Those that follow my analysis closely know that I am not a fan of the big banks. In fact, I find most of their charts quite unhealthy from a long term perspective. When you consider that most stocks in the overall market are well above the highs they struck back at the 2007 stock market top, and that Goldman Sachs is still well below its 2007 high, it does not take a brain surgeon to recognize that something is very wrong here.
So, if Goldman Sachs may have issues in several years, why would they now want the “commoners” deposit money? As we know, they are some of the smartest people on Wall Street, so what could they be thinking in moving down this path?
For those that have read my analysis over time, you also know that I am not the type who dons a tin foil hat. However, when I look at the potential issues in the long term charts, there is one perspective that comes to mind, which may be shared with the doomsdayers.
Before I discuss my theory as to why Goldman MAY be moving into this new segment of the banking business, let’s begin with some background understanding of the relationship that depositors have with their banks.
Most Americans utilize bank accounts for the purpose of commercial expediency. We use them to pay our bills, as well as a depository for our excess funds. But, what most people do not understand is that when we give our money to the banks via deposits, we are actually giving that bank a loan, as we become unsecured creditors of the bank.
Yes, the money we place deposit with a bank has the legal status of a loan to the bank, and there is no security that the bank provides to us that such deposits will ever be paid back. It is no different than when we loan money to an individual, and then receive interest for the loan we provide. The main difference is that you likely know more about the financial stability of the person to whom you loan your money than the bank to whom you loan your money in the form of a deposit.
So, while many believe that they can simply walk into the bank and demand their money at any point in time, this is simply not the case. If the bank should run into financial difficulties and default, you will stand in line with the rest of the bank creditors to receive pennies on the dollar through the bankruptcy process.
Many of you are now saying to yourselves that this is not such a big issue to most American’s since the FDIC guarantees bank deposits up to $250,000 per depositor, per insured bank. So, of course, most Americans believe that their bank deposits are quite secure, since the FDIC is backstopping their unsecured status. While this belief is reasonable when individual banks run into problems due to extenuating circumstances which may cause relatively small defaults across the system, it is not a reasonable belief during times of systemic stress.
Consider that in 2009, as we were experiencing a tremendous amount of stress on the banking system as a whole, the FDIC Insurance Fund fell into a deficit of almost $21 billion. Yes, you read that right. The supposed “backstop” had a massive deficit. So, one has to consider how much you can rely upon the FDIC if we should see an even worse systemic break down than the one seen in 2008.
So, what does Goldman’s recent decision have to do with all of this? Well, when we consider what occurred in Cyprus several years ago, it may open some eyes.
When the financial crisis hit the Cypriot banks several years ago, which were already in a poor fiscal position after the conversion to the Euro, there was no bail out being offered (much of the reasons for which seem to have been political in nature). As a result, two of the largest banks were on the verge of closing. Ultimately, Laiki Bank had to be wound down, and the depositors of that bank lost most of their uninsured savings. However, the Bank of Cyprus, rather than wind down as well, entered into a restructuring, and utilized the cash held from depositors for the funds needed to effectuate the restructuring. The depositors were issued shares in the newly restructured bank in return for their deposits which were used for the restructuring.
Now, I do not believe we are on the cusp of a major banking crisis such as the kind seen in 2008 and 2009. However, if you look at my long term chart of the S&P500, I do think we can reasonably see another such crisis, and potentially one that is even worse, once we turn the corner into the 2020’s. That means that Goldman has at least 3-4 years to build its common depositor’s base, which it has just announced its intentions to do.
Now, let’s first assume I am correct in my expectations for another major banking crisis to be seen in the not too distant future. Let’s further assume that, rather than a bail out being offered by the government again, the powers that be determine that a Cyprus-style “bail-in” would be the preferred path. Do we begin to see the light as to why Goldman wants to increase the deposits it holds within its virtual safes?
There is one more point that should be made. As far as I know, we still do not have any laws in place which authorize the Cyprus-style “bail-in” scenario. While that does not mean that one may not be passed when a desperate “emergency” situation arises, we currently do not have a mechanism to legally effectuate and enforce such a “bail-in” on depositors.
I also want to point out that those who do maintain deposits in large banks, such as Goldman, would be better served by bail-ins as compared to the bankruptcy option. As a former lawyer with a significant amount of mergers and acquisitions experience, I would argue that the depositors may prefer a “bail-in” in such a scenario. Under such extreme circumstances, a “bail-in” at least preserves the “good” assets of the bank, and gives them future hope of being able to recover more of their losses than they would have otherwise had to recognize under the bankruptcy option. The bankruptcy alternative truly leaves them nothing in their unsecured status, so providing a restructuring using a “bail-in” type of scenario places them in a better position than as a standard unsecured creditor would hold.
In conclusion, there could very well be many business reasons as to why Goldman has now moved down the path of opening its vaults for mass deposits. But, when considering where I view the market several years down the road, along with the lagging long term charts of the bank stocks, one has to consider the Cyprus-style potential “bail-in” scenario a little more seriously. Ultimately, one must consider whether they even want to place money in the large banks to begin with considering the potential risks being alluded to within the long term charts.