remember, the question is not ‘what is money?’ it is ‘what is the $1,000 printed as your bank balance?’ That is the question. Once you have gone over several possibilities in your mind, here is the answer...

The $1,000 is simply a recorded number. Just numbers written on a paper or computer disk. You have agreed to it, your bank has agreed to it, and you even agree to use it in a cashless way by paying for things using your ATM card. The $1,000 printed on the ATM slip does not represent any sort of wealth that the bank is keeping for you. It does not, for example, represent the value of diamonds the bank is keeping for you in a safe. In other words, there is nothing real backing it – it is just a number! As simple as this sentence sounds, it is just a number Not a record representing anything tangible at all. The only difference between the $1,000 written on that ATM balance slip and $1,000 you would write on a piece of waste paper is that the one on the ATM slip is on record as having been agreed upon by whomever you bank with. If you took that slip, or your ATM card, to a country or civilization (on Earth) where they don’t share your system, they would look at you as if you were crazy as you tried to buy real goods and services with a piece of plastic or a paper with a number written on it. In other words, gold is something you can take almost anywhere on this planet and get something reasonable in exchange for it. But your piece of paper and plastic card is meaningless except where another person like you agrees to it. Hold this thought. So what is real? People are real. Effort is real. Goods are real. Services are real. Gold is real. In any part of the world, people will have value; goods will have value; and so on. This value may shift but it is there. If you go to the Amazon, Africa, Siberia... anywhere... you will always be valuable, and your efforts will always produce value, and you will eat real food and be able to trade by exchange real goods. However, if you have some currency from some country and you go to any of these countries, you will not be able to use it (forget about moneychangers and Traveler’s Checks for now). Most of all, you will not be able to use your plastic card and imaginary numbers printed on a piece of paper.

The point of all this is to show you that the money we use in what you might call the Western civilization of today is 96% imaginary numbers written on invoices, slips, and computer disks, while 4% of it is in paper and coins. That 96% does not exists in the sense that you cannot possibly go anywhere on this world and hold it, touch it. It is nowhere! It physically exists nowhere at all on this planet. You cannot see it, feel it, taste it, or touch it. It doesn’t exist! The only reason it works is that we the people have agreed on it and we act in predictable ways when certain numbers are written down for us in our name. Now that we know what 96% of it is, let us see what the remaining 4% is.

The 4% that exists as physical real ‘things’ is not made of gold or anything valuable at all. It is made of funny colored pieces of paper, and cheap alloy coins not worth their own weight in money (they are made cheap so that people don’t profit from melting them into iron). If you live in France and trade using French Francs, you will find this idea ridiculous because, of course, you use your francs to get products and services. But you take that franc to China and try to buy something with it and you will see that it will only get laughs. Even 1,000 francs, in the backwoods of China where international finance means nothing, will get you not a single banana. Now I want to show what is real, people and people believing on what they can accomplish if they put their minds to it.

