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McAlvany Financial Companies CEO David McAlvany on the risks of a banking crisis worse than the one in 2008.
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The apparent easing of the debt crisis in Europe is not easing our next -- he says continuing problems over there -- could spell.
Over on to our shores and lead to another banking meltdown in 2000 well David -- Romania is CEO -- map of any financial companies and he joins us now -- David.
You're talking about in 2008 like crisis.
I think 2008 was a crisis I don't think it was the crisis that I think is gonna unwind and we'll see it in front what you're saying it'd be worse than 2008 what -- heading up to.
Absolutely absolutely.
What we had in 2008 we -- we started with pristine balance sheets for the central banks and we are able to take.
All of the problems that we had an individual financial institutions and roll that over sort of from from these individual corporations under the public balance sheets -- -- -- we've seen an expansion of our balance sheet to close to three trillion to the same thing with the ECB.
And so we have kind of the same problem.
They're spent we can't really push this sovereign issues.
Up any further he well I I understand that there are a lot of things in the financial statements -- big banks like Citi and everything that people question now but.
It back in 2008 there were just loaded with all kinds of bad information about how much these sub primes were worth.
Didn't we get rid of a lot of that didn't we rationalize the books back then actually eating your rid of any of -- we -- got to mark things to make believe we get to -- and the fantasy we took away the Fed has been rules.
What happened in the fall of 2008 was everything was going to have to be marked to market.
And there was a panic.
Then fast B roll that back and said -- and you can come up with a model you can come up with some sort of a fantasy of what it should be worth what you think it's worth.
And we can we can hold -- the fair value we can.
That's -- they've played with so we have a lot of toxic assets still on the balance sheets of banks what does that mean for my money I mean there was there was a real danger 2008.
That I would go to my bank and I couldn't take my cash out.
Are you saying suggesting that something similar to the like that will happen.
Well I think one of the things this difference in 2008 is we were faced with a real liquidity issue then.
We're faced with a real solvency issue now.
And the question is what is the trigger here in the US financial sector in the US bank sector could are -- our banks actually crash to the point where we couldn't go winning get her money out.
I think we could see up to 10% of US banks up to 20% if you're including US and European banks either bankrupt -- nationalist.
-- now what about a bailout we are we were told that all these new regulations that we have we're gonna prevent.
Too big to fail prevent more bailouts -- I assume you don't agree with that well the problem is they're even bigger today than they were in 2008 I mean if they were too big to fail then.
David have bigger than now let's just didn't focus on that because we talked about it before here the top four banks in the country right now have 62%.
Of all the commercial assets for five years ago it was much less that was 54% so despite all the regulations were becoming more concentrated.
Yet for companies having more too big to fail companies I think when people understand the nature fractional reserve banking they'll appreciate how -- I I don't understand so let's go let's.
Not throw that phase around -- will talk Turkey to -- let's say I'm in the banking you give me -- dollar and that's the deposit.
Would it be strange that -- lend out ten dollars instead of the one eaten it might be and yet that's essentially what happens through fractional reserve banking.
And it means that out of a ten dollar portfolio of loans with only one dollar of of of assets backing in.
It takes very little volatility in that loan portfolio to put me as a lending institution.
Out of -- and see what kills me is we have spent bill what the majority of the time over the past three years regulation wise trying to prevent all this from happening again.
And we have come out with a lot of regulations we sat on a lot of small bankers who say it's hitting them because they couldn't afford the lobbyist for the cut -- said the cut -- that the big banks get.
So we are killing the small banks the big banks as we see your are getting even more power than they had before so all this regulation is not only for nothing it's making things worse I think I think one of the things that's it is sort of diversion areas affected the coming up with -- numbers in terms of earnings here in the in the third and fourth quarter.
As we finish the year 2011.
We have the idea that banks are sort of back in business the problem is the crafting those earnings using derivatives that's that's one issue the others are moving loan loss reserves.
Cross and -- counting -- as profits so I mean what we see is very much a pretty got paid.
I'm afraid that we're gonna see some some of that unwound -- twenty and so what we saw -- MF global Jon Corzine's -- is gonna be happening at other bigger banks like Citi and -- everybody's comfortable with the leveraging up leveraging up leveraging if you didn't get away with that new growth cycle.
But when credit contracts -- you Begin to look around at your neighbors and say.
You know how about the collateral we we we we still have it right or maybe we need a little bit back that's -- those leveraged portfolios Begin to unwind.
You're seeing that happen in Europe right now where banks will not lend to each other they're going to the ECB there's so much -- Or or coming to us through the IMF we got to leave it at that David medical -- it's a scary picture glad you pointed out to us I think.
David -- of any C -- back of any financial companies thanks again for coming yet well the out of.
