Im not trying to give a definitive treatment of anything here, but heres what I wrote up in the

style of a law school-type hypo (with enough explanation that its not a test) which I hope has
some explanatory value without going into too much detail or specifics. I recommend the Best
Way to Rob a Bank is to Own One by William K. Black for a real life example, not a hypo and
to understand the nature of accounting control fraud.
Banks create money and the definition of money as assets without any liabilities attached is
deluded.
Take Bank 1, insured by the FDIC. They make a mortgage loan to Shell Corp. Bank 1 credits a
$10 million deposit in Shell Corp.s account. Shell Corp. then transfers its deposit to Island
Corp. for the purchase of a property. The appraisal is inflated with the cooperation of a bank-
friendly appraiser, meaning the collateral is certainly worth less than the $10 million. Island Corp
sells the desert property it acquired earlier for $2 million for $10 million to Shell Corp., netting
an $8 million capital gain for its shareholders.
Bank 1 loan manager just got a bonus.
Bank 1 may attract retail deposits or wholesale funding as the cheapest source to fill its reserve
requirements or borrow at the discount window or from another bank or it may sell equity shares,
but (in our hypo) investors arent liking what they are seeing in terms of a risky loan portfolio
and are more interested in the booming tech and biopharmaceutical sectors so the timing to offer
new bank shares is not good.
Bank 1 attracts $5 million worth of deposits broken up into increments of $250,000 or less by
paying a slightly higher rate of interest, and borrows $5 million from the discount window to
replace its depleted reserves after this transaction.
Shell Corp. stops paying on the loan and goes bankrupt; $10 million in the hole. Island Corp.
netted an $8 million profit derived after the bank loan/deposit was transferred to it, which was
withdrawn in the form of a cashiers check drawn on Bank 1.
The collateral turns out to be worthless because of environmental problems detected after the
sale was completed under a quitclaim deed.
The bank charges off the loan, taking a loss of $10 million. The timing of when a bank
recognizes its loans matters.
Should the bank make too many more of these types of loans or purchases of worthless paper
(i.e. junk bonds from a company that itself is on the way to becoming insolvent) it will become
insolvent. FDIC is on the hook to insured depositors or the Fed (or likely both) is on the hook
depending on who provided the deposits/reserves for the bank as it grew its asset portfolio or
needed to borrow reserves. Neither the FDIC or the FED faces solvency constraints (both face
political & other constraints) given the USG is the monopoly issuer of the dollar & its liabilities


are denominated in US $ (Both cash and reserves can be used by banks to fulfill reserve
requirements).
Bank 1 loan manager has made 30 (or more, it doesnt matter) other similar deals and with the
help of the manager of the non-performing assets division, has managed to extend the terms of
these loans to delay the inevitable. Using mark to model accounting despite what they know will
turn out to be tremendous losses Bank 1 is still carrying these assets on its balance sheet at the
nominal value of $300 million and Bank 1 Loan Manager and the higher level employees of the
bank are making a nice living. The name of the game they are playing is pretend and extend.
Regulator B gets a tip from a disgruntled employee of the bank, and starts to investigate.
Regulators freeze the bank before it can create any more fraudulent loans. Regulators find the
$300 million hole in the balance sheet. Before regulators could act, short term funding providers
pulled their money from the banks in a flight to safety, requiring Bank 1 to seek out the discount
window again as the Fed stepped in as lender of last resort.
The small sliver of bank equity (say $10 million) is wiped out as are the shareholders, and
insured depositors are reimbursed fully up to $250,000.
Elsewhere, companies like Island Corp and others who issued worthless paper purchased by the
bank have accumulated $300 million in profits. They are well connected politically and are not
prosecuted and investigators have lost the trail of money through a maze of offshore corporations
and trusts and along with it the hope of clawing back any of the money for the banks
shareholders. The FBI reassigns many of their investigators to investigate whether aliens are
real.
Unfortunately because so many banks across Texas and California have been doing the same
thing, FDIC reserves (1.35% of insured deposits) are insufficient to cover insured depositors
losses. Left with no choice, after the FDICs deposit insurance fund is overwhelmed with bank
losses 6 times greater than it is able to pay out of its current budget, Congress votes to fund an
emergency relief plan to reimburse all depositors nationwide.
Tally for gains and losses caused by Bank 1s fraud:
Island Corp (+8 million) and others total = +300 million
Shell corp. = -10 million
Bank : -300 million, (Bank in receivership)
FDIC = -50 million
Treasury -250 million
NFA (net financial assets for the private sector after Congress votes) +$250 million


Thanks to non-convertible fiat currency the only thing it took was a keystroke to replace the hole
that opened up in the banks balance sheet, something the government was forced to do by the
fraudulent bank to make whole insured depositors. The fraudsters forced the government
(Congress here in this hypo) to cough up $300 million for worthless desert property and junk
paper by taking control of the bank.
This is why bank deposits are considered money. No dispute that the US government creates the
$, is the monopoly issuer of the currency and reserves, but by nature of the promise to reimburse
depositors & (implicit?) measures like TBTF, and given their role and position in the payment
system banks have the power to create MONEY. The US government can never go insolvent, but
now the fraudsters have $300 million to buy up the real assets of the economy that are for sale, as
well as Congress, and pay for organizations similar to Fix the Debt.