I think there's a problem with terminology here. Consider Bill's claim:
"why did you put “Withdrawals” on the LH column, above my $30,150 deposit? That should be “Deposits”, not “Withdrawals”. That transaction represents the value of the loan agreement I deposited in the Bank, doesn’t it?"
To deposit with a bank means to hand *cash* to the bank, in exchange for the bank crediting your account. Bill didn't hand over any cash at all: he just wrote a promissory note. Therefore Bill didn't deposit anything.
The statements are presented as though Bill has (1) withdrawn $30,150 of cash from a new account with an overdraft facility, (2) paid $150 cash to the bank as a fee, and (3) deposited the remaining $30,000 into the access advantage account. Let's look at the effects of each on the bank's (A)ssets, (L)iabilities and (E)quity:
(1)
A: - $30,150 (cash); + $30,150 (Bill)
(2)
A: + $150 (cash)
E: + $150 (fee - Bill)
(3)
A: + $30,000 (cash)
L: + $30,000 (deposit - Bill)
Notice that the changes to the bank's cash position cancel each other out, leaving just:
A: + $30,150 (Bill)
L: + $30,000 (deposit - Bill)
E: + $150 (fee - Bill)
All in all, that seems perfectly reasonable to me.
There are several terminology problems here. Let me clear them up.
Problem 1: A “deposit with a bank” is not restricted to *cash*; a ‘good’ cheque has the same effect. But people also deposit other *valuable objects* with banks, including mortgage documents. That’s what has happened here. Mortgages are “negotiable instruments” which banks can (and often do) sell into the derivatives market as Mortgage-Backed Securities (MBS) via Special Purpose Vehicles (SPV’s). Prof. Richard Werner explains this in many of his online videos.
In this case, the “30,150.00” posted in the LH (Debits) column caused the balance in Bill’s “Loan account” to INCREASE from “0.00 [Dr]” to “30,150.00 DR”, but the heading of that LH column is “Withdrawals” and the post is described as a “LOAN DRAWDOWN’, “draw-down” being an obvious synonym of “withdrawal”.
If that looks OK to you, be prepared to feel ‘cog-dis’ when you recognize the outright bank LIES you are looking at on the face of that account statement.
Problem 2: By *RULE 0*, nothing can be “withdrawn” from an EMPTY account – ever – by anyone – not even a banker. I call this RULE “0” for a reason. It is the first and most fundamental RULE of accounting and it applies to ALL accounts, both Asset and Liability.
[Note: By *RULE 3*, asset accounts (like this one) always have “DR balances”. The “DR” suffixes on the balances are adjectives, identifying this as a bank asset a/c rather than a bank liability a/c. More importantly, that “DR balance” is NOT a “negative” quantity! It simply represents the monetary value of the asset(s) the bank has obtained - *from Bill* in this case! That’s why the account is in HIS name.]
This account is NOT “overdrawn”. It has had the $30,150.00 monetary value of an asset posted to it in the LH (Debit) column and [by *RULE 4a*] that Debit item was ADDED to the “0.00” Opening Balance to give a “30,150.00 DR” balance. So, there was NO “Withdrawal”; the entry was NOT a “draw-down”; the transaction was a Deposit of “something” valued (by the ANZ Bank) at $30,150.00. That “something” is now a bank asset, as recorded in this account, which was opened in Bill’s name, NOT because Bill owns the account, but because he was the source of the asset the bank now owns. After depositing his mortgage document, Bill’s only asset here is the “CR balance” in the other [bank liability] a/c.
Problem 3: By *RULE 5b*, *IF* the “30,150.00” entry indeed represented a “Withdrawal” - as the transaction description and both column headings all imply - it MUST be placed in the RH (Credits) column. In this case, it can’t be placed there because the account is empty and you can’t take anything out of an empty account [RULE 0]. Bill can only withdraw funds from the other account in his name, which has his CR balance in it.
Conclusion: The bank’s ACT of placing the “30,150.00” in the LH column is evidence of the fact that they are recording “receipt of an asset from Bill”, as per RULE 4a, while their WORDS contradict the visible evidence of that ACT. They’ve LIED on the face of this document in two places: Column Headings are both the opposite of the truth, and the Transaction description is an outright lie.
Suppose when Bill agrees to the loan, the bank assigns two physical record books, one for the loan account (which has an overdraft facility) and one for the access advantage account. A bank employee, Alice, goes down to the bank vault with the two record books, and a box labelled "Bill". She takes $30,150 of cash from the vault and puts it in the "Bill" box, recording this as a $30,150 withdrawal in the loan account record book. (That reduces the debit balance in the bank's cash account).
Now Alice takes $150 from the "Bill" box, as a fee, and places it in the vault, and writes a receipt which she puts in the "Bill" box. Then Alice takes the remaining $30,000 from the "Bill" box, places it in the vault, recording this as a $30,000 deposit in the access advantage account. She puts the record books in the "Bill" box.
Alice then goes back to the office, and hands Bill the "Bill" box, containing the two record books and the receipt for the $150 fee. She also hands him a new debit card and a cheque book for spending the balance in the access advantage account.
Your thought-experiment seems to imply ‘cash’ is a necessary part of the solution. I disagree. I do want banks to continue, as banks, but with severely revised Terms & Conditions.
Cash may ultimately be replaced by credit - a more efficient exchange-medium than cash - but that would be a disaster on banks’ present T’s & C’s and must be prevented until we can *remove the fraud*.
