Denninger has been labeling the failure of our government to close bad banks earlier to minimize the 40% and 50% level catastrophic losses the taxpayer has been having to eat the last couple of years as “malfeasance”:

How can anyone possibly believe, given the overwhelming history of the last two years in this crisis, that the nation’s banks are claiming and carrying their assets at anything close to their actual value when we continue to see, week after week, losses to the deposit insurance fund proving that close to half of the claimed “asset value” in these seized banks is a pure, unadulterated fiction?

We agree.  But there’s more to it than that. The fact that banks’ asset values are being misrepresented is indeed the reason why the banks aren’t being closed closed in a timely fashion.  But the real important issue relates to what ultimately causes the banks to go belly up and be closed… despite their fictionalized balance sheets.  The answer is cash flows.  The ultimate proof of insolvency is inability to pay obligations as they come due.  Denninger’s post of an analyst’s demonstration that the cash available to JP Morgan/Chase has deteriorated substantially helped lead him to conclude that a credit lock-up may be imminent.  We believe that without the government’s recent systematic enabling of large bank trading incomes, the cash flows of large banks would have already been insufficient to meet their obligations.   The TBTF’s massive “speculation” is made sure through special access to information, manipulation and socialization of any losses.  Their trading cash flow appears to be the only thing standing between the big banks and the abyss.  Can they keep this up?

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