Archive for June, 2010


Roundup – Not Always Right

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Line O’ the Day:

Me: “Hi there! Welcome to [furniture store]. Is there anything I can help you find today?”

Customer: “Yes. Do you sell wine?”

Me: “No, ma’am. We don’t sell alcohol.”

Customer: “But…but this is Texas!”

In A (Lone Star) Drunken State [Not Always Right]

Best of the Best:

The Remains:

You Should Gather From the Fact that this is a Red Band Trailer, that it is NSFW:

A Serbian Film was released to great controversy in terms of its graphic and often sexually explicit violence.  Screenwriter Srdjan Spasojevic has responded to the controversy with “This is a diary of our own molestation by the Serbian government…It’s about the monolithic power of leaders who hypnotize you to do things you don’t want to do. You have to feel the violence to know what it’s about.”

Scott Weinberg wrote “I think the film is tragic, sickening, disturbing, twisted, absurd, infuriated, and actually quite intelligent. There are those who will be unable (or unwilling) to decipher even the most basic of’ messages’ buried within A Serbian Film, but I believe it’s one of the most legitimately fascinating films I’ve ever seen. I admire and detest it at the same time. And I will never watch it again. Ever.”

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Any opinion expressed here is my own and not that of the firm which employs me.  Under no circumstances should writings or links on this website be taken as a solicitation for an investment or as investment advice.  These topics and commentaries are, whole and entire, for entertainment and discussion purposes only.


On Mark-to-Market and Its Supposed Suspension

One of the most misunderstood episodes of the financial crisis concerned the events surrounding fair value accounting, specifically in reference to what securities should be marked to market.  Most recently, Steve Forbes criticized the re-imposition of any such rule on banks:

An economic version of the bubonic plague is ready to reemerge: mark-to-market accounting. This rule was the principal reason that the financial disaster of 2007–09 threatened to destroy our financial system. The system could have survived the losses from subprime mortgages and other unsound exotic transactions–though there would have been substantial casualties among players–just as we survived the raft of bad Latin American and commercial real estate loans in the 1980s and early 1990s.

In effect, mark-to-market accounting rules forced financial institutions to value securities for capital purposes as though they were day-trading accounts. Traditionally, an asset was held at book value for regulatory capital purposes unless it was disposed of or became impaired. In 2007 that standard was overturned by the Financial Accounting Standards Board (FASB). When panic set in regulators and auditors forced banks and insurers to write down the values of assets to absurdly low levels that weren’t even remotely justified by their cash flows. Forbes columnist and noted economist Brian Wesbury explained in his book It’s Not as Bad as You Think: Why Capitalism Trumps Fear and the Economy Will Thrive (John Wiley & Sons) that if mark-to-market had been in effect during our last big banking crisis some two decades ago the largest commercial banks in the country would have been destroyed. Those institutions had Latin American loans equivalent to 260% of their capital. On a mark-to-market basis those loans would have fetched barely ten cents on the dollar.

Mark-to-market is like being told to mark down the value of your house to a price that it will fetch within the next 24 hours. An absurdly destructive concept. But it explains why the massive losses financial institutions took were mostly book losses and not actual cash losses on bad paper.

Mark-to-market accounting was banned in 1938 because it was contributing to financial distress during the Great Depression. In March 2009 Congress forced a change: The FASB would allow cash flow accounting to be used when markets were illiquid. Overnight the terrible bear market ended, and the credit system came back to life.

But did Congress actually force a change, or just imply that they may take some action?  The language in many articles discussing the events during that tumultuous period is vague, whether deliberately or not.  Earlier this spring, another author was characteristically as blunt about the supposed suspension of the rules, although his conclusion was different—intriguing because he also harked back to the Latin American debt crisis:

