More from Bill Black criticizing the government’s bank bailout and cover-up…this time in a Barron’s interview:

“The scale of fraud is immense. This whole bank scandal makes Teapot Dome [of the 1920s] look like some kid’s doll set. Unless the current administration changes course pretty drastically, the scandal will destroy Barack Obama’s presidency. The Bush administration was even worse. But they are out of town. This will destroy Obama’s administration, both economically and in terms of integrity.

With most of America’s biggest banks insolvent, you have, in essence, a multitrillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale.

These firms will ultimately have to be forced into receivership, the management and boards stripped of office, title, and compensation…

Obama, who is doing so well in so many other arenas, appears to be slipping because he trusts Democrats high in the party structure too much.

These Democrats want to maintain America’s pre-eminence in global financial capitalism at any cost.”

The conspiracy is far reaching: add to the actions of the PPT as documented by Zero Hedge to manipulate the stock market using Goldman Sachs and other loyal-to-the government traders in low volume situations,  the big bank’s clear attempt to manipulate their stock prices by making incomplete yet sensational “announcements” about recent profitaility.  There is indeed amble reason to think this scandal could bring down those now in power.

Mike Shedlock reports on GMAC’s new plan to save GM.  After all, there’s nothing to lose since GM will likely go kerplunk soon. The strategy? – it’s biblical (see Luke 6:25) – “Lend, expecting nothing in return”:

Here’s some quotes from the article:

NEW YORK/DETROIT (Reuters) – GMAC Financial Services said it will resume making car and truck loans to subprime borrowers and will lower inventory financing costs for cash-strapped auto dealers, part of a series of moves intended to spur sales at General Motors Corp.

The moves announced Wednesday come as the embattled automaker races to restructure and get customers back into its showrooms amid growing risk that it will be pushed into bankruptcy by the Obama administration.

The finance company plans to resume accepting finance applications from car and truck buyers who have credit scores below 620, a line dividing prime borrowers from less creditworthy subprime borrowers. The median U.S. credit score is 723, according to Fair Isaac Corp’s myFICO unit.

GMAC also will cut borrowing costs for some new and used vehicle purchases.

In addition, it eased a variety of fees and payments imposed on dealers, giving them more breathing room to lower both costs and inventory of unsold vehicles.

What the heck, it’s only taxpayer money and it’ll all be over soon. Let’s go out with a bang!

But what about the banks?  It is indeed a travesty that the taxpayer is funding most of the “deal” and is giving up most of the upside to the bond daddy’s, like PIMCO and Blackrock.  However, the greed of said bond daddy’s will make it hard for them to turn this deal down.  Setting conscience aside, I can’t blame them. It’s a bird’s nest on the ground!

But, will the banks sell?  If they don’t, then the plan is a failure. If they do, it’s true, the taxpayer suffers ($2 trillion, maybe more?), but the banks will indeed unload those “toxics”.  And, if those toxics are off the banks’ books, does that make the banks able to lead us into economic recovery?  Well…there’s still CMBS’s and Credit card loans left to go really bad and be dealt with.  Will those be more upside opportunity for the bond daddy’s?  Well, it could be that if the Treasury pulls off this first heist, or gift to the bond daddy’s, they will be able to pull off the second and third for CMBS’s and credit cards, respectively, too.  So… in summary, it all depends on whether the banks will accept the bond daddy’s offers.  If they do-looks like we should be buying bank stocks…and bond daddy’s too.   The market today clearly thinks the banks WILL accept their offers.  The WSJ reports the big banks are likely to take the offers:

“By Matthias Rieker

Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)–Strong banks will benefit from the Treasury’s new plan to buy to $1 trillion in troubled loans and securities; for weak banks, the plan may require them to face write-downs they can ill afford.

Thomas B. Michaud, a vice chairman of KBW Inc., agreed. “The market went from too much leverage to no leverage,” and that led “to a massive problem in price discovery” for assets banks would like to sell, he said. Private investors had to rely on the loans or securities alone to generate their returns, but with the benefit of the government’s leverage, investors are able to pay higher prices.

The Treasury intends to establish an auction process for assets banks want to sell.

“Those [banks] with enough capital” will benefit, Michaud said. “Those who can afford to rid themselves of the bad assets at the prices offered. If you are a very thinly capitalized institution you may feel as if you cannot afford to sell assets at the required prices.”

However, in concert with the other government programs already put in place, the banking system might be on its way to stability, Michaud said. Though he said many will need to raise more capital to make it through the crisis.”

