How do Banks Track Money?

Banks track money the same way accountants have tracked money since the beginning of time: with balance ledgers. They look at their coming money in and going money out, how much they are collecting in fees and interest on various loans, and calculate the sum of their assets at the end of every day. Losses and gains are noted on the balance sheet, and life at the bank goes on as usual.

Recently, in the wake of the government’s Troubled Asset Relief Program – also known as the federal bank bailout – the question of how the bank tracks money has become an issue for many Americans, since most of the banks who received money under the bailout – $700 billion dollars in taxpayer money, so far – have no accounting whatsoever of what they have done with the money, what they plan to do with it, or where it’s gone in the bowels of their respective financial institutions.

How did major banks such as Citibank, Bank of America, JP Morgan Chase, Morgan Stanley, Bank of New York Mellon, and SunTrust Banks collectively lose a sum of money that is about equal to the total national economy of the Netherlands? Rest assured, it was not because they were unable to do the math. They never tracked the money because, under the terms of the bank bailout passed by the Bush administration and Congress, these banks were never required to track or account for the money given to them by the US taxpayers.

Pressured to approve the money quickly by dire market predictions, Congress handed out the $700 billion dollar bailout package with virtually no strings attached. Bank executives were summoned to Capitol Hill last year and admonished to lend the money to borrowers, rather than hoard it or spend it on executive bonuses, junkets, or corporate jets. However, they were not legally required to earmark the funds for any specific purpose, and there are no legal consequences for not complying with the request.

Since the banks were not required to track the bank bailout money, it was added to the other cash assets at the bank’s disposal. At that point, tracking the money is as hopeless as the possibility of tracking certain drops of water in a pool of water. Once the money has been mixed in with other funds, it is impossible to say with certainty what money is being used to what purpose.

There is still a $350 billion block of bailout money that has not been disbursed, and lawmakers now say that they plan to tighten restrictions on the use of those funds before handing them out. Treasury Secretary Henry Paulson also made recent assurances that the Treasury Department is stepping up oversight on the monitoring of bank spending.

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