Ahh. Another 2007 round of profits by the big six private banks again. From an article on CBC, they state:

Canada’s six biggest banks reported 2007 profits totalling a record $19.5 billion on revenues of slightly more than $74 billion. A banner year, to put it mildly. Three of the six banks reported their best-ever annual earnings. And that’s despite most of them having to take big writedowns related to the subprime mortgage mess in the United States. Generally speaking, the banks are crediting the numbers to more mortgage and commercial loan business, fatter spreads, more credit-card borrowing, more mutual fund sales, more stock market trading, and better cost controls. Four of the banks — Scotiabank, TD, Royal and CIBC — also posted gains from selling their stakes in credit card giant Visa Inc. National Bank and BMO, which are affiliated with MasterCard, reported gains in 2006 when that credit card company beat Visa in the race to go public.Canadian consumers love to complain about bank fees, especially monthly bank account fees and ATM fees. While the banks don’t break those out separately in their financial reports, the Canadian Bankers Association has said that service fees account for about five per cent of total bank revenues. For 2007, that would mean service fee income of about $3.7 billion. Click on each of the Big Six logos to find out how they made their money.

So I clicked on those Big 6 Banks (sorry I could not repost the links here as CBC shipped the story in a Flash file.

From TD Bank:

TD Bank CEO Ed Clark called 2007 “tremendous,” “fantastic” and “spectacular.” Last year, he declared 2006 to be “exceptional.” Whatever it was, one thing 2007 wasn’t was a record, at least as far as profits were concerned. TD reported an annual profit of $4 billion, down $600 million from the year before, when the bank had a large one-time gain from the sale of some of its interest in Ameritrade. TD’s profits were driven by double-digit earnings growth in most of its businesses, with especially strong growth in wealth management and its retail banking units. During the year, it announced plans to acquire New Jersey-based Commerce Bancorp for $8.5 billion US.TD was the only one of the Big Six banks that managed to avoid taking writedowns related to the U.S. subprime mortgage mess. Sometimes, taking a less risky approach pays off.

From BMO:

BMO Financial Group made $2.13 billion in fiscal 2007 — down more than $530 million from the year before. The good news? Its personal and commercial banking division earned record profits as business grew. The bad news? BMO’s bottom line was hit hard by a variety of charges relating to big losses in natural gas trading (it put two commodities traders on leave) as well as losses from what is euphemistically referred to as the “deterioration in capital markets.” That’s accountant-speak for writedowns related to the subprime mortgage meltdown south of the border.As a result, BMO missed most of its annual targets. For 2008, its goal is to boost earnings per share growth by 10 per cent to 15 per cent.

From RBC:

In 2007, Royal Bank posted the highest annual profit ever for a Canadian bank, $5.49 billion. That’s up 16 per cent from 2006. Royal said earnings at its wealth management and banking businesses were strong. Capital markets, however, were less stellar as the subprime meltdown led to a $160-million charge in the fourth quarter.During the year, it acquired Alabama National BanCorp for $1.6 billion US. For 2008, RBC forecasts more modest earnings per share growth of seven to 10 per cent. Domestic banking should remain strong, it said.

From CIBC:

CIBC’s 2007 featured some good news, but a lot of bad news. On the positive side, the bank can boast that it made a record $3.3 billion in profit — up 25 per cent from 2006. Return on equity improved slightly.On the downside: the subprime mess. CIBC has more exposure to the slumping U.S. subprime mortgage market than any other Canadian bank. When it released its fourth-quarter results, it revealed that it has $9.3 billion in hedged subprime mortgage derivatives contracts and warned that more writedowns are possible. The stock took its biggest one-day tumble since its last bombshell — in 2005, when the bank took a $2.4-billion writedown related to Enron litigation.

