Below is a copy of Hank Paulson’s prepared testimony for tomorrow’s (June 16th) hearings which will cover the assistance that FED’s provided to Bank of America (thanks Zero Hedge):

Goldman Sachs had one of its biggest quarters ever by reaping the benefits of the Fed’s currently cheap discount window while still operating with hedge fund levels of risk. That doesn’t even take into consideration the profits they gained from the AIG bailout. From Rolfe Winkler’s blog:

In addition to the federal money it took last fall, it benefited from the government’s bailout of the American International Group, being paid 100 cents on the dollar for its $13 billion counterparty exposure to the insurer, and it has $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation.

They simply should not be allowed to continue doing this. Making record profits by trading with tax payer protection is not going to create the jobs that are needed for the economy. Gasparino has some remarks about the topic in the video below.

Bloomberg’s analysis of Citi’s earnings release shows it taking advantage of accounting changes:

“Citigroup posted a $2.5 billion gain because of an accounting change adopted in 2007. Under the rule, companies are allowed to record any declines in the market value of their own debt as an unrealized gain.”

This is really funny – as if Citi can, or would buy back its debt…  WSJ‘s reporting shows it relying on nonrecurring investment banking gains like the other banks:

“The institutional clients group, which includes securities and investment-banking operations, reversed a year-earlier loss caused by write-downs. Several other big banks recently, including Goldman Sachs Group Inc. and J.P. Morgan Chase & Co., have seen their results given a large boost from their investment-banking businesses. In fact, some analysts have said those two banks’ results wouldn’t have been nearly as good in the quarter if not for the investment-banking segments.”

With the new MTM rules and the governments backdoor assistance to the banks through canibalization of AIG’s assets, investors will have to anticipate future realized losses themselves rather than depending on the banks to anticipate them for investors through writedowns. The good news is that realized losses, if they occur, cannot be hidden.  Ultimately, losses arise when the return on assets is less than the actual cost of funding those assets.  The FDIC’s Quarterly Banking Profile for the end of 2008 shows the current spread between rates on earning assets and cost of funds for all banks at about 2%, down from 3.5% in late 2006.  As more of the banks assets become nonperforming (that is non-earning), this spread will continue to narrow until there is no hiding the fact that it is negative.

Robert Barba and Marissa Fajt report in the American Banker:

“The Federal Deposit Insurance Corp. dusted off a tool it had not used in more than a quarter century to resolve New Frontier Bank in Greeley, Colo., which failed Friday.

After no buyer emerged for the $2 billion-asset New Frontier, the FDIC established a deposit insurance national bank — a last resort in which the Deposit Insurance Fund sidesteps a mass payout by giving the failed institution’s depositors 30 days to shop for a new bank.”

Maybe we should try something like that with Citi or B of A.

The New York Post reports that insiders in the FDIC consider Geithner’s Bank stress tests a pointless exercise, aimed at the naive general public:

“The FDIC’s basic beef with the stress test is that it is not a credible way to assess how much additional cash beaten-down banks will need to weather what many Wall Street experts predict will be more losses in the coming months.”

“Many high-profile analysts already are voicing the concern that losses will pile up in areas most of Wall Street hasn’t watched closely, such as residential and commercial loans that are currently on banks’ balance sheets.”

The article also refers to a “growing rift” between the Treasury Department and the FDIC.  We doubt that rift really exists…Sheila Bair is clearly in cahoots with Timid Tim to smoke screen the banks’ true condition.

Andrew Ross Sorkin in the NYT says (we added the emphasis):

“…the F.D.I.C is trying to stabilize the system by adding more risk, not less, to the system.

It’s going to be insuring 85 percent of the debt, provided by the Treasury, that private investors will use to subsidize their acquisitions of toxic assets.

These loans…are, for example, “nonrecourse,” which means that if an investor loses money, he owes taxpayers nothing. It’s the closest thing to risk-free investing — with leverage! — around.

So where did the risk go this time?

To the F.D.I.C., and ultimately, to us taxpayers.”

So if there is no risk of loss, then why won’t private investors buy the assets without FDIC gaurantee? The FDIC is effectively answering that private investors perceive risk where there is none.  To substantiate their claim, they have asked their accountants  to carefully evaluate these non-existent risks.

” “We project no losses,” Sheila Bair, the chairwoman, told [Sorkin] in an interview. Zero? Really? “Our accountants have signed off on no net losses,” she said.”

Sounds like famous last words to us…

FT reports

“US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.

Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions ”gaming the system to reap taxpayer-subsidised windfalls”.

Administration officials reject the criticism because banking is part of a financial system, in which the owners of bank equity – such as pension funds – are the same entities that will be investing in toxic assets anyway. Seen this way, the plan simply helps to rearrange the location of these assets in the system in a way that is more transparent and acceptable to markets.”

“Transparent and acceptable”… to the markets? or opaque and acceptable to the banking oligarchy/administration?  Clusterstock calls it money laundering:

“And let’s be honest, that’s exactly what it is. Banks buying assets from each other to inflate their books has nothing to do with “price discovery” or any such nonsense. It’s all about using taxpayer money to create bids that are higher than what the market currently prices those assets at. And if it turns out those bids were too high and the cash flows never materialize then, oh well, it’s the taxpayer left holding the bag.”

With mark to market now “mark to fantasy” and banks allowed to collude to bid their assets up to prices that are even higher than fantasy, they are sure to show big “profits” soon.

BTW, Zero Hedge has a great post on the resignation of the leader of FHLB over the recent changes of MTM to MTF. If this guy is saying the bank’s numbers are full of baloney, we probably should too.  Check it out.

The following was provided on DOW JONES.  A copy of the legal document can be found here.

By Peg Brickley

WILMINGTON, Del. (Dow Jones)–Washington Mutual Inc. (WAMUQ) Friday sued the Federal Deposit Insurance Corp. over the takeover of Washington Mutual Bank, seeking billions in damages for the loss of its prized thrift.

A complaint filed in the U.S. District Court in Washington, D.C., says WaMu’s
former parent is entitled to recoup up to $6.5 billion in capital contributions
it made to the thrift from December 2007 through the September 2008 seizure.

(This article also appears in Daily Bankruptcy Review, a publication from Dow
Jones & Co.)

Washington Mutual filed for bankruptcy protection the day after losing
control of WaMu to regulators, who said it was on the point of failing. If that
was the case, Washington Mutual said, it is entitled to get the money back
under Bankruptcy Code fraudulent transfer provisions.

Parent Washington Mutual is also chasing $4 billion worth of trust preferred
securities that were transferred to WaMu as part of the takeover.

The complaint faulted federal regulators for getting only $1.9 billion from
JPMorgan Chase & Co. (JPM), which bought the thrift, and said the FDIC sold
property it had no right to sell.

Additionally, Washington Mutual says it’s entitled to up to $3 billion in tax
refunds it expects to receive due to the 2008 losses triggered by the WaMu

Other damages sought include $177 million in unpaid loans the parent company made to its subsidiary, WaMu, before the thrift’s mortgage-lending practices pushed it into insolvency, court documents say.

In Chapter 11, Washington Mutual is trying to round up money to pay its
creditors. WaMu’s former parent has been battling JPMorgan and the FDIC for
access to an estimated $4 billion in cash that it had on deposit at WaMu when
regulators took over.

The FDIC is serving as receiver for WaMu, responsible for helping the
thrift’s creditors collect their money. Washington Mutual, the parent, filed a
claim in the receivership but was turned down, according to the complaint.

WaMu’s former parent said it would seek a jury trial of its case against the

-By Peg Brickley, Dow Jones Newswires; 302-521-2266;