Also, the “loan” account is not an ‘overdraft facility’. As a mathematician, you are probably thinking algebraically, like I did, as an engineer. That was my mistake for most of my life, until my accountant recognized my problem and explained to me that the word “debit” in “debit balance” does NOT make it a ‘negative’ number, caused by a ‘subtraction from $0.00’; it’s a *defining adjective*, distinguishing any asset account from all liability accounts (which MUST have credit-balances, by definition).
Learning the double-meanings of ‘debit’ and ‘credit’ from my accountant deepened my understanding dramatically and I aim to teach people how to learn this ‘trick’ of accounting.
Nobody, not even a Bank of England director, can “withdraw” funds when no ‘funds’ are present. That is what the ANZ Bank has PRETENDED to do with these [verbal] records. But its [numerical] records PROVE that it accepted the “loan agreement” as the Deposit, by Bill, of an “asset valued at $30,150.00”.
Deliberate deception (by making false [verbal] statements about true [numerical] statements) is simple fraud. I believe it is a criminal offence.
I'm afraid I'm not following your reasoning here. I think it might help if you could answer a couple of questions.
Can you give me your analysis of what happens when Frank opens a current (checking) account which offers a $500 overdraft facility, he's given a debit card, he goes to the ATM, enters his PIN, and requests (and is given) $200? Would you call that a withdrawal? What's different about that and the scenario where Alice takes $30,150 from the bank vault on behalf of Bill?
Absent full account statements, I can’t compare this hypothetical to your other hypothetical ‘cash vault’ process. I'm not an accountant.
Try asking one or two specific questions about “my reasoning”, rather than posing hypotheticals. I can’t see a clear connection between your hypotheticals and my comment.
Your argument appears to rest on your rule 0 ("Funds cannot be withdrawn from an empty account"). But where did that rule come from? Is it based on intuition, or some fundamental axiom? It doesn't seem obviously true to me, and you acknowledge in footnote 9 of post 1 (https://patcusack.substack.com/p/1-bank-accounting-magic#footnote-9-125866882) that overdraft facilities can exist, leading to an account with a debit balance (i.e. an asset of the bank). Why do you say this same analysis can't apply to Bill's loan account?
I think it's important to remember that these statements are intended to communicate information to the customer in a way they can understand, rather than be formal accounts. An average bank customer thinks of banks as a place which takes in money from savers and lends some of it to borrowers. In their minds, it's all just cash going in (deposits) and cash coming out (withdrawals).
We both know that's not how it really works. But I expect most customers would find it very confusing to see a statement showing a set of debits and credits from the bank's perspective. So to make it easier for customers to use its services, the bank simply presents the accounts *as though* it's all deposits and withdrawals of cash. It shows all debits as "withdrawals" (even if it's just the customer writing a new note, and no cash leaves the bank) and all credits as "deposits" (even if it's just increasing the balance of the access advantage account, and no cash is handed to the bank).
Doesn't that resolve the concerns about fraud? Customers are free to transact with the bank on terms which are acceptable to both parties, or to not use the bank. Do you think that Bill is actually disadvantaged in any way? What would you like to see done differently either in the changes to assets and liabilities, or in its presentation?
Again, I disagree! Banks are not benevolent societies, trying to be ‘understood’ by *knowledgeable* people.
As public corporations dealing with *unsophisticated* customers, they are required by law to keep accurate financial records and provide truthful statements. They must also publish their balance sheet at regular intervals. If they knowingly falsify a financial statement or knowingly convey false information they are in for BIG legal trouble. Bill has been deceived by “sleight-of-pen”, concealing the ‘accounting truth’ with a ‘verbal falsehood’. That’s truly masterful magic.
You are right about what “[a]n average bank customer thinks of banks”, but pandering to customer ignorance is to the advantage of the banks, not the customers. Supporting or reinforcing that ignorance can only conceal the fraud. Once you are aware of the fraud, recommending that approach could be seen as “aiding and abetting” the bank’s crime.
Bill is disadvantaged by paying out interest on *something he already owns, as creditor*. Wouldn’t you consider that a disadvantage? At the posted rate of 10.99% p.a., that amounts to almost $65 per week or about $3,313 p.a.! For what? For rudimentary bookkeeping, which uses primary school mathematics, with a nasty logic twist added to the mix.
I won’t be posting what I would like to see done differently. I see my role as an investigator, not a politician. My task is focused on exposing hard documentary evidence of accounting fraud in numerous banking corporations. I need people to (i) see and (ii) understand this evidence for themselves. If they then look further afield, they will find it everywhere.
To that end, I’m prepared to spend as much time as necessary helping people understand the rules of accounting which the banks are clearly breaching.
Without widespread understanding of this fraud, my hopes and wishes are irrelevant.
With widespread understanding of this fraud, the public will quickly work out amongst themselves what changes need to be made.
Let's look at what seems to be the core of your argument:
"Bill is disadvantaged by paying out interest on *something he already owns, as creditor*."
I'm assuming you mean "on something he's already *owed*, as creditor", and that you mean creditor of the bank. Is that right? And when would you say he becomes a creditor of the bank?
Re: *owed* vs owns. I quote your comment in my “Bank Accounting; Magic?” thread: “Assets are not just what an entity owns, but also what it is *owed*”.
Do you *own* your assets? I think you said, “Yes”, right there. Is a “debt owed to you” one of your assets, and is “it” also the liability of someone else? Again, “Yes” and “Yes”. I think you’re agreeing with me.