After WWII, much of Asia was destroyed. Africa, until the late 1970s, was the darling of the West. Africa’s untapped reserves and wealth were immense, as they still are. The Asian countries did not have much. What is the picture today? Asia is a powerhouse and Africa isn’t why? It is very interesting to see how all this came about. After WWII, Japan had shattered industries, a broken economy, and not much to go on. However, they united all the people under a common vision, to make Japan a global power. They carefully selected the industries they thought would be big on the global economy and they geared their education, financial, political and legal systems to make the whole country walk as one towards achieving their goals. First, they selected the steel industry, then the shipping industry, and finally the hi-tech industry. Guess what? Japan became the biggest steel exporter in the world. Now I am going to tell you a little secret? Japan has no steel reserves on its land that are worth any mention. They found ways to get the ore worldwide and process it locally. How did a country so broken down, without any steel of its own, end up being the biggest steel exporter in the world? Its people that’s how. They had a vision and jointly moved towards it and won. They repeated this winning formula with other industries with great success, each time gearing all systems (education, financial, political, and legal) in alignment with this goal. And the other Asian countries saw that this formula worked, and they used it to become the Asian tigers we all have read about. At the end of the day, it is always the people, and never the money, that matters. And the best way to see how this works out is to look at Africa. That beautiful continent has enough blessings to make most other continents and countries envious. To begin with, it is massive. Although the global map makes it look small compared to other countries due to the earth’s curvature, it is actually much larger than most people think. The United States (3,717,796 sq miles) can fit into West Africa. Africa is the second largest continent in the world, covering 11,699,000 sq miles (22 per cent of the world's total land area). Japan is only 145,884 sq miles. Africa also has about 25% of all the seats and votes in the U.N. Contrary to what you hear in the press, Africa has plenty of food and some of the richest soils (the problem is not food shortages but distribution). Africa is also very rich in mineral resources and has almost all types of the world’s known minerals, many of which are found in significant quantities. It also has abundant reserves of fossil fuels including coal, oil, and natural gas. Africa also has some of the world's largest concentrations of gold, diamonds, copper, bauxite, manganese, nickel, platinum, cobalt, radium, germanium, lithium, titanium, and phosphates. About 25% of all gold ever mined in the world has come from Africa. It also has uranium, iron ore, chromium, tin, zinc, lead, thorium, zirconium, vanadium, antimony, beryllium, clays, mica, sulphur, salt, natron, graphite, limestone, and gypsum. Now, the simple question that remains is, if you have one-quarter of the voting seats in the U.N., much of the world’s food, more minerals than anyone else, all the fuel you need... why do you then have the world’s poorest countries there? This bothers me a great deal some say its lack of money and they need loans. But this has nothing to do with the solution; in fact, the debt has only entrapped them. Democracy, capitalism, money... all those are not necessarily the answer – no one way is the right way and the idea that one way can be forced to fit all situations actually creates breakages instead of success. The people simply need a self-initiated vision (not one placed on them) they share in and desire for themselves, and they will move forward in any direction they choose. Everything else is right there waiting for them. It is interesting to see how Japan with nothing became affluent and Africa with everything lost control and became poor except a few.

"A democracy cannot be both ignorant and free" - Thomas Jefferson

Now it is time to look at the systems we live in. By understanding the system you live within, you can find increasingly efficient and effortless ways to achieve your desires within the system. This you may find acceptable, or you may find it shocking and deny it: It is possible that you live within a system that silently enslaves you and you don’t even know it.

And this second point is the one we need to look at now (and that will automatically guide us towards achieving the promise of the first point). It holds a key to your increasing freedom. But be prepared to be surprised. There is much that has been hidden from most people for a very long time now; yet this does not mean it doesn’t exist. Things are not always what they appear to be. But you can always know them by their fruits. Welcome to the secret world of our civilization’s current system of money.

You are about to see how you are playing a game within a structure that appears to be one thing but is actually another. You are playing a game with rules that are sometimes designed to stack the odds against you especially if you are not aware of them. You are playing a game you don’t even have to play, but you think that you do. But you think that this game is the only game, that the only way to play it is the way they tell you to, and that if you can't win then it is you who is wrong, and not the game system itself. You may not even realize that you can play any one of several other games instead of this one, and that the others are much easier and more enjoyable. You assume that the game you are playing in was designed for your benefit, and you fail to see that it may have been designed for someone else’s benefit but at your expense. Most of all, you are playing a game that has been altered to slowly erode your sense of self-reliance and self-determination. Now let begin our journey. It is a journey that will take us to plenty of different topics but in the end, it will all make sense.

We will begin with debt, because here lies one key to much of the puzzle we find our self in

Healthy vs. unhealthy debt

There is nothing wrong with debt, when used healthily as a tool. But when it arises, as it mostly does, from fear, feeling of lack, and negative self-worth beliefs, then it is a control game being played, a painful one at that. Additionally, what most people don’t know is that debt, in our current civilization’s money system, is designed to collapse for a certain number of its holders I bet you didn’t know that did you?

