City of London/Wall Street Collapse Ratchets Down Another Level
Aug. 7, 2020 (EIRNS)—The banking-financial system shows increasing signs of being ready to burst. The giant City of London and Wall Street banks are pouring large amounts of funds into loan loss provisions in anticipation of a flood of loan defaults, and Warren Buffett’s Berkshire Hathaway appears to have carried out a “back door” bailout of Bank of America. While the unsustainability of the financial bubble system has been papered over, especially since the 2008-10 financial crisis, in the last six years of “quantitative easing” it appears that fix has run into limits. Lyndon LaRouche’s clear plan for bankruptcy reorganization is necessary.
During the second quarter of 2020, JPMorgan Chase, Citigroup and Wells Fargo—three of the four largest Wall Street banks—set aside $28 billion in loan loss provisions, bringing the total amount of their loan loss provisions to $47 billion for the first half of 2020. The amount of loan loss provisions that these three banks set aside in the second quarter almost equals what these banks set aside during the second quarter of 2009, when the meltdown of the world financial system was in full swing. By law a bank is forced to declare a loan loss provision as “an income statement expense to allow for uncollected loans and loan payments”; that is, it has provisions equal to the size of the loans that are anticipated to default, and thus would be covered.
This is not strictly a U.S. phenomenon. National Westminster, one of the City of London’s largest banks, took a further £2.1 billion ($2.74 billion) charge to cover bad loans during the second quarter. The Dutch ING Group wrote off €300 million ($352 million) during the second quarter. In addition to loan loss provisions, there are sharp drops in profit, or outright losses. London’s HSBC, Europe’s largest bank, with a longstanding history in the global opium trade, saw its profit plummet 96% during the second quarter. Spain’s Banco Santander, the fifth largest bank in Europe, reported a $12.7 billion loss for the first half of this year.
In this environment, Warren Buffett’s Berkshire Hathaway investment company conducted a sotto voce bailout of Bank of America. On July 23, Buffett purchased 34 million additional shares of Bank of America stock, bringing his holdings up to 982 million shares, or 11.3% of the company’s total stock. His holdings of the bank are worth about $25 billion. Prior to that, Bank of America had to announce a second-quarter $5 billion loan loss provision; its stock had fallen 30%, and was plummeting.
The Federal Reserve has been gushing out money since especially March, increasing its assets (and thus simultaneously increasing money creation) by more than $3 trillion. This has been holding up and expanding the rapacious speculative bubble, which drains the life from the physical economy. This torrent of money has done only a tiny amount to help the people.
The financial bubble and human life cannot coexist. In a Jan. 26, 2015 LaRouchePAC video discussion, economist Lyndon LaRouche asserted, “Wall Street is bankrupt and Wall Street must be terminated as a functioning part of the operation. It can have some kind of limited function, but its present investment banking must be eliminated. Because you cannot maintain, you cannot avoid a terrible crisis of the entire U.S. economy, unless you bring Wall Street under control, as being managed by an organization, not by Wall Street itself.”
LaRouche emphasized, “we have the new institution which is going to supply Federal credit for the purpose of supplying the funding of economic growth in the United States now.”
Today’s fundamental crisis demands such a solution.