Between September, 2008, and March 2009, the Fed backstopped the entire US banking system—but it still wasn’t enough. The losses were too great, the holes in the balance sheets too big.
So on April 2, 2009, a key FASB rule was suspended: Specifically, rule 157 was suspended, related to the marking of assets to market value—the so-called “mark to market” rule.
Essentially, the mark-to-market rule means marking an asset to the value it can fetch in the open market at the date of the accounting period. If I own a share of XYZ stock which I purchased at $100, but today it’s quoted at $60, I mark it on my books at today’s market price—$60—not at the purchase price—$100. The reason is obvious: By marking the asset to market value, I’m giving a realistic picture of the financial shape of my company or bank.
However, ever since April 2, 2009, when the FASB rules were suspended, the American banking system has been floating on nothing by air. By suspending rule 157, none of the banks have had to admit that they’re insolvent. With the suspension of mark-to-market, accounting rules are now basically mark-to-make-believe.
Why was FASB rule 157 suspended?
Geitner, Bernanke and Summers seem to have been trying to duplicate what Volcker did so successfully in 1982. This period since March 15, 2009, when the suspension of the rule went into effect, has been called “extend and pretend”.
Has it worked?
Prima facie, it would seem so. The banks seem to be stable, and have been raking in the big bucks ever since the rule was suspended. The markets—from their March ’09 lows—have rocketed onward and upward. In fact, Citigroup stock has quadrupled, Goldman Sachs has doubled—everything is wonderful! Nothing hurts!
However, the basic problems in the banking system remain: The banks are still broke, because of the same reason—the toxic assets on their books.

And referring back to the Latin American crisis:

In 1982, many of the banks hit by the Latin American debt crisis were effectively insolvent. Paul Volcker, as the then-Chairman of the Federal Reserve—charged with overseeing the banking system—effectively cast a blind eye on this banking insolvency.
Volcker’s reasoning seems to have been that the US banks were not broke—they were just getting temporarily squeezed. Volcker seems to have concluded that time would heal the balance sheet wounds caused by the Latin American defaults. Therefore, to hold the banks to the letter of the accounting rules would likely drive one or more of them broke, to no useful purpose—and it could potentially cause a bank panic and general financial crisis. But to pretend (for a while) that all was right with the US banks would avoid a potential panic—so long as the crisis sorted itself out and the banks repaired themselves by writing off and renegotiating their toxic Latin American debt.
Volcker gambled, and won: The US banks indeed took the Latin American debt hit, but grew their way out of their hole.

Regardless of the conclusions, both articles make the same claim: fair-value accounting was either suspended or forced out of existence, by either Congress or FASB or both.  The specifics on the mechanics of what actually occurred remain cloudy, however.  For instance, were the banks able to value anything based on cash flow models rather than market prices, or merely just certain loans, as the Forbes article suggests?  Was the problem really loans to small businesses or complex derivatives or securitized loans which did trade, but whose markets suddenly dried up—a question the Forbes article assiduously avoids, seemingly claiming that banks were forced to value their entire loan portfolio in some market, a fairly dubious assertion.  Other articles made similar, though less stringent assertions:

I contacted several academic accountants with substantial business experience in order to try and resolve this question.  Their responses paint a decidedly different picture than many news or even research analysis might depict.  Also notable is that their responses had slight differences between them.  I have listed my original question to them and their responses, given in the order they were received back to me.

Original Question:

I have heard this repeatedly in several articles about banking or the economy in general: that fair value accounting, or marking to market, was suspended or notably modified at some point between the financial meltdown in the fall of 2008 and the spring of 2009 in order to allow banks to hide losses (although it was never transparently stated that way).  In an accounting class, I recall (hopefully accurately) hearing that while the flexibility in determining pricing already inherent in fair-value accounting was used to full extent by most financial institutions, there was no substantial change to the accounting method promulgated by either FASB or a governmental body or agency.  Notably, there was a press release in late September 2008 jointly by the FASB and the SEC that reiterated the previous accounting methods, with special attention to the current situation, but did not alter it (  However, I keep hearing the assertion that accounting rules were suspended, changed or otherwise modified.  Moreover, this Bloomberg article from late March 2009 seems to indicate that the FASB did in fact cave to the banking interests.  As Bloomberg  states: “Four days after U.S. lawmakers berated Financial Accounting Standards Board Chairman Robert Herz and threatened to take rulemaking out of his hands, FASB proposed an overhaul of fair-value accounting that may improve profits at banks such as Citigroup Inc. by more than 20 percent.  The changes proposed on March 16 to fair-value, also known as mark-to-market accounting, would allow companies to use “significant judgment” in valuing assets and reduce the amount of writedowns they must take on so-called impaired investments, including mortgage-backed securities. A final vote on the resolutions, which would apply to first-quarter financial statements, is scheduled for April 2.”

So my question is:

  • Did FASB (or some other governmental body) make (or, as Bloomberg article implies, consider making) material changes to fair value accounting methods at some point during the meltdown?
  • If these changes were made, were was their content and implications?