The Medici The Kings of the Renaissance

Before cash money was invented in it’s present form, people used to trade by barter. They would exchange goods and services. Finally, one day, a powerful merchant family such as the Medici family of Italy (powerful merchants and later bankers who ruled through influence between the 13^th and 18^th century i.e. the Renaissance) said, “We have another way we can do this. We can make promissory notes we shall call money. They are more convenient to carry than goods and gold.” The first paper money worked as follows. A trader would go exchange his or her goods for gold. They then take this gold to deposit it with the Medici, and the Medici write up a paper with their signature and family seal, a paper that would represent the gold that was deposited with them. This paper, upon return to the Medici, would be exchanged into its gold equivalent. That concept is where the gold standard came from.

Now let us look at debt. Imagine that the Medici have just opened up their first bank and announced the new scheme to the traders. So one trader, let us call him Mel, goes to the Medici and deposits $100 worth of gold. The Medici make up a paper saying that they promise to exchange that paper for $100 worth of gold upon its return (less a banking fee, plus an interest, whatever). Alan takes this paper and goes home. Alan can use this paper to buy things, but let us assume he does not. So far, he is the only customer at the Medici’s new bank. Now James, another person, wants to start a new business, a hotel. He has the land and building but needs some pots and pans. He does not have any goods to trade in exchange for pots and pans, but he hears that the Medici is giving “loans”.

So James goes to the Medici and asks for a $100 loan. The Medici says they can do that, but James has to pledge his land and building as a security, collateral, in case of default. The Medici make up money (money that did not exist) by writing up a new paper, sign and seal it, and give it to James. (Yes, they could just write up the money out of thin air, and as you will see soon, that is exactly how the Federal Reserve makes U.S. dollars, contrary to most people’s imagination that it is backed by something.) The condition is that on return, James has to give back $100 plus $10 interest. Now freeze that right there. Imagine that James and Mel are the Medici’s only two customers at the time. This means that the economy only has two paper notes out there, one with Mel and one with James. And James has to return his plus $10. Where will James get that $10, unless Mel comes and rents a room at James’ hotel for $10? The Medici did not print the extra $10! So even if James is hyper-careful with his loan, even if he does not spend it at all but returns it after a year, the $100 intact, it is physically impossible for him to pay the $10 interest. This is because he cannot print the extra $10 money and Mel does not want to spend his money at the hotel, yet Mel is the only one with the only other note printed! Do you see the error in this system? Even if James now has goods to trade, he cannot trade

them for paper money because there is no more out there – and the Medici wants cash money or the collateral. James will have to lose his hotel to the Medici simply because of a paper shortage error. He has the original $100 they gave him because he did not spend it, but he cannot possibly get the $10 they want in addition as interest, because he can't print money nor does the only other person with bank notes want to stay at his hotel and pay cash. His hotel may be highly successful, renting rooms in exchange for goods, but he still would not have the printed paper for $10 that he has signed to give back to the Medici as interest. So his hotel would have to be seized by the bank. This example shows exactly how our modern civilization’s debt system works. But because there are millions of people playing this game, the players don’t realize there is a problem because only 8% of people are caught by this error (about 8% of all debts are unpayable). And those that are caught by this error think there is something wrong with them only – they never imagine that the system itself is flawed are you getting this have we gone down far in the rabbit hole yet?

Debt, by its very nature, in our current financial system, is designed to fail for a certain percentage of the population, no matter how much effort or care they put into it. And it is so simply because there is not enough money created (printed) for the interest requested. The only reason this illusion has managed to run this far is that there are millions of players rotating the money and it looks like it works for most people, which makes the few it doesn’t work for look like something is wrong with them and not the system. Every now and then, the debt bubble bursts, like in this last financial crisis but someone somewhere comes along and rescues it, again with more debt and more conditions of control. It happens to individuals, companies and countries. And it keeps rising, getting bigger and bigger it becomes a chain reaction globally.

