Conjuncted: Banking – The Collu(i)sion of Housing and Stock Markets

bank-customers-1929-stock-market-crash

There are two main aspects we are to look at here as regards banking. The first aspect is the link between banking and houses. In most countries, lending of money is done on basis of property, especially houses. As collateral for the mortgage, often houses are used. If the value of the house increases, more money can be borrowed from the banks and more money can be injected into society. More investments are generally good for a country. It is therefore of prime importance for a country to keep the house prices high.

The way this is done, is by facilitating borrowing of money, for instance by fiscal stimulation. Most countries have a tax break on mortgages. This, while the effect for the house buyers of these tax breaks is absolutely zero. That is because the price of a house is determined on the market by supply and demand. If neither the supply nor the demand is changing, the price will be fixed by ‘what people can afford’. Imagine there are 100 houses for sale and 100 buyers. Imagine the price on the market will wind up being 100000 Rupees, with a mortgage payment (3% interest rate) being 3 thousand Rupees per year, exactly what people can afford. Now imagine that government makes a tax break for buyers stipulating that they get 50% of the mortgage payment back from the state in a way of fiscal refund. Suddenly, the buyers can afford 6 thousand Rupees per year and the price on the market of the house will rise to 200 thousand Rupees. The net effect for the buyer is zero. Yet, the price of the house has doubled, and this is a very good incentive for the economy. This is the reason why nearly all governments have tax breaks for home owners.

Yet, another way of driving the price of houses up is by reducing the supply. Socialist countries made it a strong point on their agenda that having a home is a human right. They try to build houses for everybody. And this causes the destruction of the economy. Since the supply of houses is so high that the value drops too much, the possibility of investment based on borrowing money with the house as collateral is severely reduced and a collapse of economy is unavoidable. Technically speaking, it is of extreme simplicity to build a house to everybody. Even a villa or a palace. Yet, implementing this idea will imply a recession in economy, since modern economies are based on house prices. It is better to cut off the supply (destroy houses) to help the economy.

The next item of banking is the stock holders. It is often said that the stock market is the axis-of-evil of a capitalist society. Indeed, the stock owners will get the profit of the capital, and the piling up of money will eventually be at the stock owners. However, it is not so that the stock owners are the evil people that care only about money. It is principally the managers that are the culprits. Mostly bank managers.

To give you an example. Imagine I have 2% of each of the three banks, State Bank, Best Bank and Credit Bank. Now imagine that the other 98% of the stock of each bank is placed at the other two banks. State Bank is thus 49% owner of Best Bank, and 49% owner of Credit Bank. In turn, State Bank is owned for 49% by Best Bank and for 49% by Credit Bank. The thing is that I am the full 100% owner of all three banks. As an example, I own directly 2% of State Bank. But I also own 2% of two banks that each own 49% of this bank. And I own 2% of banks that own 49% of banks that own 49% of State Bank. This series adds to 100%. I am the full 100% owner of State Bank. And the same applies to Best Bank and Credit Bank. This is easy to see, since there do not exist other stock owners of the three banks. These banks are fully mine. However, if I go to a stockholders meeting, I will be outvoted on all subjects. Especially on the subject of financial reward for the manager. If today the 10-million-Rupees salary of Arundhati Bhatti of State Bank is discussed, it will get 98% of the votes, namely those of Gautum Ambani representing Best Bank and Mukesh Adani of Credit Bank. They vote in favor, because next week is the stockholders meeting of their banks. This game only ends when Mukesh Adani will be angry with Arundhati Bhatti.

This structure, placing stock at each other’s company is a form of bypassing the stock holders

– the owners – and allow for plundering of a company.

There is a side effect which is as beneficial as the one above. Often, the general manager’s salary is based on a bonus-system; the better a bank performs, the higher the salary of the manager. This high performance can easily be bogus. Imagine the above three banks. The profit it distributed over the shareholders in the form of dividend. Imagine now that each bank makes 2 million profit on normal business operations. Each bank can easily emit 100 million profit in dividend without loss! For example, State Bank distributes 100 million: 2 million to me, 49 million to Best Bank and 49 million to Credit Bank. From these two banks it also gets 49 million Rupees each. Thus, the total flux of money is only 2 million Rupees.

Shareholders often use as a rule-of thumb a target share price of 20 times the dividend. This because that implies a 5% ROI and slightly better than putting the money at a bank (which anyway invests it in that company, gets 5%, and gives you 3%). However, the dividend can be highly misleading. 2 million profit is made, 100 million dividend is paid. Each bank uses this trick. The general managers can present beautiful data and get a fat bonus.

The only thing stopping this game is taxing. What if government decides to put 25% tax on dividend? Suddenly a bank has to pay 25 million where it made only 2 million real profit. The three banks claimed to have made 300 million profit in total, while they factually only made 6 million; the rest came from passing money around to each other. They have to pay 75 million dividend tax. How will they manage?! That is why government gives banks normally a tax break on dividend (except for small stockholders like me). Governments that like to see high profits, since it also fabricates high GDP and thus guarantees low interest rates on their state loans.

Actually, even without taxing, how will they manage to continue presenting nice data in a year where no profit is made on banking activity?

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