From National Bank:

CIBC’s 2007 featured some good news, but a lot of bad news. On the positive side, the bank can boast that it made a record $3.3 billion in profit — up 25 per cent from 2006. Return on equity improved slightly.On the downside: the subprime mess. CIBC has more exposure to the slumping U.S. subprime mortgage market than any other Canadian bank. When it released its fourth-quarter results, it revealed that it has $9.3 billion in hedged subprime mortgage derivatives contracts and warned that more writedowns are possible. The stock took its biggest one-day tumble since its last bombshell — in 2005, when the bank took a $2.4-billion writedown related to Enron litigation.

Finally, from ScotiaBank:

The Bank of Nova Scotia made a record $4.05 billion in fiscal 2007, up $500 million from 2006. Scotiabank reported double-digit profit growth in domestic banking and international banking and met or beat all of its targets for the year. But investment banking profits rose by only six per cent as the bank took a $135-million after-tax charge in the fourth quarter related to the battered U.S. mortgage market.Despite that, it boosted its stock dividend by two cents a share. Scotiabank — like TD, CIBC and RBC — reported a one-time gain on the sale of its interest in Visa Inc., which is restructuring on its way to an initial public offering.

How do banks really make money? Would you believe that the answer is because banks actually manufacture or print money?

I could go into the historical evolution of our modern banking system, all the way from the goldsmiths to the establishment of the England’s Central Bank in 1694 to the cashless society that we read about from time to time. But I won’t. My job is to strip out all of the banker language and the accounting terminology and speak it as best as I can in plain ol’ English.

Since I have your attention as it is only 4 paragraphs into the article, let’s dive right into the topic…

Now I know that there are other ways that banks make money such as service fees, investment services, alternate products and services or whatever, but the bulk of their revenue comes in from of interest on their loans. This is the “bread and butter” of the business. Canada Banking Statistics – 2007

Most folks are under the impression that banks borrow the money from their depositors and lend it out to borrowers. Banks charge higher interest on loans than they pay out in interest to deposit accounts. In other words, they make their money in the loan/deposit function from the difference (or “spread”) in the interest rates. And as long as you keep on thinking that, it is just fine with the banks – more on that later.

Here is how the banks print money:

1 – You go into the bank for a mortgage. For sake of simple math, let’s say it is for 300K at 6% for 25 years. We will make the assumption that you will not make any prepayments, not double up your mortgage payments, and the interest rate will remain the same over 25 years.

2 – The bank puts you through the hoops to determine your risk of default. If it is low, the bank grants you the mortgage. The bank doesn’t really care if you pay off the loan. They DO care that you will constantly pay interest.

3 – The bank does not take this money from other depositors or their private vaults. They make a few entries into their computer and “poof”, you have $300K of bank credit, which is a substitute for money, deposited to your account. This is brand new money (credit) added to the economy. In reality, you don’t see the money, as a cheque for $300K is transferred to the deposit account of your house seller. Through a very simple accounting trick, this 300K appears as both an asset to the bank (i.e. a loan is an asset) and as a liability (i.e. a deposit into someone’s account). The books balance.

4 – The seller spends your 300K on the things they want, and so on, and so on. That new money makes its way into the economy.

5 – Your job is to repay that credit money – which is backed by nothing but your promise to pay it. So over the amortization of the loan, you are sucking the original principle – the 300K – PLUS the interest. At 6% for 25 years, this amounts to a total of $300,000 + $275,826 = $575,826.00. Wow.

6 – We know how the $300K was created, but where do we get the extra $275,826 dollars of interest? Answer: From other loans created after your loan, which must translate into economic expansion, otherwise it cannot be paid back.

7 – Multiply this process by thousands of loans, tens of thousands of loans, hundreds of thousands of loans, and you can rapidly see this is VERY lucrative. How lucrative? Well, take a look at this Bank of Canada weekly report, dated 07/12/2007. A short summary (all figures are in millions of dollars, unless otherwise noted):

  • Bank notes in circulation (in millions): $50,724
  • Bank notes in the vaults of all the chartered banks added together: $4,085
  • Non-mortgage loans issued by the chartered banks: $568,113
  • Total mortgage (residential and non-residential) loans: $1,048,968 (that’s Trillion!)