From Silla Brush at The Hill:

“We like it,” said Scott Talbott, a lobbyist at the Financial Services Roundtable, which represents 100 of the nation’s top financial corporations. “Our banks say, ‘We’ll be selling,’ and our private equity clients say they’ll buy.”

Of course the prices haven’t been established yet so it’s unclear how the lobbyist’s banks can know they will sell…or do they really already know and the fix is in? Are there those who think otherwise?  On Sunday, Mark Williams of the  Associated Press reported:

“It’s quite possible we could make bad banks out of good banks,” Sung Won Sohn, professor of economic and finance at the Smith School at California State University, said Sunday.

Sohn wonders whether the sale of assets at bargain prices, to remove them from banks’ balance sheets, would then force other banks to have to write down the value of similar assets they might not want to sell…”

IF one bank IS forced to write down their assets due another bank accepting the offer from the bond daddy’s…this could bring a panic as all banks scramble to find capital to offset the losses and scramble to find other bond daddy’s to buy their toxic assets too.  The Treasury program might then have to morph into a much larger plan…even before the CMBS’s and credit cards go really bad.

Felix Salmon says the plan could make things worse due to the same things we point out above: setting a market that other banks can’t live with:

“The status quo, absent any Treasury proposal, is basically the Hempton plan: let profitable-but-insolvent banks work their way slowly back to solvency by making large operating profits and not paying dividends. But the problem with the Hempton plan is that it only works on a kind of don’t-ask-don’t-tell basis: the banks can’t be publicly insolvent, since then they need to be taken over by the government.

The minute the Treasury plan is put into action, we’ll have a lot of public price discovery for the banks’ bad assets. And if the prices don’t clear — if the minimum price the banks will accept is higher than the maximum price that the public-private partnerships are willing to pay — then no one will any longer be able to perpetuate the fiction that America’s banks are solvent. And without that fiction, the Hempton plan — the muddle-through status quo — is toast.

The big hope of the Treasury plan is that the private sector will be willing to pay a higher price for leveraged assets than it would for unleveraged assets.”

Following up on Felix Salmon’s last sentence, if investors pay 10% more than they think the underlying  assets are worth (without leverage) they increase the risk of complete wipeout of the scant equity they put up…If investors (the bond daddy’s) truly believe the value of the toxic assets will at least stay stable, if not rise, this may be a good bet. But if there is much risk they will fall, then they won’t buy them.  This is true even if the assets are held by the investors to maturity because if the value falls it is because the cash flow stream has fallen.

Liberal Arianna Huffington wants Geithner to resign and calls the Geithner plan a rehash of Paulson’s ideas:

But the issue isn’t Geithner’s delivery, it’s what he’s delivering: an approach to the crisis that is as toxic as the assets that have hamstrung the economy. Geithner, brilliant and hardworking though he is, is trapped within a Wall Street-centric view of the world and seems incapable of escaping.

That’s why every proposal he comes up with is déjà vu all over again — a remixed variation on the same tried-and-failed let-the-bankers-work-it-out approach championed by his predecessor, Hank Paulson. For Paul Krugman, this “insistence on offering the same plan over and over again, with only cosmetic changes, is itself deeply disturbing. Does Treasury not realize that all these proposals amount to the same thing? Or does it realize that, but hope that the rest of us won’t notice?  That is, are they stupid, or do they think we’re stupid?”

Well, if you are confused about who exactly IS stupid here and about whether the banks will accept the offer and whether we should buy banks – We are too.  How can the market be so sure?

From Zero Hedge:

Sheila Bair came out with some very scary words for depositors everywhere:  “Without additional revenue beyond the regular assessments, current projections indicate that the [depositor investor] fund balance will approach zero”.

Even if the FDIC has all the funding it normally has, it’s not enough to handle a run on a money center bank…the Treasury would have to step in… but the fact that she is willing to risk undermining public confidence with words like these is unusual.

Bank bondholders need to take haircut, probably from being forced to exchange their bonds for equity in the banks. But, if governments force this equitization, then a default event occurs and all the off-balance sheet CDS’s written on those bonds become payable.

Willem Buitner’s column “Should you be able to sell what you do not own? talks about the idiocy of allowing CDS’s, an insurance-like product to be purchased against assets not owned by the purchaser.

What if:  To reduce to a more manageable level, the net proceeds of these CDS payouts due CDS holders, governments, collaborating worldwide, enact (say) a 90% tax on proceeds of CDS’s to holders without an insurable interest.   Then the various governments’ share of CDS proceeds could simply be forfeited and left with the payor/obligor.

It seems this would help mitigate the panic from a forced equitization of bank bonds.