A Gallup poll shows consumer confidence in banks to be at a low. Fewer than 20% of Americans have “a great deal” or “quite a lot” of confidence in the banking system.  (ht bankinnovation.net)

When the New York Times begins to raise the possibility of giving bondholders haircuts instead of making the taxpayer bear the entire cost of bailouts, we may think there is a change in public opinion, but will it change government policy?  Well, Timid Tim is “in control”, so…

BEA released an advance estimate of -6.1%!  As the previous post indicates, we expected only -4ish, with a slow revision to a more accurate number.  The opposite. hmmm.  Just when we thought the government was getting predictable by simply assuming the worst from it.  Perhaps we have to rethink what is the worst.  Could the worst be engineering crisis to sell Treasury debt?

Regardless, to trade on the advance number is probably a mistake.

In January 30, 2009, the BEA provided the advance estimate for fourth quarter real GDP growth of -3.8. This was revised on February 27 to -6.2% and finally revised in March to -6.3%.  So the advance figure for real GDP growth for first quarter to be released this morning should be viewed with skepticism. This is especially true given the strong tendency of the government to manage expectations through intentional slow release of the truth.  Consensus estimates for real GDP growth are around -5.1 or -5.2%.  Although the revised figure will likely be greater than the consensus estimate, -5.3% level or worse, we would not be surprised if the BEA announces an “expectations managing” advance figure in the neighborhood of the last advance number: -3.8 or so.

Silly stock market, advance releases are for kids… If you are skeptical that GDP figures are manipulated, check out John Williams‘ 2004 piece here:

A Tempting Target for Manipulation

In the introduction to this series on government reporting, I mentioned political manipulation of the GNP/GDP in the Johnson and first Bush administrations that went beyond overly positive methodological changes. In both instances, my sources were consulting clients who had been involved directly in the process. In the latter instance, an individual at the BEA also confirmed the situation.

Few people argue with the GNP/GDP reports, so when Lyndon Johnson kept sending the initial GNP estimates back to the Commerce Department for correction, he eventually got what he wanted, and the media dutifully reported stronger than actual economic growth.

Near the end of the first Bush administration, an outside-the-system manipulation was worked. A senior member of the Executive Branch approached a senior officer of a large computer company and requested that reporting of computer sales to the BEA be inflated. This was done specifically to help with the reelection effort. The request was granted, and thanks to the heavy leverage of computer deflation, reported GDP growth enjoyed an artificial spike.

There are suggestions of other direct manipulations over time, specifically involving the Clinton administration and the current Bush administration. Most recently, a bizarre annual revision to the GDP data eliminated the 2001 recession, at least as traditionally defined with two consecutive quarters of real GDP contractions.

Heritage Foundation ran an article entitled, “Treasury Exposes Markets to Added Stress Flu” in which they suggest that the Treasury is adding to the uncertainty by announcing its intention to exchange preferred stock for common stock in banks:

“The Treasury [ ] doubled down on market fears through its equity conversion proposal. Treasury currently owns billions in preferred shares of the major banks. These shares plus its supervisory powers mean the most troubled banks have already been effectively nationalized through the backdoor. The banks are still learning what this means in practice, and its not pretty – threatened pay caps, CEO firings, etc. Converting the preferred shares to common shares takes this nationalization one small step further.

What the conversion does not do is make the banks any healthier. Banks that are light on capital remain so. And because it has so little concrete meaning, the conversion to common shares raises serious questions about Treasury’s real intentions.”

So…could the Treasury actually intend for uncertainty to rise with consequent rise in risk premiums and attendant flight to safety in Treasury bonds? Yesterday the Treasury announced they would need to borrow $361 billion in marketable debt in the second quarter, a record for the period and more than double its previous projection. They expect to borrow about $500B in the month of July alone.  Is the Treasury so sinister as to engineer a flight to safety to insure a demand for its debt?

Dean Baker reasons that 10.5% is about the minimum to expect for year end 2009:

Even if the economy, lost no additional jobs between April and the end of the year, then the unemployment rate would still rise to about 9.5 percent by December. If it loses 1.6 million jobs (200,000 per month), then the unemployment rate will be 10.5 percent by December. At this point, this is probably about as optimistic a scenario as can be believed.

So, if a job loss rate of 200,000 per month through year end and an ending level of  10.5% is optimistic, then a job loss rate of 400,000 per month through year end would result in 1.0% more unemployment than 10.5%, or a 11.5% level at year end.

Satyajit Das writes in RGE to review the recent history of the banking crisis and attempts to mitigate it, concluding:

“Banks have gone from catastrophic to just awful. By most standards, that condition does not constitute a necessary and sufficient condition for a recovery in the global economy.”

We are still not sure whether “awful” is better or worse than “catastrophic”

Brian S. Wesbury and Robert Stein writing for Forbes, project a decline in real GDP of 4.2% when the first estimate is announced tomorrow.  We will know more tomorrow, but we may want to take their estimates with a grain of salt. These are the same fellows who said in Oct 2008, “We suspect the worst of the financial mess may be behind us” and “We still expect fourth-quarter real gross domestic product to fall at an annual rate of 1.5%”.

According to the WSJ, the sacrificial lambs will include B of A, Citi and a few regionals:

Regulators have told Bank of America Corp. and Citigroup Inc. that the banks may need to raise more capital based on early results of the government’s so-called stress tests of lenders, according to people familiar with the situation.

Industry analysts and investors predict that some regional banks, especially those with big portfolios of commercial real-estate loans, likely fared poorly on the stress tests. Analysts consider Regions Financial Corp., Fifth Third Bancorp and Wells Fargo & Co. to be among the leading contenders for more capital.

No way could GS or JPM need capital, not with crony Geithner at the helm…and… B of A and Citi have not finished squirming out of it yet…

Sheila Bair is trying to make a case that the FDIC, rather than the FED, is the logical institution to wind down “systemically important” financial firms.  She wants the authority to oversee bank holding companies in order to wind them down…We welcome and support ANY federal organization with the courage to end zombie banking.