Re: Creditor of whom? I cannot mean anything but ‘creditor of the bank’, and automatically the bank is debtor (to him). No other ‘entity’ is named in the relevant bank account.
Re: *When* does the customer become creditor? We are getting into legal territory here, so this is a non-lawyer’s opinion, OK? I believe the Debtor-Creditor relationship comes into existence when duplicate copies of the document recording the nature of the agreement between the bank and the customer have been “signed by & delivered to” each party. That is to say, even before the two bank accounts [“Loan” and “Access”] are opened.
I think I must have not explained clearly enough what I meant about "owed" vs "owns". I would say that a person *owns* their tangible assets, and *is owed* their debt assets. It's one or the other, never both.
Bill is only owed something ($30,000) by the bank because he agreed to owe something ($30,150 + interest) to the bank in exchange. If he hadn't agreed to owing this debt to the bank, he wouldn't be owed anything by the bank. Both debts come into effect simultaneously. Do you disagree with any of this?
Also, do you agree that the bank would make a loss if Bill were to default?
A question for you, without getting into the details of terminology and accounting rules.
Would you say that this arrangement with the bank allowed Bill to buy $30,000 of goods and services in the short term, in exchange for paying the bank $30,150 plus interest (and late payment fees) in the longer term?
But the interest charged was based on a fraudulent accounting record, arguably criminally so.
At best, the bank can rightly charge fees for performing their accounting function, but they never owned (and could not own) the credit-balance in their liability account. From the moment that record was created it was Bill's asset (and the bank's liability). In fact Bill became entitled to it from the moment the bank accepted his signed "loan" agreement as a commercially valuable deposit. Bill never received his "$30,000 worth of amber", he simply transferred his "right to receive $30,000 worth of amber". That way, the bank doesn't need to have ANY "amber" at all. It cost the bank no "amber" to create an accounting record.
While the bank doesn't need any money just to create the $30,000 balance in Bill's account, it certainly does need to provide it as soon as Bill withdraws or spends it (unless the seller banks with the same bank).
Imagine Bill bought a Tesla with the $30K, didn't pay for insurance, and then wrecked it. Also suppose he didn't have any other assets. He's going to default to the bank, but the bank still owes $30K to whoever sold him the Tesla. The bank has to have some way to cover that $30K loss, and that's the role of interest. The only other sources of income for banks are fees and speculative proprietary trading. If these don't cover at least the running costs and the costs of default, the bank is going to go out of business sooner or later.
The reason that lending banks came into being was to provide people with IOUs which could be used as a means of exchange. Even if the banks lost some of their assets (e.g. borrower default), they had surplus capital so they could still guarantee payment to whoever now has the bank's IOUs. Contrast this with someone using their personal IOU to buy something: if they default it's the seller who loses out. Banking is essentially insurance of other people's IOUs, and interest is analogous to insurance premiums.
On a side note, I'm not confident that the banks actually do have enough capital to cover defaults nowadays. I'm firmly of the opinion that they should have let the insolvent banks fail in 2008.
Your side note is 100% justified since the world has only ~$1 of “cash” for every $19 of “bank-IOUs". So, the banking industry is indeed inherently insolvent. By design, they can’t honour more than 5% of the loan commitments (IOUs) they’ve made.
Before I can answer your main questions, I need to pin down the idea of “interest” more precisely.
Before discussing “money”, I can only justify interest as “economic rent”. That means, ONLY IF you are, for example, borrowing some “thing” which somebody else owns, depriving that person of the opportunity to use it. This is the “opportunity cost” justification. For borrowed cars, wheelbarrows, books, etc., there is the added consideration of “wear & tear” from normal use, or simply natural aging. For all such cases, an agreed, fixed amount (rent) or time based (interest%) payment would be a legitimate “charge for temporary use”.
While it is justifiable in such cases, it is not necessary. Such a charge can equally be foregone or forgiven, as a “gift”, and slightly different considerations apply to things like a bottle wine, which is *destroyed* when it is “used”. I hope you’d accept an “equivalent” bottle in return.
Banks clearly aren’t into this kind of lending, so, the above cases don’t apply to banks.
When I introduce borrowing “money”, I need to distinguish what banks do from a case where you might lend “money you have earned” - and therefore own (whether you were paid in “money” or “not money”). If you lend me $120 from your earnings/savings, I can easily equate that to the above “economic rent” case and you do run a risk with me. What if I die after spending your loan? That is up to you. It becomes a personal decision, based on any prior agreement, your situation and our previous relationship.
My question is: does a bank own what it purports to lend, the way you own “money” (or “not money”) which you have earned from legitimate exchange processes or your creative efforts?
I think you will agree that you clearly differ from a bank, in that you earned the $120 of “money” (or “not money”) I borrowed from you, but the bank has no, and cannot have, ownership of any accounting Credit which YOU cause them to create - by depositing your valuable IOU with them.
The bank, as bookkeeper, certainly ‘creates’ one account - in which they record a Credit - but they do not, and cannot ever, OWN that Credit. What they OWN is the matching Debit they create in their other (Asset) account. You OWN the Credit they create in their Liability account. That is my main point. You own their IOU the same way they own your IOU.
If they CAN justify charging interest for your use of their IOU, how can they deny paying you the same interest for their use of your IOU.
I’ll leave it at that for now. Perhaps we can get into your wrecked Tesla and insurance problems later.