So what you say? What does this have to do with me? Simple. As you are about to see next, inappropriate use of debt is a function of control and fear. Unhealthy debt is a product of fear, and a deep-seated belief in not having and not being able to have. And fear is a means of control. We all play the control game. We play it with our spouses, family, friends, competitors, customers, and so on. What happens when you feel that you are in control of another person? You feel powerful, and they feel drained. Fear, were you to observe it at an energy level, leads to the victimizer literally (really) sucking the energy out of the victim. It is an energy game. When one is in fear, they lose energy to those who put fear into them. Isn’t that the way any abusive relationship works? It does not matter whether this relationship is between people, institutions or countries, or what the forms and symbols used are. Intimidation is an energy-sucking and draining game – like a vampire sucking the life out of its prey. This is not a metaphor – energy is literally sucked out of the victim and taken by the victimizer in an intimidation scenario. You can even observe this on an energy level. Fortunately, the victim has to choose to accept the draining for it to happen – and that is why in reality there really aren’t any ‘victims’ as such, just willing players in a distorted game.

Now, let us consider the mortgage game that many of us whether we like or not are playing right now. Mortgage what does that word mean? Where does it come from?

Split it up and look at its origins. Mort, mortuary, morgue... do you see the root? Gage, engage. Engaged till death. Why would your house loan be called a name that has its word origins from the words that mean death and engagement? Why those two? Of all the millions of words, why those two?

This is not the time to blame the issuers of debt, or anyone else for that matter. There is no judgment or guilt in the matter. Only basic facts the minute you start playing the blame game and judgment game, you enter into a victim position, and that is no good for you nor for America. Nevertheless, the unhealthy type of debt is a function of fear and self-worth issues. Look at the rich even if they have debt, their asset column is longer than their debt column. They only use debt as a tool. And they always have more assets than debt.

Now consider people with debt problems, or countries with debt problems. What is the personality of such people? Chaos, fear, never having enough, support issues, and so on. These do not arise because of debt. The debt arises because of these mental states. That is not a bad thing. Remember, we are not judging anything here. We are merely observing basic facts. The debt rope is always being thrown at us all the time. You don’t have to grab it. The world has built a very large global fear-ego, and this fear-ego is expressing itself in various physical means to maintain itself. Our world is now a world of contracts that try to commit you into debt (we now even have phone contracts that penalize you for not using the service for a certain amount of time!); credit cards that do the same; jobs that scare you towards that end. But none of these is to blame. Only you can accept them. And they can only work on you when you accept them. There is nothing wrong with debt, when used as a tool. But when it arises, as it mostly does, from fear and negative self-worth beliefs, then it is a control game being played, a painful one at that. A game we created and continue to create.

The Constitution of the United States clearly states that only Congress shall have the power to create money and regulate the value thereof. Today, however, the money is actually created and regulated by a privately owned company that controls and profits by printing money through the Treasury, and regulating its value. What is the private company that prints U.S. dollars? It is the Federal Reserve Bank (the Fed). Most people think the Fed is a government arm. Its name is misleading. It says ‘Federal’ yet it is not federal at all. It is a fully private corporation. It also says ‘Reserve’, yet it has no reserves it is not backed by any value or gold (that ended decades ago when they abandoned the gold standard). The Fed began when, in 1914 and after trying to do so unsuccessfully several times before due to opposition, about 300 people and banks put together just $100 each and formed the Federal Reserve Banking System wish I had a piece of that private offering. These people and bankers formed and still form part of the top 2% of the world’s wealthiest and powerful people. The Fed is one of the most profitable companies in the world. It also collects billions of dollars in interest annually, interest charged to the U.S. government. This is how, in a nutshell, the Fed works: The Fed creates money from nothing, and loans it back to the U.S. and other governments, and charges interest on the currency. It buys government debt with money that it creates, and charges interest to U.S. taxpayers.

