Taking a Leak On The Banking System

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“I think you have a hit an all time low on this one.

“Having no interest in NAB’s success, but being very knowledgeable of the inner workings of the payments industry the conclusions are absurd. I support a lot of the messages in your newsletters. But stick to what you know something about, rather than looking for a sensational headline. It would be a sad world if all your conspiracy theories were actually true.”

That was a letter from reader AW in response to Monday’s Money Morning. We suggested National Australia Bank’s [ASX: NAB] so-called computer glitch was just a beard or a cover-up for something much more sinister.

That is, the problem at the NAB was more a question of solvency rather than glitchery.

But maybe we’re wrong. Maybe it was just a computer error that caused the bank to stop processing payments for a week. And maybe it was a glitch that caused its investment banking division to not know the value of the assets in its accounts.

We’ve received emails from technical guys telling us that the major problem with all banks’ IT systems is that they’ve got layers and layers of different software and hardware that has been patched together.

And that in most cases, because these have been layered over time, there’s no one person who has any idea about how the entire network works.

While that may be true – and we’d imagine it’s true – there’s absolutely no way a single “corrupted file” would have the widespread impact on the bank’s payment systems as the bank claims happened over the past week. No way.

The banks spend millions on software, hardware and networks. They have redundancy and back-up and data recovery systems. All of which should be designed to kick-in and bypass a problem in the network.

There is zero chance that the NAB wouldn’t have such belt-and-braces IT system in place to kick-in in the event of a so-called corrupted file causing a problem.

It would be the equivalent of McDonald’s only having one deep fryer, or a petrol station only having one pump.

When your entire business revolves around tallying up what’s in which account and who owns what to whom, it’s just not possible for a glitch to cause the widespread problems that happened to the NAB over the past week.

The fact is, the way banks operate, all of them are insolvent. I won’t cover old ground on this one, but to put it simply, the banks have larger obligations to pay demand depositors than the amount of deposits held at the banks.

Any way you crunch the numbers on this, banks are insolvent.

Here’s just one example. NAB has a total of $134 billion of “on-demand and short-term deposits”, yet it only has $26 billion of “cash and liquid assets” on its books.

Yet despite that, every depositor is under the impression that if they wished to withdraw their money today they could go into the bank and the bank would be able to honour this obligation.

Only it wouldn’t, not without a massive cash injection of newly printed dollars from the Reserve Bank of Australia (RBA), or newly created electronic numbers on the banks’ balance sheet, again courtesy of the RBA.

The banks operate on the basis that not everyone will demand their money at the same time. Besides, for a start, there aren’t enough bank notes in existence to honour this obligation. The banks merely create the money from thin air knowing that not everyone will want their cash out at the same time.

Should a greater number of depositors ask for their cash than the bank expects then it’s in trouble. It’s called a bank run. Or, on the other side of the ledger, if certain assets on the bank’s balance sheet become less valuable than previously – oh, let’s say European sovereign debt exposure – then that’ll also impact the bank’s liquidity.

The NAB’s problem was a liquidity or solvency problem rather than a software problem.

It seems more likely to us that NAB simply needed to prevent cash flowing out of the bank’s accounts for a period, rather than it being the fault of a computer problem.

Because don’t forget how fragile the global banking system is. In recent months you’ve heard a lot of rubbish from the mainstream press about competition among the banks and how the government should create a “fifth pillar” by making Australia Post a so-called People’s Bank.

In reality all this is irrelevant. It doesn’t really matter whether Australia has three banks, four banks, five banks or fifty banks. It’s not the number of banks that’s the problem, it’s how banks function that’s the problem.

The ability to create money from thin air, backed by nothing is the entire cause of the banking problem, and by extension the problem with asset bubbles.

Banks worldwide are on the ropes, and if Wikileaks makes the kind of impact on banks that it’s having on governments then it could be curtains for the entire current monetary system – and that would be a good thing.

Wikileaks should be applauded and praised. We notice the corrupt politicians and bureaucrats claim that the leaks threaten national security. What they’re really saying is that they’ve done and said a whole bunch of bad things and they don’t want anyone to know about it.

It shows you how dangerous politicians and bureaucrats become when they are put in power. They act recklessly, they assume that they know how best to control everyone’s lives. And their lust for power leads them to do unconscionable things – usually in the guise of protecting your freedom.

Protecting their position of power more like.

Anyway, in an interview with Forbes magazine, Wikileaks founder Julian Assange was asked, “So do you have very high impact corporate stuff to release then?”

Mr. Assange’s response was as follows:

“Yes, but maybe not as high impact [as the political cables]… I mean, it could take down a bank or two.”

[Spits coffee across desk]

Sorry. Blimey, that’ll do it. Now we’re talking… which bank? What is it that could bring the bank or two down? When is Wikileaks going to reveal this?

We skim through the rest of the interview… something about Russia… something about Apple iPhones… what about the banks? What about the banks?

Well, the interview draws a blank on that score. Nothing more is said about it. But apparently investors are looking at Bank of America [NYSE: BAC] which dropped 3% overnight as the possible target.

As we’ve said for some time, we don’t care for investing in the banks. Even though we missed out on the 50% or more gain they made through 2009. There are plenty of other things to invest in, why bother risking money on a supposedly blue-chip stock you know is prone to collapse?