"Your side note is 100% justified since the world has only ~$1 of “cash” for every $19 of “bank-IOUs". So, the banking industry is indeed inherently insolvent. By design, they can’t honour more than 5% of the loan commitments (IOUs) they’ve made. "
This is one of the issues which I've had to wrestle with in my study. If you owe something you don't currently have, does that make you insolvent? Thinking about it led me to understand that there are two fundamental concepts: solvency and liquidity. They've been known about for a long time, but they haven't always been explained well. Here's what I've concluded:
Liquidity is being able to pay your liabilities which are currently maturing (i.e. the debt is now due and presented for payment).
Solvency is being able to pay *all* of your liabilities, both current and future, by using your existing assets (either directly, or by trading them for what you owe).
There is never any ambiguity about liquidity: when you have to hand something over, it's obvious whether you succeeded or failed. But whether you are solvent is often uncertain: if your only liability is for one apple, and your only asset is $1 cash, you are probably solvent, but if the debt is due in a year, and there's a period of hyperinflation in that time, you might not be able to swap the $1 for an apple so in fact it turns out that you were insolvent and just didn't realise. Market prices are a good *guide* to whether you are solvent.
When it comes to a bank not having enough cash to pay all of its IOUs in current/checking accounts, it can certainly be *illiquid* if there is a bank run, but it can still be solvent. For example, it might own vast amounts of gold, financial assets, or even land and buildings. The bank can pay its debts, but it needs to sell its assets to get the cash, or use them as collateral for a loan. This can take time, but *in the end* the creditors will be paid everything they are owed.
Far more concerning is if the bank is actually insolvent, not having enough total assets to pay all of its liabilities. It might remain liquid for a long time (decades, even) if few people draw on their credit balances, but when enough people do, the insolvency would be revealed.
So I'd say banks aren't inherently insolvent even when they don't have 100% cash reserves, because they have assets they can sell or mortgage to pay their creditors. Banks are always in danger of being illiquid if there is a bank run. This is where Bagehot's dictum is useful: it's a good idea for a central bank to act as *lender* of last resort:
Lend freely at high [interest] rates to *solvent* firms with *good collateral*.
I’m really enjoying your work. It’s extremely important, as it confirms some conversations I’ve had with senior bankers…….
This banking license seems an important nexus. Like entry into a club. I wonder who grants these?
They are all creating credit out of a few spurts of digital energy typing some numbers……and none call each other out. As they are all guilty of the same practice.
Please, please keep disseminating this knowledge and best of health wishes too.
Stay tuned. There are two more articles in the works.
The Australian Prudential Regulation Authority (APRA) is responsible for granting banking licenses in Australia. If you've got $50,000,000 you could be in the running to get one.
Would you like to expand on what those 'senior bankers' are saying in your conversations? I'm curious as to what part o the world you might be in. {I've deleted your duplicate post.)
1. Back in the 90’s I worked in advertising and had different banks as clients, for whom I would plan campaigns say for mortgages or for deposits or insurance which they’d begun dabbling in. Any way, like a cocky young thing, I was at a function chatting to my husband’s boss. My husband was a senior manager for corporate and commercial at what was The National Bank ( now owned/subsumed by ANZ). His boss was top of that division. So at the function I was talking away to the big boss when someone came up and asked the question that you ask. Namely how do loans work? I excitedly replied “ I know!!” And I asked the boss if I could reply. He said he’d be very interested in my reply.
So I explained to the person how the bank spent time and money amassing deposits, and when they had lots they could then lend out lots of loans. That it was a type of symbiotic relationship ebbing and flowing with economic factors. ( yes, I know, I was completely wrong, but I was totally naïve and was unaware of the corruption in the world). Back to the anecdote. At some stage during my recital, the boss chap suppressed an internal chuckle and gave a tiny wry grimace. Like in Poker, a “ tell”. And I immediately realised what I’d said must be wrong. But how? It’s what I’d learnt at Saatchi from our clients….run a campaign to get deposits in/ or mortgages out so our business is balanced type of thing. The boss let my statements remain unchanged to the questioner, but I knew deep down I hadn’t got it right or at least the whole picture.
You will be wondering if my husband ( long out of banking) has/ had any relevant knowledge. No, he’s unfortunately very rule abiding, uncurious, and not understanding the reality of the world.
2. However as of interest to me, I just asked him how a loan was drawn down……”off the bank’s balance sheet” was his reply. So he’s swallowed the Kool Aid. And also I realise, most of the staff will think this too. Only a few in the inner ranks will have any idea of the truth/reality. That’s it “ birthed/created “ when some ink writes it down, or fingers type it in.
3. So the big boss I was referring to earlier was definitely in the “ know”, he had been top in other banks around the world and was very savvy, selfcontained, and secretive.
The only other thing of interest he said in the above conversation, was reference to our Reserve Bank, our central/gov bank in NZ. I think it was to the effect that the Reserve Bank decreed the parameters for them, but I’m not 100%. I mean I know they set the rate, but I got the sense it was more than that.
Phew, what a lot!!
I’m not sure any of it helps, but when I read your substack work, it totally reverberates with truth, as I’ve been learning of the inter generational theft and lies in so many arenas and areas. (and it reminded me of the above anecdote and how the boss’s behaviour was both condescending and jarring and I just knew there was more going on!!!)
My health has been good., thanks. Glad you find the information helpful.
I'm looking forward to criticism from people like your husband, who have had experience in banking, so don't be afraid to put it under his nose some time, if that's appropriate for you.
The main task at present is to spread the message to as many as possible.
I think there's a problem with terminology here. Consider Bill's claim:
"why did you put “Withdrawals” on the LH column, above my $30,150 deposit? That should be “Deposits”, not “Withdrawals”. That transaction represents the value of the loan agreement I deposited in the Bank, doesn’t it?"
