The NYT reports:
The inspector general who oversees the government’s bailout of the banking system is criticizing the Treasury Department for some misleading public statements last fall and raising the possibility that it had unfairly disbursed money to the biggest banks.
Is it just misleading or plain ole lying?
Former Treasury Secretary Henry M. Paulson Jr., for instance, said on Oct. 14 that the banks were “healthy,” and that they accepted the money for “the good of the U.S. economy.” The banks, he said, would be better able to increase their lending to consumers and businesses. In truth, regulators were concerned about the health of several banks that received that first bailout, the inspector general writes.
Treasury Secretary Timothy Geithner said “signs of economic recovery are “stronger” and have appeared “sooner” than expected”. Is he telling the truth this time? Don’t bet on it!
Simon Johnson writes in Economix for the NYT that with the FDIC having unlimited drawing power from the FED in case of emergency and also with online banking, a depression era, consumer-type run on a bank in which people lined up to withdraw their money is no longer likely. However, a new kind of run where investors run from a bank’s equity and perhaps debt securities is a very real possibility.
The big banks are announcing “record profits“, which are a sham. Time says the banking crisis is over. Goldman, the strongest of the bunch, is proposing to sell new stock to the public before the sham is completely disclosed. With the Treasury’s help, they may just pull the heist off, but it won’t change anything in the end. More losses loom. The big banks aren’t fixed yet and they will have to be, before recovery can take place.
F. William Engdahl at Financial Sense writes about the concentration of risk in the big banks:
“Today five US banks according to data in the just-released Federal Office of Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.
The five are, in declining order of importance: JPMorgan Chase which holds a staggering $88 trillion in derivatives (€66 trillion!). Morgan Chase is followed by Bank of America with $38 trillion in derivatives, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs with a ‘mere’ $30 trillion in derivatives. Number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain’s HSBC Bank USA has $3.7 trillion…
The problem is concentrated in these five large banks. The financial cancer must be isolated and contained by Federal agency in order for the host, the real economy, to return to healthy function.”
Mike Whitney at Counter Punch is equally pessimistic about economy because the big bank problems have not yet been contained:
“The S&P 500 has soared 23 per cent in the last four weeks, but the current bear market rally is misleading. The prospects for a quick recovery are remote at best. The fundamentals are all weak. Corporate profits are down, GDP is negative 6 per cent, housing is in a shambles, and the banking system broken. The Fed has increased the money supply by 22 percent, but economic activity is at a standstill. The velocity at which money is being spent is the slowest since 1987. Nothing is moving. The banks are hoarding, credit has dried up, and consumers are saving for the first time in 2 decades. The banks’ credit-conduit cannot function properly until bad assets are removed from their balance sheets. But the magnitude of the losses make it impossible for the government to purchase them outright without bankrupting the country.
Geithner’s plan does not fix the problems with the banks, it only delays the final outcome. The next leg-down in the recession will push many of the undercapitalized banks into receivership. Geithner’s PPIP won’t change that. As housing prices fall and foreclosures rise, the capital position of many of the banks will become untenable leading to a rash of bank failures.”
Meredith Whitney believes much more must be done to increase loss reserves at the big banks for real estate and mortgages:
“In Whitney’s narrative financial firms will relive the worst struggles of 2008 because housing prices in the major markets will fall much further than expected. Bank of America ( BAC – news – people ), HSBC ( HBC – news – people ) and even the resilient JP Morgan Chase ( JPM – news – people ) will have to increase reserves as real estate losses mount unabated. Home price expectations for the banking industry play a critical role in their entire accrual accounting methodology.
As home prices fall and as unemployment rises, banks will have to retain earnings to fund greater reserve funds as part of a cycle that Whitney says has “no end in sight as both forecasts continue to rise quicker than expectations.” It’s a “never ending game of catch up,” she says because the banks have been underestimating losses ever since the credit crisis began a year and a half ago. The average bank thinks the total decline in housing prices was going to be 30% at the end of the first quarter. Now, says Whitney, they’re thinking more like 37% — still behind reality.”