Thank you for any help you can provide on this matter.

Opinion #1:

In my opinion, what are described as “changes” in the below paragraph do not involve rewriting of any fair value standards  . . .

“The changes proposed on March 16 to fair-value, also known as mark-to-market accounting, would allow companies to use “significant judgment” in valuing assets and reduce the amount of writedowns they must take on so-called impaired investments, including mortgage-backed securities. A final vote on the resolutions, which would apply to first-quarter financial statements, is scheduled for April 2.

Instead, the way I interpret the above paragraph relates to how the existing fair value standards are applied.  More specifically, I think what the FASB and SEC are saying is that just because a transaction price is observed, that doesn’t imply that other firms should automatically value their own assets and liabilities via reference to the observed transaction price.   For example, if another bank sells a mortgage back security at a fire sale price, my bank doesn’t have to draw upon that price if I intended to hold a similar security into the future.

Having said that, the FASB did issue an FSP that clarifies when markets are “inactive” and when transactions are “disorderly” – both of which presumably allow a firm to use a “Level 3” fair value.   The following document seems to summarize these things well. . .

Hope this helps!

Opinion #2:

This was very confused, and I’m not sure that I know exactly what happened either, but here is what I THINK happened.

First, this was going on simultaneously in multiple jurisdictions.  The pressure for change was actually higher in Europe (on the IASB) than it was here in the US, and I believe that there were some fairly major changes in IFRS to weaken the role of fair value.  In fact, I believe that the EU may have suspended certain IFRS rulings, with the result that, at least in terms of fair value, there is now an “IFRS” set of rules and an “IFRS-EU” set of rules.

In the US, there was substantial pressure on FASB to water down the provisions of fair value, but FASB has gotten fairly good (through lots of practice) at resisting such pressure.  I don’t believe there was ever any official change to the rules.  What the FASB did do, however, was to issue a number of “interpretations” and clarifications, where they made clear that provisions in the original rules did allow for firms to use judgment to ignore market value when market value wasn’t well defined (e.g., when markets were highly illiquid).  These provisions had not originally been well understood (they were very vague) and so these clarifications probably did change the way in which the rules were applied, even though technically they didn’t change the rules themselves.  My guess is that this is what the Bloomberg article is referring to.  My sense is that the accountants in the US did a pretty good job of NOT caving in, given the circumstances.  I also recall that FASB has several times promised to “review” the rules going forward.  FASB has learned that politicians have short attention spans, and so delaying a decision generally means not having to make a change.

Again, I haven’t studied this carefully – at the level of the courses that I teach, nothing has changed.  So it’s possible that I’ve missed something!

Opinion #3:

The FASB “clarification” issued on April 2 lead to an “easing” of mark-to-market requirements in cases where quoted prices are produced by illiquid markets.

My answer is not based on the text of the FASB’s April 2nd pronouncement.  The FASB is correct to argue that they did not say anything on April 2nd that differs from prior statements.

However, by reemphasizing the role of judgment in the application of mark-to-market, the FASB seems to have reduced the burden of proof on firms that argue against using market prices from illiquid markets.  In particular, the market in question was the market for mortgage-backed securities and the quoted price in question is the family of ABX.HE indices which provide quotes on a variety of portfolios of subprime mortgage-backed securities.

I make this statement after examining the economic implications of the standard with my colleagues.  First, firms were permitted to use the new ruling to prepare Q1 financials.  As a result, Wells Fargo says they reduced reported losses on available for sale securities in Q1 2009 by $4.4B.  But the anecdotal evidence is weakened by the fact the JP Morgan Chase and Citigroup say the standard had little effect. Second, the market price of bank stocks seems to have increased when the new standard was announced.  I say “seems” because the significance of the positive market reaction varies depending which events are included in the measurement period.  In some cases it is insignificant.

The key point seems to be that the rules were not changed, but that FASB tried to run cover for financial firms by stating that it was in their discretion to decide how certain securities and loans would be valued.  In truth, the original rules were so vague themselves that much of it was left to the judgment of companies employing such standards.  Moreover, the primary issue, in my opinion, was not that all of a bank’s securities suddenly had to be valued by some market price, but that certain securities which had, in the past, been accounted for in such a manner, no longer traded in orderly markets and would likely fetch an extremely low price, regardless of future cash flows.  Thus, the crux of Forbes’ article appears overblown—that fair value accounting is somehow equivalent to rat poison for financial institutions—and the talk of an outright suspension of the rules appears groundless: neither FASB nor Congress nor any governmental body revoked the standard.  What does appear to have happened was that FASB, under duress from Congress and financial firms, reiterated its position that companies had discretion in employing the rules, while never changing the wording or content of the rules themselves.