It is beyond question to ask if banks lend out more than they have on reserve.
8 – Assuming that the average interest on those loans is 4% (for simplicity – and I feel like being conservative), this means that approximately 40 odd billion dollars of interest is being pulled out of the economy and makes its way back to the bank, plus the principle. The principle is retired in the banks ledgers, but the interest…that is pure profit and reported as such.

9 – As a bank, that money does not go into my vault and stay there. No. I pay my employees, shareholders, business costs, make strategic investments at home and abroad, but generally spread my wings of influence wherever I can. So some of that money comes back out of the bank, but that money is my asset so I can do whatever I please with it. For after a while, once I have more money than I know what to do with, the game for me becomes power, not wealth. The best part of it is, my shareholders cheer me on if I make more money!

10 – Here is what my shareholders don’t see. Since interest must be paid back on the credit that the Bank Act of Canada gives me the right to create, the economy MUST expand to find that interest money? More houses have to be built, more businesses have to take out loans, or a recession/depression will occur as I am pulling too much money out of the economy. I demand more people, more products, more consumption, and continue to demand more resources from the Earth. More farming, more mining, more production.

11 – If more credit needs to be added to the economy, my buddies at the Bank of Canada will lower the interest rates, to encourage more loan creation. If there is too much credit being added to the economy, my buddies raise it. Either way, I don’t care. I win. You see, if I can create credit out of nothing, I don’t have to charge a whole lot of interest on it to show a profit. Couple that with my service charges and fees, I win even more! And my shareholders, ever desiring better and better returns, cheer me on! Even though my money creation mechanisms rob them of their wealth via inflation!

12 – I pay corporate taxes too. Gladly, no problem. This is why the government loves me too. What do I care? It’s not like I had to work to create the $300,000 I loaned you. And the people still cheer me on, because they do not know that I am the worm at the core of Capitalism.

Wouldn’t you like to be a bank? Wouldn’t you like to be able to legally counterfeit money, lend it to people, and charge interest on it? You can’t (big tongue sticking out). We are a pretty exclusive club.


Let me leave you with some quotes from people far brighter than I:

“Banking was conceived in iniquity, and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen, they will create enough deposits, to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in. But if you wish to remain the slaves of Bankers, and pay the cost of your own slavery, let them continue to create deposits.”
— Sir Josiah Stamp, Former President of the Bank of England

“Those few who can understand the system (check book money and credit) will either be so interested in its profits, or so dependent on it favors, that there will be little opposition from that class, while on the other hand, the great body of people mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear it burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.”
— the Rothschild Bros. of London

“The modern banking system manufactures money out of nothing. The process is, perhaps, the most, astounding piece of sleight of hand that was ever invented. Banks can in fact inflate, mint, and un-mint the modern ledger-entry currency”.
— Major L. L. B. Angus

“This is a staggering thought. We are completely dependent, on the Commercial Banks. Someone has to borrow every dollar; we have in circulation, cash or credit. If the Banks create ample synthetic money, we are prosperous; if not, we starve. We are, absolutely, without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity, of our hopeless position, is almost incredible, but there it is. It is the most, important subject; intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse, unless it becomes widely understood, and the defects remedied very soon.”
— Robert H. Hemphill (Credit Manager of Federal Reserve Bank, Atlanta, Georgia)

“Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars in accounts on their books in exchange for a borrower’s IOU.”, p. 19. – Federal Reserve Bank of Chicago, Modern Money Mechanics.

So now that reserve ratios were done away with, these means that the banking system in Canada today can issue an infinite number of loans without having any cash at all on hand to back them up. There is a term for this. It is called “Fractional Reserve Banking”.

So do they create money infinitely? No. They can only create credit if there are people and businesses lined up at the loan window. How is this encouraged/discouraged? By altering the interest rate. You and I will think twice about obtaining a loan that has a high interest rate. This discourages people seeking a loan to walk away, if they can. Lowering interest rates encourage people to line up again. In other words, their ability to manufacture money is limited to the volume of people and the size of their respective loans they are willing to go into debt for.