To deposit with a bank means to hand *cash* to the bank, in exchange for the bank crediting your account. Bill didn't hand over any cash at all: he just wrote a promissory note. Therefore Bill didn't deposit anything.
The statements are presented as though Bill has (1) withdrawn $30,150 of cash from a new account with an overdraft facility, (2) paid $150 cash to the bank as a fee, and (3) deposited the remaining $30,000 into the access advantage account. Let's look at the effects of each on the bank's (A)ssets, (L)iabilities and (E)quity:
(1)
A: - $30,150 (cash); + $30,150 (Bill)
(2)
A: + $150 (cash)
E: + $150 (fee - Bill)
(3)
A: + $30,000 (cash)
L: + $30,000 (deposit - Bill)
Notice that the changes to the bank's cash position cancel each other out, leaving just:
A: + $30,150 (Bill)
L: + $30,000 (deposit - Bill)
E: + $150 (fee - Bill)
All in all, that seems perfectly reasonable to me.
There are several terminology problems here. Let me clear them up.
Problem 1: A “deposit with a bank” is not restricted to *cash*; a ‘good’ cheque has the same effect. But people also deposit other *valuable objects* with banks, including mortgage documents. That’s what has happened here. Mortgages are “negotiable instruments” which banks can (and often do) sell into the derivatives market as Mortgage-Backed Securities (MBS) via Special Purpose Vehicles (SPV’s). Prof. Richard Werner explains this in many of his online videos.
In this case, the “30,150.00” posted in the LH (Debits) column caused the balance in Bill’s “Loan account” to INCREASE from “0.00 [Dr]” to “30,150.00 DR”, but the heading of that LH column is “Withdrawals” and the post is described as a “LOAN DRAWDOWN’, “draw-down” being an obvious synonym of “withdrawal”.
If that looks OK to you, be prepared to feel ‘cog-dis’ when you recognize the outright bank LIES you are looking at on the face of that account statement.
Problem 2: By *RULE 0*, nothing can be “withdrawn” from an EMPTY account – ever – by anyone – not even a banker. I call this RULE “0” for a reason. It is the first and most fundamental RULE of accounting and it applies to ALL accounts, both Asset and Liability.
[Note: By *RULE 3*, asset accounts (like this one) always have “DR balances”. The “DR” suffixes on the balances are adjectives, identifying this as a bank asset a/c rather than a bank liability a/c. More importantly, that “DR balance” is NOT a “negative” quantity! It simply represents the monetary value of the asset(s) the bank has obtained - *from Bill* in this case! That’s why the account is in HIS name.]
This account is NOT “overdrawn”. It has had the $30,150.00 monetary value of an asset posted to it in the LH (Debit) column and [by *RULE 4a*] that Debit item was ADDED to the “0.00” Opening Balance to give a “30,150.00 DR” balance. So, there was NO “Withdrawal”; the entry was NOT a “draw-down”; the transaction was a Deposit of “something” valued (by the ANZ Bank) at $30,150.00. That “something” is now a bank asset, as recorded in this account, which was opened in Bill’s name, NOT because Bill owns the account, but because he was the source of the asset the bank now owns. After depositing his mortgage document, Bill’s only asset here is the “CR balance” in the other [bank liability] a/c.
Problem 3: By *RULE 5b*, *IF* the “30,150.00” entry indeed represented a “Withdrawal” - as the transaction description and both column headings all imply - it MUST be placed in the RH (Credits) column. In this case, it can’t be placed there because the account is empty and you can’t take anything out of an empty account [RULE 0]. Bill can only withdraw funds from the other account in his name, which has his CR balance in it.
Conclusion: The bank’s ACT of placing the “30,150.00” in the LH column is evidence of the fact that they are recording “receipt of an asset from Bill”, as per RULE 4a, while their WORDS contradict the visible evidence of that ACT. They’ve LIED on the face of this document in two places: Column Headings are both the opposite of the truth, and the Transaction description is an outright lie.
One more thought:
Suppose when Bill agrees to the loan, the bank assigns two physical record books, one for the loan account (which has an overdraft facility) and one for the access advantage account. A bank employee, Alice, goes down to the bank vault with the two record books, and a box labelled "Bill". She takes $30,150 of cash from the vault and puts it in the "Bill" box, recording this as a $30,150 withdrawal in the loan account record book. (That reduces the debit balance in the bank's cash account).
Now Alice takes $150 from the "Bill" box, as a fee, and places it in the vault, and writes a receipt which she puts in the "Bill" box. Then Alice takes the remaining $30,000 from the "Bill" box, places it in the vault, recording this as a $30,000 deposit in the access advantage account. She puts the record books in the "Bill" box.
Alice then goes back to the office, and hands Bill the "Bill" box, containing the two record books and the receipt for the $150 fee. She also hands him a new debit card and a cheque book for spending the balance in the access advantage account.
Do you think that would be ok?
In one word: “No!”
Your thought-experiment seems to imply ‘cash’ is a necessary part of the solution. I disagree. I do want banks to continue, as banks, but with severely revised Terms & Conditions.
Cash may ultimately be replaced by credit - a more efficient exchange-medium than cash - but that would be a disaster on banks’ present T’s & C’s and must be prevented until we can *remove the fraud*.