Any opinion expressed here is my own and not that of the firm which employs me.  Under no circumstances should writings or links on this website be taken as a solicitation for an investment or as investment advice.  These topics and commentaries are, whole and entire, for entertainment and discussion purposes only.


Fractional Reserve Banking No Necessary Evil: the McCulley Speech

The most remarkable aspect of PIMCO managing director Paul McCulley’s recent speech on the nature of banking is not its conclusion, seemingly radical in its emphasis banking is and will forever be a public-private partnership.  This conclusion follows quite logically from its assumptions.  The assumptions themselves are wherein the problematic facets of the argument lie—mainly the assumption that fractional reserve banking (FRB) is de facto necessary and any imitators should be reigned in to a regulatory structure that encompasses (or at least should encompass) FRB.  What is strange is that McCulley never states that FRB is necessary or why it should be necessary—merely that it is, and thus should be regulated, given the existence of a central bank and deposit insurance, both necessary bastions to prevent bank runs:

The essence, or the genius of banking, not just now, the last century or the century before that, but since time immemorial, is that the public’s ex-ante demand for assets that trade on demand at par is greater than the public’s ex-post demand for these types of assets. Let me repeat this, because this is a first principle: The public’s ex-ante demand for liquidity at par is greater than the public’s ex-post demand. Therefore, we can have banking systems because they can meet the ex-ante demand, but never have to pony up ex-post. In turn, the essence or the genius of banking is maturity, liquidity and quality transformation: holding assets that are longer, less liquid and of lower quality than the funding liabilities.

A second principle: A banking system is solvent only if it is believed by the public to be a going concern. By definition, if the public’s ex-post demand for liquidity at par proves to be equal to its ex-ante demand, a banking system is insolvent because a banking system ends up, at its core, promising something it cannot deliver.

The conclusion of the second principle should at least cause a modicum of hesitation: an assertion that the banking system simply cannot deliver on its promise, given the mismatch between maturities, valuations and liquidity on its assets and liabilities.  However, as McCulley wisely notes, the public’s demand varies pre- to post-deposit.  They require immediate liquidity but after buying a deposit, rarely act on it en masse or for their entire deposit.  Jesus Huerta de Soto has an exhaustive study of the rise of FRB in the Western world and interprets it as a gradual subversion of the initial deposit contract, wherein banks would agree to hold, at all times, the entirety of any specie (typically gold or silver) deposited.  The deposit contract began to break down as bankers succumbed to the temptation to surreptitiously lend out deposited specie as they realized, as McCulley noted, the ex-ante and ex-post demand for deposit redemption was substantially different.  Depositors had a low coincidence of redemption demand unless and thus bankers could often accomplish the ruse, especially as a bank grew and coincidence of redemption between depositors became gradually lower with their increased numbers.

100% Reserve banks gradually gave way to FRBs as the public and, more importantly, governments began to allow the FRB deposit contract to exist.  Governments generally were lenient to banks as the state recognized them as an effective way to extract the savings of the populace in the form of loans from banks to the government.  However, runs on banks were a periodic and disastrous occurrence and more or less every bank that practiced FRB eventually collapsed due to a run.  An instructive example is the Bank of Amsterdam, which initially maintained 100% reserves for a 150 year period:

To all intents and purposes the Bank of Amsterdam maintained a 100- percent cash reserve. This allowed it, in all crises, to satisfy each and every request for cash withdrawal of deposited florins.  Such was true in 1672, when panic caused by the French threat gave rise to a massive withdrawal of money from Dutch banks, most of which were forced to suspend payments (as occurred with the Rotterdam and Middelburg banks). The Bank of Amsterdam was the exception, and it logically had no trouble returning deposits. (de Soto, p. 98)

The Bank of Amsterdam did eventually begin to violate the 100% reserve principle, losing its prominence due to this fact and the fact that England was replacing the Dutch in commercial power:

Unfortunately, in the 1780s the Bank of Amsterdam began to systematically violate the legal principles on which it had been founded, and evidence shows that from the time of the fourth Anglo-Dutch war, the reserve ratio decreased drastically, because the city of Amsterdam demanded the bank loan it a large portion of its deposits to cover growing public expenditures. (de Soto, p. 106)

Clearly evident is influence of government upon the bank to make fractional reserve loans in order to wrest citizens’ savings in order to finance a war.