The Fed’s relationship with the government is very loose. As a private company, it is not required to disclose much to the public. It is run by a powerful group of people who are free from the usual restrictions of governmental checks and balances. Its Board of Governors is independent of the government and its governors hold office for far longer than any U.S. president does. It is also self-financing (actually it is one of the most profitable corporations in the world) and so does not rely on the national budget (the primary tool of control that Congress uses to influence agencies and other bodies). It operates outside of the national budget (in fact finances it) and so has monetary autonomy as well. In its task of regulating the money supply, it is completely independent of the government and is only ‘required’ to make decisions that will be in line with the nation’s economic policy.

The Board or the Fed has the following main functions:

Set open market policies (responsible for interest rate and money supply movements)
Set the required cash deposits reserve ratio
Set the interest rate (called the discount rate)
Set how much new currency to print (or make up on the computer as most of it is done actually)
Monitor the economy and also report periodically to congress on the U.S. economy

The 12 regional Feds each have the following functions:

Buy and sell government bonds in secondary markets (open market operations that are responsible for interest rate and money supply movements)
Lend to member banks
Give check-clearing services
Enforce money deposit reserve requirements and other regulations of the member banks
Monitor banking and economic activity in the region that they cover
Issue Federal Reserve notes (money) and collect worn-out ones for destruction

Can you now see that the interest rate, money supply, inflation, and all these other factors are very much controllable by a very small group of people? The job of the Chairman of the Fed is to keep the economy going in a certain direction, and he manages that consistently for many years and that is why people find him powerful. The point is, he can and does shape the economy. That is his job. Now, in the minds of most people, the economy is some wild crazy thing. But what if it wasn’t wild at all? What if it was very tame and always listened to the boss? The point I am trying to make is this: (1) the Board has proven itself able to direct the economy with a fairly high degree of accuracy and (2) this proves the economy is under the direction of the Board (otherwise the Board would be powerless and we wouldn’t even have it).

Now, and this is very important, the economy only looks to be out of control to those who are finding themselves in it but hurting. Did you get that? If you are jobless, you will think the economy is bad and out of control, because that is your personal experience. But that is looking at it from the bottom end. If you look at it from the top end, there is hardly any ‘out of control’ going on. And this is why: At the top, at the level where these bankers see things, they control exactly how much money is in the system (they make up and print the money at whatever level they deem fit – government has nothing to do with it since the 1914 law), they control the interest rates, the regulate cash deposit reserves (which determine how much credit/debt you are ‘allowed’ to have), and so on. So what part of the economy is a mystery to them? To you, the interest rate is a mystery and can move either way to end up hurting or helping you. But to them they can predict it better than you can predict the weather – because it is they that set up the rate. To you, you don’t even know what the money supply situation is or will be – but they do because they print the money. To you, you pay taxes, 40% of which go towards paying the government’s debt to the Fed – but they simply print up the money and ‘loan’ it to the government (much of the national debt is money ‘owed’ to the Fed). People think that the Chairman of the Fed is tackling some unknown thing and maybe so. However there isn’t much in the economic equation that is unknown to him simply because he sets it all up and has all the tools necessary to make sure the plan work almost as planned (the tools in this case being the Fed system, banks, money press, monetary controls, etc). So just because the economy may look out of control for you, personally, or even for a few million people the are in hard economic times, does not mean that, at the top level, it is out of control at all. It is very deliberately set – that is the point of the Board, to control the economy. The perspective is very important. The truth can look very different indeed depending on what perspective you use to observe it. So if you think the government did not have to step in when they did to save the economy I would love to show you some swampland I am selling. You probably also thought that the U.S. health care system was just fine the way it was too. Well if you did how about I throw in the London Bridge with that piece of swampland. So before you go and make that critical vote remember seriously think about what you are voting for.