Also, the “loan” account is not an ‘overdraft facility’. As a mathematician, you are probably thinking algebraically, like I did, as an engineer. That was my mistake for most of my life, until my accountant recognized my problem and explained to me that the word “debit” in “debit balance” does NOT make it a ‘negative’ number, caused by a ‘subtraction from $0.00’; it’s a *defining adjective*, distinguishing any asset account from all liability accounts (which MUST have credit-balances, by definition).
Learning the double-meanings of ‘debit’ and ‘credit’ from my accountant deepened my understanding dramatically and I aim to teach people how to learn this ‘trick’ of accounting.
Nobody, not even a Bank of England director, can “withdraw” funds when no ‘funds’ are present. That is what the ANZ Bank has PRETENDED to do with these [verbal] records. But its [numerical] records PROVE that it accepted the “loan agreement” as the Deposit, by Bill, of an “asset valued at $30,150.00”.
Deliberate deception (by making false [verbal] statements about true [numerical] statements) is simple fraud. I believe it is a criminal offence.
I'm afraid I'm not following your reasoning here. I think it might help if you could answer a couple of questions.
Can you give me your analysis of what happens when Frank opens a current (checking) account which offers a $500 overdraft facility, he's given a debit card, he goes to the ATM, enters his PIN, and requests (and is given) $200? Would you call that a withdrawal? What's different about that and the scenario where Alice takes $30,150 from the bank vault on behalf of Bill?
Absent full account statements, I can’t compare this hypothetical to your other hypothetical ‘cash vault’ process. I'm not an accountant.
Try asking one or two specific questions about “my reasoning”, rather than posing hypotheticals. I can’t see a clear connection between your hypotheticals and my comment.
Your argument appears to rest on your rule 0 ("Funds cannot be withdrawn from an empty account"). But where did that rule come from? Is it based on intuition, or some fundamental axiom? It doesn't seem obviously true to me, and you acknowledge in footnote 9 of post 1 (https://patcusack.substack.com/p/1-bank-accounting-magic#footnote-9-125866882) that overdraft facilities can exist, leading to an account with a debit balance (i.e. an asset of the bank). Why do you say this same analysis can't apply to Bill's loan account?
I think it's important to remember that these statements are intended to communicate information to the customer in a way they can understand, rather than be formal accounts. An average bank customer thinks of banks as a place which takes in money from savers and lends some of it to borrowers. In their minds, it's all just cash going in (deposits) and cash coming out (withdrawals).
We both know that's not how it really works. But I expect most customers would find it very confusing to see a statement showing a set of debits and credits from the bank's perspective. So to make it easier for customers to use its services, the bank simply presents the accounts *as though* it's all deposits and withdrawals of cash. It shows all debits as "withdrawals" (even if it's just the customer writing a new note, and no cash leaves the bank) and all credits as "deposits" (even if it's just increasing the balance of the access advantage account, and no cash is handed to the bank).
Doesn't that resolve the concerns about fraud? Customers are free to transact with the bank on terms which are acceptable to both parties, or to not use the bank. Do you think that Bill is actually disadvantaged in any way? What would you like to see done differently either in the changes to assets and liabilities, or in its presentation?
Again, I disagree! Banks are not benevolent societies, trying to be ‘understood’ by *knowledgeable* people.
As public corporations dealing with *unsophisticated* customers, they are required by law to keep accurate financial records and provide truthful statements. They must also publish their balance sheet at regular intervals. If they knowingly falsify a financial statement or knowingly convey false information they are in for BIG legal trouble. Bill has been deceived by “sleight-of-pen”, concealing the ‘accounting truth’ with a ‘verbal falsehood’. That’s truly masterful magic.
You are right about what “[a]n average bank customer thinks of banks”, but pandering to customer ignorance is to the advantage of the banks, not the customers. Supporting or reinforcing that ignorance can only conceal the fraud. Once you are aware of the fraud, recommending that approach could be seen as “aiding and abetting” the bank’s crime.
Bill is disadvantaged by paying out interest on *something he already owns, as creditor*. Wouldn’t you consider that a disadvantage? At the posted rate of 10.99% p.a., that amounts to almost $65 per week or about $3,313 p.a.! For what? For rudimentary bookkeeping, which uses primary school mathematics, with a nasty logic twist added to the mix.
I won’t be posting what I would like to see done differently. I see my role as an investigator, not a politician. My task is focused on exposing hard documentary evidence of accounting fraud in numerous banking corporations. I need people to (i) see and (ii) understand this evidence for themselves. If they then look further afield, they will find it everywhere.
To that end, I’m prepared to spend as much time as necessary helping people understand the rules of accounting which the banks are clearly breaching.
Without widespread understanding of this fraud, my hopes and wishes are irrelevant.
With widespread understanding of this fraud, the public will quickly work out amongst themselves what changes need to be made.
Let's look at what seems to be the core of your argument:
"Bill is disadvantaged by paying out interest on *something he already owns, as creditor*."
I'm assuming you mean "on something he's already *owed*, as creditor", and that you mean creditor of the bank. Is that right? And when would you say he becomes a creditor of the bank?
Re: *owed* vs owns. I quote your comment in my “Bank Accounting; Magic?” thread: “Assets are not just what an entity owns, but also what it is *owed*”.
Do you *own* your assets? I think you said, “Yes”, right there. Is a “debt owed to you” one of your assets, and is “it” also the liability of someone else? Again, “Yes” and “Yes”. I think you’re agreeing with me.
Re: Creditor of whom? I cannot mean anything but ‘creditor of the bank’, and automatically the bank is debtor (to him). No other ‘entity’ is named in the relevant bank account.