Runs on FRBs then occur for two primary reasons.  Usually the loans the bank has made come into question, resulting in concerns about the banks solvency.  Depositors know the bank’s cash holdings cannot cover all the deposits but rest assured if the bank’s loans only default in small percentages, the bank should be able to handle a regular cycle of redemptions.  However, if the loans start to default in high percentage, this ability is called into question and depositors attempt to redeem while the bank’s cash holdings are still available.

Secondarily, a bank could be exposed to a large depositor, who, whether because they themselves experience financial trouble or merely wish to make a large long-term investment, withdraw their deposits which the bank cannot handle.  This is less of a concern since a bank could prevent exposure to such depositors by limiting deposit amounts—depositors were likely to do the same by spreading a their large deposit demand across multiple banks.

McCulley notes that these issues have been experienced by bankers since the existence of banking, meaning specifically FRB[1].  Moreover, McCulley reiterates in his speech that: “Demand deposits, conceptually, have a one-day maturity. But in aggregate, they have a perpetual maturity. So, therefore, banking can engage in maturity, liquidity and quality transformation: a very profitable business. Banks can issue, essentially, perpetual liabilities – call them demand deposits – and invest them in longer dated, illiquid loans and securities, earning a net interest margin. It’s a really, really sweet business.” This is true inasmuch as the banking system is governed by a central bank which clears for all member institutions and can provide liquidity should one bank experience a substantial amount of redemptions.  More importantly, the existence of deposit insurance calmed the public’s rise in demand for liquidity of deposits, namely in times of crisis:

In order for that business not to be prone to panics and, therefore, financial crises, you needed to have deposit insurance. Deposit insurance, by definition, cannot come about as if by the invisible hand. Deposit insurance cannot be, cannot be a private sector activity. It is a public good. The deposit insurer must be a subsidiary of the fiscal authority. And in extremis, the monetary authority can monetize the liabilities of the fiscal authority. I’m not saying that pejoratively. I’m not being pejorative at all. Just descriptive. Bottom line: Deposit insurance is inherently a public good.

Access to the Fed’s balance sheet is also inherently a public good, because the Federal Reserve is the only entity that can print currency. So essentially, banking has two public goods associated with it. Therefore, naturally, it should be regulated.

There can be little disagreement that if deposit insurance is offered by the government, that regulation must follow or banks would merely take reckless advantage of the subsidy knowing that their deposits were always backstopped.  The banks would be able to shift risk to the provider of deposit insurance while reaping any of the potential rewards of speculative loans.  McCulley then criticizes the “shadow banking system”, which he refers to as any product that mimics an FRB deposit but is unregulated, for instance, money market funds:

Banking is inherently a joint venture between the private sector and the public sector. Banking inherently cannot be a solely capitalistic affair. I put that on the table as an article of fact. And, in fact, speaking at a Minsky Conference, I know I’m preaching to the converted. Big bank and big government are part of our catechism. And, in fact, that’s exactly what came to the fore to save us from Depression 2.0.

And I think the first principle is that if what you’re doing is banking, de jure or de facto, then you are in a joint venture with the public sector. Period. If you’re issuing liabilities that are intended to be just as good as a bank deposit, then you will be considered functionally a bank, regardless of the name on your door. That’s the first principle.

Number two, if you engage in these types of activities – call it banking, without making a big distinction here between conventional banking and shadow banking, as Paul Krugman intoned this morning – in such size that you pose systemic risk, you will have higher mandated capital requirements and you will be supervised by the Federal Reserve.

None of this is tremendously debatable given the unspoken assumptions but it is notable that McCulley never makes the case of why FRB is necessary or why the public should be extorted via an ultimately taxpayer-funded insurance bulwark in order to gird its existence.  Given the last quote and what scholars analyze as the gradual move away from 100% reserve banking, one can imagine McCulley several hundred years ago (or de Soto in the present) demanding that any institution calling itself a bank and offering deposits much be made to have the 100% reserve ratio given the risks to FRB and creating a shadow banking system that promises the immediate liquidity inherent in the 100% reserve banks but “unregulated” by the 100% reserve requirement.