The Color of Wealth

2010-09-18T14:50:00.000-07:00

New Banking Rules Swiss welcome “indispensable” Basel III deal

2010-09-13T06:06:00.000-07:00

The Bank for International Settlements in Basel (Keystone Archive)

Banks will have to significantly increase their capital reserves under rules endorsed in Basel on Sunday by the world’s major central banks.

financial regulators welcomed the agreement, known as Basel III, saying banks would now be more resilient to shocks, although they added that the international community still needed to sort out the “too-big-to-fail” problem.

The new banking rules are designed to strengthen bank finances and rein in excessive risk-taking in order to prevent another financial collapse, but some banks have protested that they may dampen economic recovery by forcing them to reduce the lending that fuels growth.

Forcing banks to keep more capital on hand will restrict the number of loans they can make, but it will make them better able to withstand the blow if many of those loans go sour. The rules also are intended to boost confidence that the banking system won't repeat past mistakes.

Under current rules, banks must hold back at least four per cent of their balance sheet to cover their risks. This mandatory reserve – known as tier 1 capital – would rise to 4.5 per cent by 2013 under the new rules and reach six per cent in 2019.

In addition, banks would be required to keep an emergency reserve known as a "conservation buffer" of 2.5 per cent.

In total, the amount of rock-solid reserves each bank is expected to have by the end of the decade will be 8.5 per cent of its balance sheet.

“Solid foundation”

The agreement was “indispensable”, according to Daniel Zuberbühler, vice-president of the Swiss Financial and Market Supervisory Authority (Finma).

“This will enable [banks] to withstand larger shocks without relying on government support. As a result, the global financial system will be more resilient to shocks,” he said.

Philipp Hildebrand, president of the Swiss National Bank, agreed, but pointed out that while the reform package was “far-reaching”, it did not yet comprehensively address the TBTF ("too big to fail") problem.

“Further efforts will be required in that area at the international and at the national level,” he said.

“For Switzerland, the Basel III reform package provides a solid foundation on which to build a comprehensive national regulatory response to the TBTF problem.”

Credit Suisse said it had anticipated the reforms and described itself as “one of the most capitalised banks in the world”. It didn’t expect the new regulations to have any impact on its business.

UBS said in a statement it had taken note of the recommendations.

"For UBS the relevant standards are mainly set by the Swiss financial supervisory authority Finma. UBS will comply with the regulatory changes within the given time frame."

“Step forward”

Officials from the United States, including Federal Reserve chairman Ben Bernanke, issued a joint statement calling the new standards a “significant step forward in reducing the incidence and severity of future financial crises”.

European Central Bank (ECB) president Jean-Claude Trichet, chairman of the committee of central bankers and bank supervisors that worked on the new rules, called the agreement "a fundamental strengthening of global capital standards" that will encourage both growth and stability.

The deal still has to be presented to leaders of the G20 forum of rich and developing countries at a meeting in Seoul, South Korea, in November and ratified by national governments before it comes into force.

The agreement is seen as a cornerstone of the global financial reforms proposed by governments stung by the experience of having to bail out some ailing banks to avoid wider economic collapse.

Objections

Earlier this year, the Brussels-based European Banking Federation warned that the rules could keep the 16 nations that use the euro in or close to recession through 2014.

The federation, which represents more than 5,000 banks, said its analysis of proposed new Basel III banking standards shows that it would limit banks' credit growth and profits, hurt the economy and prevent the creation of up to five million jobs in the eurozone.

Another measure agreed on Sunday aimed at preventing banks from overstretching themselves was the introduction of a leverage ratio of three per cent.

Leverage, or borrowing to invest elsewhere, boosts returns but can backfire catastrophically if an investment declines. Some European banks had objected to this, arguing that the measure unfairly penalises small lenders with relatively safe credit portfolios.

