Banks have so many different words for stealing, it’s difficult to keep up.  Here we’ll take a brief look at three variations on the theme, keeping in mind that a scam by any other name is still a scam.

Rehypothecation

To hypothecate is to provide collateral to be held by a bank in case the borrower defaults on the loan. That’s simple enough. BanksWe all understand how that works.  But, banks borrow money too. So they rehypothecate that same collateral to collateralize their loan.  In North America, banking rules dictate that rehypothecation can only happen once.  European banking rules, however, don’t have any limits.  That’s right.  In Europe, rehypothecation is limitless and so American banks simply transfer their loans to their European subsidiary and rehypothecate your collateral until they’re dizzy. So, what if your collateral has been rehypothecated several times and someone defaults? Are you starting to feel that there is something amiss here? Is it becoming clear why banks cannot be allowed to fail?

Derivatives

From the root word, “derive” simply means something not original but derived from something else. Oily RagThis is another clever scheme that came to light in the last couple of decades and became very popular in the late 20th century.  Investors can buy bits of mortgages that have been bundled up, sliced and diced and rebundled and sold as derivatives to unsuspecting buyers all over the world.  They aren’t actually investing in mortgages, they are investing in an instrument derived from mortgages.  It’s a lot like buying the smell off an oily rag.  It’s not really oil that your investing in and it’s not quite the rag but it is the smell off an oily rag and that’s a derivative.

Fractional Reserve Banking

At one time, it was thought that when you deposited your pay cheque into the bank, they would keep it in reserve for you andFraction give it back to you when you asked for it. Since the bank is in the business of loaning money for profit, it wasn’t long before they devised a scheme called fractional reserve banking.  This is where the bank takes your $100 on deposit, agrees to pay you a small percentage to leave it with them, gambles that you won’t ask for it back any time soon, then loans out $90 of it to someone else in return for a higher interest rate than the bank is paying you. The risk for the bank is that all their depositors might demand their money back at once.  This is called “a run on the bank”. This is when the bank has to admit that they don’t have your money and declare a “bank holiday”, which is an excuse to close their doors while they figure out how to get out of that mess.

That knot in the pit of your stomach is telling you something.  All three of these banking tricks are blended daily to achieve a melange of seedy, underhanded, immoral yet seemingly-legal schemes to take what you have away from you.  You can choose not to play their game. You can buy gold and silver while it’s still affordable and keep it safe.  And in return, it will keep you safe.

 

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Image Credits:

“Piggy Bank Leaving Bank”:Image courtesy of Stuart Miles/FreeDigitalPhotos.net

“Rag”:Image courtesy of antpkr /FreeDigitalPhotos.net

“Pie Chart”:Image courtesy of digitalart/FreeDigitalPhotos.net