Taking a Leak On The Banking System

“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.


Kris Sayce
For Money Morning Australia

Kris Sayce
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 editor of Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. 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 close to twenty years’ experience in analysing 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 55,000 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.

To have his investment insights delivered straight to your inbox each day, take out a free subscription to Money Morning here.

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73 Comments on "Taking a Leak On The Banking System"

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Monopoly: Telstra disproves your theory. They DID need to be regulated because no one could get access to the exchanges at a price where they could make a profit. Before you go off saying well build their own exchanges or ducts, I’ll say that would be the daftest response you could make. Second, I like how the whole NAB thing went from being a heavy conspiracy to being back pedalling which resulted in the above. I’m involved in telco and IT and I can tell you that whilst your comment: “There is zero chance that the NAB wouldn’t have such… Read more »
Wow, you continue to confirm my suspicions that you in fact have no academic qualifications in economics at all. The idea that the NAB could be even close to insolvent is simply ludicrous… as you yourself point out they have $26 billion in liquidity. Explain to me how all this liquidity got instantly consumed last week, and then suddenly is back and available again this week? If NAB had even come close to running out of liquid assets, it would be a permanent on-going issue that would have every major business customer with large cash flows grinding to a halt.… Read more »
Kris A quick note (other than saying I have really enjoyed and looked forward to daily musing) on the IT side. I have been in IT for over 30 years and of late have worked with several of the big banks (and mid size brokers) on business continuity, IT risk and Disaster recovery. Unfortunately, I am often the guy brought in post system disaster to shoot the wounded or try and resuscitate the brain dead. The common theme is that these organisations (and its not just Aus finance houses) do not have the levels of belt and braces systems you… Read more »

“But this is Australia — we’re different!” — “Aussie Aussie Aussie! Oi Oi Oi!”



To CB and the other gold followers:

The GOLD ETF is up 2.3% on the ASX. I couldn’t understand what the hell was going on. Had North Korea attacked overnight? Had the penny dropped in Spain? No. The answer is that China’s securities regulators are allowing mainland Chinese to invest in foreign exchange-traded gold funds for the first time. This is massive in my opinion. If gold’s in a bubble, my guess is that we aint seen nothing yet.



Of course banking systems are a handful. Some core systems are perhaps 30 years old. And they are not as automated and error-proof as we are made to believe. And if, like you suggested before, they just “unplug” their computers and then re-run the whole thing again, this could double transactions – like in CBA glitch a few years back.
None of which increases our confidence in the banks.

Peter Fraser

JC @ 4 – as you know I’m not a gold bug, but I have seen recent predictions of $6000USD an ounce for gold.

This is a new dimension added to the market – interesting stuff.

“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.” Umm, sorry Kris, I like you’re writings but you really overestimate the capabilities of IT people and systems. I’m speaking as someone who has worked in the industry for over a decade. While I don’t know the truth behind the NAB debacle, the IT screw-up thing is perfectly plausible to me. Really, most systems ARE held together by chewing gum and sellotape, it’s quite shocking seeing some of them. But the truth… Read more »

I’ll make another point about FRB that I’ve made elsewhere. People want it. They want it because they want immediate access to their money and for that money to earn interest.

If you have full-reserve banking you have to give up one of those.

NB: that’s not to say I approve of the banks, I don’t, but I don’t have a problem with FRB.

Peter Fraser

Mike – if your still there – I understood all banks have shadow off site systems.

As I understand it you are saying they are not as good as they are made out to be, which is more of a worry to me than the “edge of bankruptcy” theories which we all understand (hopefully).