This is what they mean by controlling inflation. If an economy gets too hot, meaning that there is an excess amount of credit creation going on and prices begin to rise too fast, the Bank of Canada raises the interest rate and private banks follow suit. This causes fewer loans to be issued AND causes existing loans to have their interest rates to be reset when their respective terms come due. Ultimately, this causes the money supply in the economy to shrink as more credit is being paid back to the credit issuers (the banks), thus slowing down the economy.

This cannot go on indefinitely. If too much checkbook money is being vacuumed up by the private banks, this causes recessions or, if left unchecked, deflation or depressions. In fact, the Great Depression was caused by this. Banks refused to lend money, or were extremely careful about who they lent it to, causing the overall money supply to shrink by a whopping 30%. Ben Bernanke (yes, he is still alive) admitted it to Milton Friedman:

“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” Source

So here we are. 95% of the money we use – checkbook money – is privately created by our banks via the loan process. Put another way, 95% of our money represents our own and someone else’s debt. This checkbook money injected into the economy must be paid back over time to the private banks PLUS the interest on that money. The interest part of that money CANNOT be, in theory, paid back, as the money does not exist. Put another way, if all of our debts were attempted to be paid back all at the same time, there wouldn’t be enough money in the economy to do it. Not to worry though. Most of us cannot pay our loans all back all in one shot anyway.

As we have debt based checkbook money, AND there is not enough money to pay back all these debts all at the same time, we MUST have continuous economic expansion. This means that we must have MORE people to take out MORE loans. We need MORE jobs so these people have the means to do so. We must have MORE products and services to be consumed. How do we do that? We call for MORE immigrants, LARGER markets via trade agreements. No matter what productivity gains a business makes to improve the bottom line (and they make plenty), eventually it falls back to the perpetual demand for economic expansion as we are all slaves to the privately created debt based money the banks produce.

Liberal, Conservative, NDP, Green, it doesn’t matter what political stripes you wear, privately created credit is the worm or cancer at the core of capitalism (and yes, I am a Capitalist).

Think the banks don’t know this? Sure, your teller doesn’t. Your Loan Officer probably doesn’t. But the top level echelon of the private banks do (see my previous quote w.r.t the Rothschild Bros.). This usurping of our money supply began years ago. Some argue all the way back to the creation of the Bank of England in 1694. This is why all these older quotes I cite are still relevant.

I found another quote (yeah, from a dead guy), that was just too good to pass up. Read it carefully:

“Capital must protect itself in every possible manner by combination and legislation. Debts must be collected, bonds and mortgages must be foreclosed as rapidly as possible. When, through a process of law, the common people lose their homes they will become more docile and more easily governed through the influence of the strong arm of government, applied by a central power of wealth under control of leading financiers. This truth is well known among our principal men now engaged in forming an imperialism of Capital to govern the world. By dividing the voters through the political party system, we can get them to expend their energies in fighting over questions of no importance. Thus by discreet action we can secure for ourselves what has been so well planned and so successfully accomplished.” – USA Banker’s Magazine, August 25 1924

Well, I hope that I have managed to prove that the existing system CANNOT go on. Perpetual economic expansion will ultimately kill us as we demand more and more from Planet Earth. This is why I shake my head at Kyoto and other environmental plans, because NONE of them will succeed unless we have an economy that will function well with zero growth and a stabilization or reduction of population growth. We are locked into a suicide course with the Earth eventually simply packing it in as it’s resources cannot sustain infinite economic expansion. Burning the rainforests, killing our oxygen supplies, to set up coffee fields. It goes on and on…

Oh sure, maybe replacing gasoline with hydrogen, coal with wind power, solar, or nuclear will help. Replacing incandescent bulbs with fluorescent. Recycling. Buying locally. New technology emerges and old ones adapt or die. And so on…

All good things, and these things should be done, but eventually it falls back to our debt based money supply and, by it’s very nature, forces economic expansion tactics. We cannot have a sustainable zero growth economy, period, end of story, full stop, unless we slay this creature.

Over the future posts, I hope to discuss potential solutions to this…