A FRB deposit may not be objected to if it is distinguished legally from a full reserve demand deposit[2].  To the point, an FRB security could likely not be called a “deposit” as such but rather a “Fractional Reserve Demand Share” or something of the like.  FRDS would function in much the same manner as either money market mutual fund shares or similar type instruments, with redemptions handled by the portfolio which would maintain some level of cash to deal with them.

If such a legal separation is possible, it might also then remove the FRDS’s current subterfuge of mismatching ex-ante liquidity with ex-post liquidity reality.  Holders would likely be much more cognizant of the possible lack of liquidity, although they could become complacent over sustained periods of plentiful liquidity—this is similar to what occurred with auction rate preferred shares, while complacency could be a problem with any financial product.  In this revised separation between 100% reserves and FRDS, there would be no government mandated deposit insurance[3], nor a central bank.  The FRDS would be managed as any other investment fund, albeit with more generous liquidity terms.

The necessity of fractional reserve banking as currently constructed is, once again, largely assumed in discourse, though there are supposedly well and good reasons for it.  Most look to FRB’s ability to expand the money supply and credit availability to support economic growth.  However if such credit is created by an obfuscation on the part of bankers, aided by a direct subsidy by the federal government, it calls into question how effective this credit is.  The existence of such a blatant subsidy would logically precipitate an overabundance of credit, or credit on artificially easy terms, or both.  If such is the case, even if it would contribute to some economic expansion, that growth may be largely artificial itself, not conforming to either the populace’s desire for further investment or time preference.  This is a crux of de Soto’s argument, although I would submit that investment would still be funneled properly if there was a legal separation between a 100% demand deposit and a FRDS, as well as the elimination of government FRDS insurance and the central bank.

What, in essence, support for an FRB regime that engages in legal obfuscation and endorses a “public-private” venture between banking and the government with attendant regulation to protect the banking system’s assets is essentially support for a corporatist policy.  This policy extracts the savings of a reluctant public who demands more liquidity than is available for certain investment products, particularly in the long-term loans made by the banking system[4], in order to invest in state motivated projects[5].  While the system isn’t completely socialist, the corporatist nature is similarly as detrimental as it will likely lead to overinvestment beyond the desires of a public—what are essentially transfers wealth to certain parties via easier loan terms than would normally be available.

The subtlety of the system is its genius—there is nothing to prevent someone from creating their own 100% reserve deposit by storing money in a safe deposit box, for instance.  However, the subsidized product benefitting from a legal obfuscation could easily crowd alternative products out of the market.  A notable exception was in the 1970s during the rise of money market funds that only came about because of a mandated cap on the payment of interest on deposits while money markets were able to gain higher rates in that inflationary decade.

In the end, the argument for the current FRB system, whether one argues for more regulation or more “free-market” mechanisms, will always be an argument for a massive corporatist structure as long as it presupposes the existence of a legal obfuscation between 100% reserves demand deposits and FRDS, fractional reserve deposit insurance and a central bank.  This structure will likely not produce the balanced outcomes[6] of an alternative free-banking system, even outside of any credit excess, and, as the current crisis well demonstrates, will likely be abused by the parties supported by it, despite the efforts of regulators.

[1] 100% reserve banks would have had no such problem with a typical bank run.  However, a 100% reserve bank could have difficulty redeeming specie if its deposits were destroyed or lost by a natural disaster or fire or stolen in a bank robbery.  These issues could be deferred with fire, disaster or theft insurance which would function more clearly as insurance than what is now deposit insurance.  Deposit insurance is, in essence, a combination of a liquidity backstop with a credit-default swap.  While theoretically possible, it differs notably from property-casualty insurance.

[2] There is large disagreement within the ASE on whether a fractional reserve bank can legally exist; I believe de Soto falls in the camp that it is impossible.

[3] It wouldn’t be required: if people wanted full liquidity, they could opt for a demand deposit; if they were willing to undergo some liquidity, as well as credit, risk, they would opt for the FRDS.

[4] As opposed to short-term loans of money-market funds, which still aren’t fully liquid as a 100% reserve and carry some credit risk

[5] I note “state motivated” since regulation governing what type of investments are allowed with bank funds will be driven by a government process.  Regulatory capture is certainly possible under such a regime, as we have witnessed.

[6] That is, balance between investor’s time preferences and liquidity desire and borrowers’ desire for loanable funds on certain terms to fund a project