Regulators also agreed to continue working on additional safeguards for "systemically important banks" – those that could bring down entire economies if they collapse.

by swissinfo.ch and agencies

New Exemptions for Advisers

2010-07-26T13:28:00.000-07:00

On July 15, 2010, the United States Senate passed the House-approved Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed by President Obama on July 21, 2010.

Venture Capital Adviser Exemption

The Private Fund Act includes a new exemption from registration for any investment adviser that acts as an adviser solely to one or more venture capital funds. Significantly, the Private Fund Act does not define what constitutes a “venture capital fund,” but rather mandates that the SEC issue final rules within one year of the passage of the Private Fund Act that define the term “venture capital fund.” The rules to be issued by the SEC with respect to advisers to venture capital funds must include provisions requiring the maintenance of certain records and the provision of certain reports by advisers to venture capital funds who are relying upon this exemption from registration.

Exclusion for Family Offices

The SEC has excluded “family offices” from the definition of an investment adviser through a series of no-action letters since the Advisers Act was passed in 1940. The Private Fund Act now specifically excludes “family offices” from the definition of an investment adviser. However, it requires that the SEC adopt rules to define the term “family office.” The rules must provide an exclusion for family offices that is consistent with the previous policies and orders issued by the SEC and must take into account the range of organizational and employment structures used by family offices. In addition, the rules must include a grandfathering provision that would exclude anyone who was not registered or required to be registered on January 1, 2010, solely because it provides investment advice to (and was so engaged before
January 1, 2010):

Natural persons who are officers, directors or employees of the family office who have invested with the family office before January 1, 2010, and are “accredited Investors” under Regulation D.
Any company owned exclusively and controlled by members of the family of the family office, or as the SEC may prescribe by rule.
Any SEC-registered investment adviser that provides advice and identifies investment opportunities to the family office, invests in these opportunities on the same terms as the family office, and whose assets as to which the family office directly or indirectly provides investment advice represent no more than 5 percent of the value of the total assets as to which the family office provides investment advice.

Significantly, any family office that would not fall within the SEC’s definition but for the grandfathering provision would still be an investment adviser for purposes of the anti-fraud provisions of the Advisers Act.

Exemption for Private Fund Advisers with Managed Assets of $150 Million or Less

The Private Fund Act also calls for the SEC to provide an exemption from registration to any investment adviser to private funds if the adviser acts as an adviser solely to private funds and has assets under management in the United States of less than $150,000,000. The exemption is available for advisers that would otherwise be subject to registration with the SEC (see discussion below on the new threshold for federal registration). Notwithstanding this exemption, the SEC will require such advisers to maintain specified records and provide the SEC with such annual or other reports as the SEC determines are necessary or appropriate in the public interest or for the protection of investors.

Foreign Private Adviser Exemption

An exemption to registration is included for “foreign private advisers”. A “foreign private adviser” is defined as any investment adviser who has:

No place of business in the United States;
In total, fewer than 15 clients (with an investment fund and its investors each counting as one client in the
United States); and
Total assets under management attributable to clients (including private funds and their investors) in the
United States of less than $25 million, or such higher amount as the SEC may deem appropriate;

and does not:

Hold itself out to the public in the United States as an investment adviser;
Act as an investment adviser to a registered investment company; or
Act as a company that has elected to be a business development company pursuant to the 1940 Act and has not withdrawn its election.

SBIC Exemption

The Private Fund Act includes a new exemption for any investment adviser, other than a business development company, that solely advises: (a) small business investment companies (“SBICs”) that are licensees under the Small Business Investment Act of 1958 (“SBIA”); (b) entities that have received from the Small Business Administration notice to proceed to qualify for a license as an SBIC under the SBIA, which notice or license has not been revoked; or (c) applicants affiliated with one or more licensed SBICs and that have applied for another license under the SBIA, which application remains pending.