Re: *When* does the customer become creditor? We are getting into legal territory here, so this is a non-lawyer’s opinion, OK? I believe the Debtor-Creditor relationship comes into existence when duplicate copies of the document recording the nature of the agreement between the bank and the customer have been “signed by & delivered to” each party. That is to say, even before the two bank accounts [“Loan” and “Access”] are opened.
I think I must have not explained clearly enough what I meant about "owed" vs "owns". I would say that a person *owns* their tangible assets, and *is owed* their debt assets. It's one or the other, never both.
Bill is only owed something ($30,000) by the bank because he agreed to owe something ($30,150 + interest) to the bank in exchange. If he hadn't agreed to owing this debt to the bank, he wouldn't be owed anything by the bank. Both debts come into effect simultaneously. Do you disagree with any of this?
Also, do you agree that the bank would make a loss if Bill were to default?
A question for you, without getting into the details of terminology and accounting rules.
Would you say that this arrangement with the bank allowed Bill to buy $30,000 of goods and services in the short term, in exchange for paying the bank $30,150 plus interest (and late payment fees) in the longer term?
Absolutely. Yes.
But the interest charged was based on a fraudulent accounting record, arguably criminally so.
At best, the bank can rightly charge fees for performing their accounting function, but they never owned (and could not own) the credit-balance in their liability account. From the moment that record was created it was Bill's asset (and the bank's liability). In fact Bill became entitled to it from the moment the bank accepted his signed "loan" agreement as a commercially valuable deposit. Bill never received his "$30,000 worth of amber", he simply transferred his "right to receive $30,000 worth of amber". That way, the bank doesn't need to have ANY "amber" at all. It cost the bank no "amber" to create an accounting record.
While the bank doesn't need any money just to create the $30,000 balance in Bill's account, it certainly does need to provide it as soon as Bill withdraws or spends it (unless the seller banks with the same bank).
Imagine Bill bought a Tesla with the $30K, didn't pay for insurance, and then wrecked it. Also suppose he didn't have any other assets. He's going to default to the bank, but the bank still owes $30K to whoever sold him the Tesla. The bank has to have some way to cover that $30K loss, and that's the role of interest. The only other sources of income for banks are fees and speculative proprietary trading. If these don't cover at least the running costs and the costs of default, the bank is going to go out of business sooner or later.
The reason that lending banks came into being was to provide people with IOUs which could be used as a means of exchange. Even if the banks lost some of their assets (e.g. borrower default), they had surplus capital so they could still guarantee payment to whoever now has the bank's IOUs. Contrast this with someone using their personal IOU to buy something: if they default it's the seller who loses out. Banking is essentially insurance of other people's IOUs, and interest is analogous to insurance premiums.
On a side note, I'm not confident that the banks actually do have enough capital to cover defaults nowadays. I'm firmly of the opinion that they should have let the insolvent banks fail in 2008.
Your side note is 100% justified since the world has only ~$1 of “cash” for every $19 of “bank-IOUs". So, the banking industry is indeed inherently insolvent. By design, they can’t honour more than 5% of the loan commitments (IOUs) they’ve made.
Before I can answer your main questions, I need to pin down the idea of “interest” more precisely.
Before discussing “money”, I can only justify interest as “economic rent”. That means, ONLY IF you are, for example, borrowing some “thing” which somebody else owns, depriving that person of the opportunity to use it. This is the “opportunity cost” justification. For borrowed cars, wheelbarrows, books, etc., there is the added consideration of “wear & tear” from normal use, or simply natural aging. For all such cases, an agreed, fixed amount (rent) or time based (interest%) payment would be a legitimate “charge for temporary use”.
While it is justifiable in such cases, it is not necessary. Such a charge can equally be foregone or forgiven, as a “gift”, and slightly different considerations apply to things like a bottle wine, which is *destroyed* when it is “used”. I hope you’d accept an “equivalent” bottle in return.
Banks clearly aren’t into this kind of lending, so, the above cases don’t apply to banks.
When I introduce borrowing “money”, I need to distinguish what banks do from a case where you might lend “money you have earned” - and therefore own (whether you were paid in “money” or “not money”). If you lend me $120 from your earnings/savings, I can easily equate that to the above “economic rent” case and you do run a risk with me. What if I die after spending your loan? That is up to you. It becomes a personal decision, based on any prior agreement, your situation and our previous relationship.
My question is: does a bank own what it purports to lend, the way you own “money” (or “not money”) which you have earned from legitimate exchange processes or your creative efforts?
I think you will agree that you clearly differ from a bank, in that you earned the $120 of “money” (or “not money”) I borrowed from you, but the bank has no, and cannot have, ownership of any accounting Credit which YOU cause them to create - by depositing your valuable IOU with them.
The bank, as bookkeeper, certainly ‘creates’ one account - in which they record a Credit - but they do not, and cannot ever, OWN that Credit. What they OWN is the matching Debit they create in their other (Asset) account. You OWN the Credit they create in their Liability account. That is my main point. You own their IOU the same way they own your IOU.
If they CAN justify charging interest for your use of their IOU, how can they deny paying you the same interest for their use of your IOU.
I’ll leave it at that for now. Perhaps we can get into your wrecked Tesla and insurance problems later.
