Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Did the Other Shoe Just Drop?
Black Rock and PIMCO Sue Banks for $250
By Ellen Brown
Al-Jazeerah, CCUN, July 20, 2016
homeowners have been battling Wall Street in an attempt to recover some
portion of their massive losses from the housing Ponzi scheme. But
progress has been slow, as they have been outgunned and out-spent by the
In June, however, the banks may have met their
match, as some equally powerful titans strode onto the stage.
Investors led by BlackRock, the world’s largest asset manager, and
PIMCO, the world’s largest bond-fund manager, have sued some of the
world’s largest banks for breach of fiduciary duty as trustees of their
investment funds. The investors are seeking damages for losses
surpassing $250 billion. That is the equivalent of one million
homeowners with $250,000 in damages suing at one time.
are the so-called trust banks that oversee payments and enforce terms on
more than $2 trillion in residential mortgage securities. They include
units of Deutsche Bank AG, U.S. Bank, Wells Fargo, Citigroup, HSBC
Holdings PLC, and Bank of New York Mellon Corp. Six nearly identical
complaints charge the trust banks with breach of their duty to force
lenders and sponsors of the mortgage-backed securities to repurchase
Why the investors are only now suing is complicated, but it involves
a recent court decision on the statute of limitations. Why the trust
banks failed to sue the lenders evidently involves the cozy relationship
between lenders and trustees. The trustees also securitized loans in
pools where they were not trustees. If they had started filing suit
demanding repurchases, they might wind up suedon other deals in
retaliation. Better to ignore the repurchase provisions of the pooling
and servicing agreements and let the investors take the losses—better,
at least, until they sued.
Beyond the legal issues are the
implications for the solvency of the banking system itself. Can even the
largest banks withstand a $250 billion iceberg? The sum is more than 40
times the $6 billion “London Whale” that shook JPMorganChase to its
Who Will Pay – the Banks or the Depositors?
world’s largest banks are considered “too big to fail” for a reason. The
fractional reserve banking scheme is a form of shell game, which depends
on “liquidity” borrowed at very low interest from other banks or the
money market. When Lehman Brothers went bankrupt in 2008, triggering a
run on the money market, the whole interconnected shadow banking system
nearly went down with it.
Congress then came to the rescue with
a taxpayer bailout, and the Federal Reserve followed with its
quantitative easing fire hose. But in 2010, the Dodd Frank Act said
there would be no more government bailouts. Instead, the banks were to
save themselves with “bail ins,” meaning they were to recapitalize
themselves by confiscating a portion of the funds of their creditors –
including not only their shareholders and bondholders but the largest
class of creditor of any bank,
Theoretically, deposits under
$250,000 are protected by FDIC deposit insurance. But the FDIC fund
contains only about $47 billion – a mere 20% of the Black Rock/PIMCO
damage claims. Before 2010, the FDIC could borrow from the Treasury if
it ran short of money. But since the Dodd Frank Act eliminates
the availability of Treasury funds for that purpose is now in doubt.
When depositors open their online accounts and see that their
balances have shrunk or disappeared, a run on the banks is likely. And
since banks rely on each other for liquidity, the banking system as we
know it could collapse. The result could be drastic deleveraging,
erasing trillions of dollars in national wealth.
Some pundits say the global economy would then come crashing down.
But in a thought-provoking March 2014 article called “American
Delusionalism, or Why History Matters,” John Michael Greer
disagrees. He notes that historically, governments have responded by
modifying their financial systems:
Massive credit collapses that
erase very large sums of notional wealth and impact the global economy
are hardly a new phenomenon . . . but one thing that has never happened
as a result of any of them is the sort of self-feeding, irrevocable
plunge into the abyss that current fast-crash theories require.
The reason for this is that credit is merely one way by which a society
manages the distribution of goods and services. . . . A credit collapse
. . . doesn’t make the energy, raw materials, and labor vanish into some
fiscal equivalent of a black hole; they’re all still there, in whatever
quantities they were before the credit collapse, and all that’s needed
is some new way to allocate them to the production of goods and
This, in turn, governments promptly provide. In 1933,
for example, faced with the most severe credit collapse in American
history, Franklin Roosevelt temporarily nationalized the entire US
banking system, seized nearly all the privately held gold in the
country, unilaterally changed the national debt from "payable in gold"
to "payable in Federal Reserve notes" (which amounted to a technical
default), and launched a series of other emergency measures. The
credit collapse came to a screeching halt, famously, in less than a
hundred days. Other nations facing the same crisis took equally drastic
measures, with similar results. . . .
Faced with a severe
crisis, governments can slap on wage and price controls, freeze currency
exchanges, impose rationing, raise trade barriers, default on their
debts, nationalize whole industries, issue new currencies, allocate
goods and services by fiat, and impose martial law to make sure the new
economic rules are followed to the letter, if necessary, at gunpoint.
Again, these aren’t theoretical possibilities; every one of them has
actually been used by more than one government faced by a major economic
crisis in the last century and a half.
That historical review
is grounds for optimism, but confiscation of assets and enforcement at
gunpoint are still not the most desirable outcomes. Better would be to
have an alternative system in place and ready to implement before the
The Better Mousetrap
North Dakota has
established an effective alternative model that other states might do
well to emulate. In 1919, the state legislature pulled its funds out of
Wall Street banks and put them into the state’s own publicly-owned bank,
establishing financial sovereignty for the state. The Bank of North
Dakota has not only protected the state’s financial interests but has
been a moneymaker for it ever since.
On a national level, when
the Wall Street credit system fails, the government can turn to the
innovative model devised by our colonial forebears and start issuing its
own currency and credit—a power now usurped by private banks but written
into the US Constitution as belonging to Congress.
problem with the paper scrip of the colonial governments was the
tendency to print and spend too much. The Pennsylvania colonists
corrected that systemic flaw by establishing a publicly-owned bank,
which lent money to farmers and tradespeople at interest. To get the
funds into circulation to cover the interest, some extra scrip was
printed and spent on government services. The money supply thus expanded
and contracted naturally, not at the whim of government officials but in
response to seasonal demands for credit. The interest returned to public
coffers, to be spent on the common weal.
The result was a
system of money and credit that was sustainable
without taxes, price inflation or government debt – not to mention
without credit default swaps, interest rate swaps, central bank
manipulation, slicing and dicing of mortgages, rehypothecation in the
repo market, and the assorted other fraudulent schemes underpinning our
“systemically risky” banking system today.
Will the BlackRock/PIMCO suit help homeowners? Not
directly. But it will get some big guns on the scene, with the ability
to do all sorts of discovery, and the staff to deal with the results.
Fraud is grounds for rescission, restitution and punitive damages.
The homeowners may not have been parties to the pooling and servicing
agreements governing the investor trusts, but if the whole business
model is proven to be fraudulent, they could still make a case for
In the end, however, it may be the titans themselves
who take each other down, clearing the way for a new phoenix to rise
from the ashes.
Ellen Brown is an
attorney, founder of the Public Banking Institute, and author of twelve
books including the best-selling Web of
Debt. In The Public Bank
Solution, her latest book, she explores successful public banking
models historically and globally. Her websites are http://EllenBrown.com, http://PublicBankSolution.com,
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