COMMENTARY:

The US Dollar as the World Turns

by Fred Cederholm

Imagine a lending institution that has to keep going farther and farther afield to find deposits to keep afloat, while its borrowers never paid off their loans. Can you think what the outcome might be?
I’ve been thinking about the rotation of Planet Earth in the context of hot money, twin deficits, debt rollovers, and the click of a computer’s enter key. What I am about to describe actually happened to a Chicago financial institution, but contemporary implications for the US Treasury are eerily familiar.

The Chicago institution had been very aggressive in its lending--so much so that local source deposits no longer covered these outstanding debts. It had to look far beyond the confines of its indigenous service market. While the debts were long-term, or even evergreen (meaning there was no intention to ever pay them off), the money funding them was short-term, requiring monthly, weekly, and even daily rollovers. Such hot money relationships are only ones of convenience looking for a safe haven for a$$ets, and for a good premium return to boot.

Dollars showing up at LaSalle Street one day could readily depart the next--leaving a funding gap to be filled (to maintain the institution’s solvency). The replacement funding, courted by enticements of increased interest, drew upon an ever-increasing global base until that base exceeded half of these funding requirements. Does this sound familiar?

This was compounded by the fact that the borrowers/citizens were not paying down the debt, or paying the interest coming due. This, via the wonders of Cleverly Rigged Accounting Ploys (CRAP), was being accrued/added to the existing debt, or to new debt. What the institution wasn’t receiving, it couldn’t pay out to its depositors. Interest owed was rolled into the renewed funding. This system worked only as long as the depositors/investors rolled over. Interesting!

While these practices had gone on for some time, it eventually reached the point where the funding $ugar daddies got nervous. The Earth’s turnings would now come into play. More and more stories were written in the global financial press about problems at the institution--not good. Domestic reporting was only just starting to inform the public here--even worse.

If a lending institution is "too big to fail," who will be called on when that institution falters?

Each new day starts in the Western Pacific Rim. On Saturday the oriental banks, corporations, and governments decided that it was time to get out. On Monday morning, they telexed the Chicago institution where to wire their maturing funds, and they telexed European banking counterparts what to do with the monies coming from Chicago. The Earth kept turning.

When Monday came to Europe, the bankers/etc there were greeted by notices of an impending influx of cash all coming from Chicago. Their response was "what do THEY know that WE don’t. We’d better get out, too." They then telexed the Chicago institution where to wire THEIR maturing funds, and they also telexed New York City banking counterparts what to do with THEIR monies that would be coming from Chicago. The Earth kept turning.

When Monday came to Manhattan, the bankers/etc there were greeted by notices of a bigger impending influx of cash from Chicago. The response: "What do THEY know that WE don’t?" Another domino was going to fall. The Earth kept turning. When dawn broke in Chicago and the early risers showed up at the institution’s wire transfer room, it was obvious that the party was over. This almost instantaneous insolvency would preclude the bank from opening its doors at 9:00 A.M. Calls were made to Officers and Directors, to the Chicago Fed, and to Washington D.C. TOO BIG TO FAIL became the crisis mantra of the moment and the bailout.

A financial package was hastily put together drawing upon the uncommitted reserves of MULTIPLE Federal Reserve Banks. I didn’t learn the why’s and how’s of all this until I became involved as a forensic accountant on the ensuing litigation coming some years later.

In the early days of this republic, the phrase "not worth a Continental" described the sorry status of a currency that had no substantive backing. In the 1980’s, it referred to the beleaguered Grande Dame of LaSalle Street. Has the pendulum swung back to where it now again describes the precarious status of Uncle $ugar’s finances? If the US Treasury is TOO BIG TO FAIL, whom will they call?


Copyright 2004 Fred Cederholm. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer who contributes the column "TH*NK*NG" to The Weekly Observer in Creston, (Ogle County) Illinois. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.



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This story was published on December 6, 2004.