"Your side note is 100% justified since the world has only ~$1 of “cash” for every $19 of “bank-IOUs". So, the banking industry is indeed inherently insolvent. By design, they can’t honour more than 5% of the loan commitments (IOUs) they’ve made. "
This is one of the issues which I've had to wrestle with in my study. If you owe something you don't currently have, does that make you insolvent? Thinking about it led me to understand that there are two fundamental concepts: solvency and liquidity. They've been known about for a long time, but they haven't always been explained well. Here's what I've concluded:
Liquidity is being able to pay your liabilities which are currently maturing (i.e. the debt is now due and presented for payment).
Solvency is being able to pay *all* of your liabilities, both current and future, by using your existing assets (either directly, or by trading them for what you owe).
There is never any ambiguity about liquidity: when you have to hand something over, it's obvious whether you succeeded or failed. But whether you are solvent is often uncertain: if your only liability is for one apple, and your only asset is $1 cash, you are probably solvent, but if the debt is due in a year, and there's a period of hyperinflation in that time, you might not be able to swap the $1 for an apple so in fact it turns out that you were insolvent and just didn't realise. Market prices are a good *guide* to whether you are solvent.
When it comes to a bank not having enough cash to pay all of its IOUs in current/checking accounts, it can certainly be *illiquid* if there is a bank run, but it can still be solvent. For example, it might own vast amounts of gold, financial assets, or even land and buildings. The bank can pay its debts, but it needs to sell its assets to get the cash, or use them as collateral for a loan. This can take time, but *in the end* the creditors will be paid everything they are owed.
Far more concerning is if the bank is actually insolvent, not having enough total assets to pay all of its liabilities. It might remain liquid for a long time (decades, even) if few people draw on their credit balances, but when enough people do, the insolvency would be revealed.
So I'd say banks aren't inherently insolvent even when they don't have 100% cash reserves, because they have assets they can sell or mortgage to pay their creditors. Banks are always in danger of being illiquid if there is a bank run. This is where Bagehot's dictum is useful: it's a good idea for a central bank to act as *lender* of last resort:
Lend freely at high [interest] rates to *solvent* firms with *good collateral*.
I’m really enjoying your work. It’s extremely important, as it confirms some conversations I’ve had with senior bankers…….
This banking license seems an important nexus. Like entry into a club. I wonder who grants these?
They are all creating credit out of a few spurts of digital energy typing some numbers……and none call each other out. As they are all guilty of the same practice.
Please, please keep disseminating this knowledge and best of health wishes too.
Hi Elizabeth. Welcome aboard.
Stay tuned. There are two more articles in the works.
The Australian Prudential Regulation Authority (APRA) is responsible for granting banking licenses in Australia. If you've got $50,000,000 you could be in the running to get one.
Would you like to expand on what those 'senior bankers' are saying in your conversations? I'm curious as to what part o the world you might be in. {I've deleted your duplicate post.)
Dear Pat,
Kia ora from NZ! I hope you are enjoying the day.
My anecdotes from bankers are as follows:
1. Back in the 90’s I worked in advertising and had different banks as clients, for whom I would plan campaigns say for mortgages or for deposits or insurance which they’d begun dabbling in. Any way, like a cocky young thing, I was at a function chatting to my husband’s boss. My husband was a senior manager for corporate and commercial at what was The National Bank ( now owned/subsumed by ANZ). His boss was top of that division. So at the function I was talking away to the big boss when someone came up and asked the question that you ask. Namely how do loans work? I excitedly replied “ I know!!” And I asked the boss if I could reply. He said he’d be very interested in my reply.
So I explained to the person how the bank spent time and money amassing deposits, and when they had lots they could then lend out lots of loans. That it was a type of symbiotic relationship ebbing and flowing with economic factors. ( yes, I know, I was completely wrong, but I was totally naïve and was unaware of the corruption in the world). Back to the anecdote. At some stage during my recital, the boss chap suppressed an internal chuckle and gave a tiny wry grimace. Like in Poker, a “ tell”. And I immediately realised what I’d said must be wrong. But how? It’s what I’d learnt at Saatchi from our clients….run a campaign to get deposits in/ or mortgages out so our business is balanced type of thing. The boss let my statements remain unchanged to the questioner, but I knew deep down I hadn’t got it right or at least the whole picture.
You will be wondering if my husband ( long out of banking) has/ had any relevant knowledge. No, he’s unfortunately very rule abiding, uncurious, and not understanding the reality of the world.
2. However as of interest to me, I just asked him how a loan was drawn down……”off the bank’s balance sheet” was his reply. So he’s swallowed the Kool Aid. And also I realise, most of the staff will think this too. Only a few in the inner ranks will have any idea of the truth/reality. That’s it “ birthed/created “ when some ink writes it down, or fingers type it in.
3. So the big boss I was referring to earlier was definitely in the “ know”, he had been top in other banks around the world and was very savvy, selfcontained, and secretive.
The only other thing of interest he said in the above conversation, was reference to our Reserve Bank, our central/gov bank in NZ. I think it was to the effect that the Reserve Bank decreed the parameters for them, but I’m not 100%. I mean I know they set the rate, but I got the sense it was more than that.
Phew, what a lot!!
I’m not sure any of it helps, but when I read your substack work, it totally reverberates with truth, as I’ve been learning of the inter generational theft and lies in so many arenas and areas. (and it reminded me of the above anecdote and how the boss’s behaviour was both condescending and jarring and I just knew there was more going on!!!)
Kia ora back at you Elizabeth.
My health has been good., thanks. Glad you find the information helpful.
I'm looking forward to criticism from people like your husband, who have had experience in banking, so don't be afraid to put it under his nose some time, if that's appropriate for you.
The main task at present is to spread the message to as many as possible.