What the Three Stooges Knew About the Banking System

Growing up, the Three Stooges were a re-run staple whenever I turned on the TV. Even to this day, their skits make me laugh out loud.

One in particular, though, recently caught my eye. Not just because it’s still funny. But because it made me realize that they were pioneers way ahead of their time.

And I don’t mean their comedy. I mean they had a far better sense of how our banking system works than most people even today. And that was 69 years ago.

At the beginning of the episode “A Merry Mix-Up” from 1957, Moe wants the $20 that Larry owes him. But Larry only has $10. So Moe takes it with Larry owing him $10.

But Moe owes Joe Besser – the forgotten sixth stooge – $20. So naturally, Moe gives him the $10 he just got from Larry.

It turns out, Joe Besser also owes Larry $20. So the original $10 goes back to Larry. Who then gives that $10 back to Moe to pay off the full $20. And back again to Joe Besser, then one more time to Larry who says, “Good! Now we’re all even.”

What exactly happened? Nothing. The money circled around and around until it ended up in the exact same place it started.

It was comedic genius.

All it took was 20 seconds for the Three Stooges to explain how the banking system works. And understanding that is a valuable tool when it comes to investing.

Our system of fractional reserve banking means that a bank doesn’t have to keep all of the money you ask it to secure. If you give the bank $100, it doesn’t have to keep all of that $100 in its system. It will typically lend most of that money out to others and keep the interest as profit.

When things are steady, that type of system works well. But when things go haywire, it can go bad in a hurry.

In fact, if you look at pretty much every negative economic event since the turn of the 20^th century – and even before – you can probably thank a breakdown in the banking system for it.

The Knickerbocker Crisis of 1907. The Great Depression. The savings and loan crisis of the 1980’s. The 1997 Asian banking crisis. The 2008 Financial Crisis...

Every one of these breakdowns were different. But they all had origins in the financial sector.

For example, the Knickerbocker Crisis – or Panic of 1907 – started from an attempt to corner the market on the United Copper Company. When that failed, it led to the collapse of the Knickerbocker Trust Company, then the third largest trust in New York City.

That collapse quickly spread across the country as people rushed to withdraw their money from their local bank. If not for J.P. Morgan coming to the rescue, the whole banking system may have collapsed.

(This event is also one of the main reasons why we have a Federal Reserve system in place today.)

And many of you probably remember the 2008 Financial Crisis. Although the collapse of Lehman Brothers was a trigger, it all started far before that event.

In short, there was too much leverage all around the financial system. In real estate. In stocks. In many other things.

We all know what happened next. There was almost nowhere you could hide.

And what enabled these events? Too much money and bad decisions.

Something created by our modern banking system. It allowed people to borrow large sums for next to nothing. Then leverage that borrowed money to the limit.

Money for nothing and the tips for free.

And if history is a guide, it will certainly happen again.

However that may be true, it’s the system we have to work within. A system that we can find ways to “manipulate” in our favor…if you know where to look.

For example, owning physical gold and silver is one of the best ways I know of to protect your assets in the event of a financial crisis. There’s nothing like holding a bar of gold in your hand. Even better, just knowing that I have that gold makes it easy to sleep at night.

And today, bitcoin is another tool at our disposal. True, it’s far more volatile than gold.

But over time, that volatility should lessen. Especially with bitcoin becoming more institutionalized and integrated with the banking system.

Holding some bitcoin outside the banking system in your own “wallet” will probably go a long way.

However, putting your cash in gold and bitcoin only goes so far. You don’t want to just hold those assets. You want to diversify beyond that.

Stocks, bonds, vintage baseball cards…you want something that has optionality. Or even better yet, you want to find something that has the potential to produce asymmetric returns. Even in the face of chaos.

Like the warrants I recommend to readers of Strategic Trader. In fact, I would argue there’s no better place to look than owning a basket of warrants.

When you have years of optionality and leverage to the underlying stock, that can give you massive asymmetry. (If you’re still learning about warrants, check out all the basics here.)   

In fact, we often see warrants created out of periods of despair. Like in the wake of the 2008 Financial Crisis.

When banks had too little cash and too much leverage, they needed to raise money quickly. Many were able to do that, but with a catch.

Investors wanted a “kicker” for taking on the risk of putting millions – and even billions – into banks desperate for cash. So the banks agreed to give them warrants.  

Eventually, many of these warrants ended up trading on the public markets. Right out in the open for anyone to take advantage.

And they came from companies like Bank of America, Comerica, Sun Trust and Zions Bancorp. In fact, these banks were so desperate for cash, they offered terms of up to 10 years to expiration for their warrants. About double the norm.

As we all know, the banking system didn’t collapse. Banks recovered. Their stocks doubled, tripled or more in the years following the crisis.

But the warrants? They did far better. Like the Zions Bancorp warrants, which returned more than 3,000% while the stock was up only 60%.

Or Sun Trust, which had two different warrants surge more than 1,500% each while the stock was up only about 130%.

Meanwhile, Bank of America saw its stock recover more than 250%. Far better than most. But its warrants? They gained more than 800%.

In every case I studied of banks that issued warrants after the 2008 Financial Crisis, every single one saw its warrants outperform its stock.

So while gold and silver helped protect wealth, warrants helped investors more than recover from the market crash. They got massive asymmetry by thinking outside the box.

And the thing is, warrants pop up in all types of chaos, not just from the banking sector. We saw a similar situation in the oil patch when a number of oil services companies went bankrupt between 2015 and 2020.

As part of their deals to emerge from bankruptcy, these oil services companies issued warrants. Which my readers had the chance to benefit from multiple times over the years.

Like offshore drilling company Noble Corp., which handed us triple-digit gains on two different warrants.

Or Valaris Ltd., whose warrants I recommended in January and sold for a 300% gain just two weeks later. All the while, Valaris stock was up “only” 53% over the same period.

The point is, our financial system isn’t perfect. It leads to great booms…and great busts. But you can use that chaos to your advantage. That is, if you know where to look…

Regards,

Editor, Strategic Trader