But we found Mr. Assange’s comments on free markets interesting. He told the interviewer:

“So as far as markets are concerned I’m a libertarian, but I have enough expertise in politics and history to understand that a free market ends up as monopoly unless you force them to be free.”

While it’s good to see Mr. Assange is a free markets fan and a lover of freedom – exposing the criminal and manipulative activities of government and politicians is proof of that. But we’d argue that in a truly free market it’s actually hard for monopolies to be formed – or abusive monopolies anyway.

Because free markets are light on bureaucracy and political meddling, there are far fewer barriers to entry for competing businesses to enter a given market.

If a particular industry does tend towards a monopoly then new businesses will enter the industry to compete and offer a lower price or a better service or product.

If new businesses don’t enter the market then it’s because entrepreneurs see no opportunity to offer a lower price or a better quality service. In that instance, even though there may be a monopoly, the consumer is still receiving the best possible price and service.

But if the monopoly business takes advantage of its position by increasing prices or reducing quality then entrepreneurs will see the opportunity to enter the market, and so competition resumes.

This can only happen in a free market.

Any attempt by government to force competition is actually a violation of free markets. Forcing competition can only be done by coercion or through subsidy or favours to a government chosen entity. As soon as that happens it’s no longer a free market but a government controlled market – and that’s when the problems and abuse begin.

Mr. Assange may have some expertise in politics and history, but we’ll bet that any example through history of abusive monopolies will show that they have formed because of government coercion, abuse and intervention rather than because of free markets.

Getting back to our starting point, sure, there’s always a chance we’re wrong. Your editor doesn’t claim to be always right on everything.

But the role of Money Morning is to explain things that you’ll never read in the mainstream press. No one is going to write a column for The Age or the Australian Financial Review claiming that Australia’s banks are insolvent.

We’ve received a number of requests from print journalists asking for a quote on things such as property or retirement savings, but after our first experience when 95% of what we said was cut out, we don’t waste our time with it.

What we’ve got to say won’t make it past the editor’s desk of a mainstream publication.

But, by the same token, we don’t take a contrary position just for the sake of it. Any muggins can do that. We take a position because we believe it’s true and correct. And we’ve got history on our side too…

You see, we take our position on the basis that a truly free market economy is the only viable economy to achieve prosperity and individual freedom.

And that anything which involves intervention by politicians, bureaucrats or cronies of those two, will ultimately lead to a negative outcome for the majority of Australians. That’s been proven time and again.

But so far, the grandest, most extravagant and also the most dangerous of manipulations – the current financial system – is still alive… but only just.

It has been saved once by the unauthorised use of taxpayer dollars by governments, but the way things are shaping up in Europe, the US, and indeed here in Australia, it won’t be long before the system completely fails.

There simply isn’t enough capital in the world to bail out the financial system again. Not even the wholesale pilfering and expropriation of private pension funds, as has already started in Hungary, Argentina, France, Ireland… and yes, don’t forget about Australia.

The Great Depression the politicians told you had been avoided in 2008 was merely postponed to a later date. And unfortunately that date is approaching. That’s why we’re happy to hold gold and silver as an insurance policy.

Alternately, you could continue to think that the NAB just had a tiny little software problem and everything is fine again! I’ll let you make up your own mind on that.

Cheers.

Kris Sayce
For Money Morning Australia

Kris Sayce

Kris Sayce

Publisher and Investment Director at Money Morning Australia

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.
Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.

Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has more than fifteen years’ experience in analysing small-cap stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.

After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia — but eventually, took over Money Morning. It’s now read by over 50,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money!

Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

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73 Responses to “Taking a Leak On The Banking System”

  1. cb

    Thanks, Drew. Yes, that was the right thing to do, but he should not have negelected crediting Sayce again in his report and submission. He is an academic and should know better.

  2. Thy

    The use of batch processing in mainframe computing is nowhere near as complex as economics, until something goes wrong. Unpicking batch failures is time consuming and complex.
    Applications containing multiple jobs are daisy chained together in a specific sequence to execute programs to manipulate data . Each of these jobs has multiple steps, including uploading, copying processing and re-organising data files.
    During the almost twenty years that I have spent in the IT Industry, I have had the opportunity to witness this type of failure on too many occasions. In most cases, the failure is caught early enough and restoration is discreet and not externally visible, there are some real clangers though.
    Once a “corrupted” file is processed and consequential processing is executed you are faced with the challenge of working out how to “undo” and verify the processing, which may now involve multiple files, and technical staff having to write code to “reverse-engineer” the processing.
    Maintaining data integrity is critical to Business Continuity long term, as failing to do so will result in a genuine loss of customer confidence, and failure to comply with both internal and external audit requirements,.
    While it has taken time to recover from the incident, it is unrealistic to try and link the incident with insolvency theories. To do so is ridiculous given the business impact of the incident. If planning to orchestrate an intentional outage to address insolvency, it would make sense to target those systems that facilitate the inter-bank exchanges, rather than just a few million worth of payrolls. Billions are exchanged daily in these transactions as paper cheques and electronic transacations flow through the process.
    I feel that you lessen your credibility by continuing to suggest that this incident was anything other than a technical failure.

    Cheers and thanks for your daily newsletter.

    Thy

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