Whitney does forecast positive earnings for 4 of the 5 big banks for full year 2009, but is much more pessimistic than the consensus:
Bank Whitney’s 2009 EPS estimate Consensus
GS $8.55 $7.95
BAC $0.04 $0.38
C $(5.00) $(1.18)
MS $0.55 $1.85
WFC $0.65 $1.18
We rarely agree with Dr. Reich’s policy prescriptions, but we gotta give him this: his current assessment is reasonable:
“But we’re not at the beginning of the end. I’m not even sure we’re at the end of the beginning. All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy…The real question is whether this means an economic turnaround. The answer is it doesn’t.
Cheap money, you may remember, got us into this mess.
Some of the big banks will claim to be profitable, but don’t bank on it. Neither they nor anyone else knows what their assets are really worth. Besides, the big banks are sitting on over $500 billion over taxpayer equity and loans. Who knows how they’re calculating profits? Most importantly, there’s still a yawning gap between the economy’s productive capacity and what it’s now producing, and absolutely nothing will turn the economy around until that gap begins to close.”
Dr. Reich is right on, “don’t bank on it“.
FT columnist and economist, Willem Buiter says we will know by early 2010 which banks will survive and which will not:
“By the end of the year – early 2010 at the latest – we will know which banks will survive and which ones are headed for the scrap heap. With the resolution of the current pervasive uncertainty about the true state of the banks’ balance sheets and about their off-balance-sheet exposures, normal financial intermediation will be able to resume later in 2010. Governments everywhere are doing the best they can to delay or prevent the lifting of the veil of uncertainty and disinformation that most banks have cast over their battered balance sheets.”
By the time we know which banks will survive, however, Dr. Buiter argues that the government funds needed for bank bailouts and, more importantly, the reduction in tax revenues from the coincident economic contraction will have brought to the fore the next potential financial crisis: sovereign default.
“In a number of systemically important countries, notably the US and the UK, there is a material risk of a ’sudden stop’ – an emerging-market style interruption of capital inflows to both the public and private sectors – prompted by financial market concerns about the sustainability of the fiscal-financial-monetary programmes proposed and implemented by the fiscal and monetary authorities in these countries. For both countries there is a material risk that the mind-boggling general government deficits (14% of GDP or over for the US and 12 % of GDP or over for the UK for the coming year) will either have to be monetised permanently, implying high inflation as soon as the real economy recovers, the output gap closes and the extraordinary fear-induced liquidity preference of the past year subsides, or lead to sovereign default.”
Dr. Buiter notes how easy it was for both the US and the UK to default on their obligation in the last depression. So, the “banks being unable to pay their bills” crisis is to be followed closely next year by the “governments being unable to pay their bills” crisis. We see either monetization or outright default as equivalent. The panic just begins with the bondholders in the one case and with currency holders in the other.
IRA has a great analysis of the PPIP. Their conclusion? Eventually we will pay the piper when the conflicting Mark to Fantasy rules and the Geithner/Summers plan both fail to cure the banks’ problem and liquidation becomes the new political expediency:
“When General Motors (NYSE:GM) is forced into an inevitable bankruptcy this June, however, doing similar for American International Group (NYSE:AIG) and the large banks will become a political inevitability and the notion of storing toxic waste will be shown to be a truly harebrained idea. As the Obama Administration begins to understand how deep the rabbit hole does indeed go in terms of subsidizing the continued existence of the growing collection of zombie financials, liquidation will become the most popular topic in Washington.
The tragedy is that the time lost between now and when the President realizes he is getting bad advice from Summers & Geithner could be the difference between a very bad recession and a crippling meltdown that is, in part, made worse by a PPIP that represents virtually no change from previous policy.”
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…
“If we lie to the people and they believe us, all will be well.” We think only the most naive don’t already know it, but since we have seen the suckers move markets on ignorance in the past, it may help to let experts, like Bill Black, a former senior bank regulator responsible for helping wind down the S&L crisis in the late 80′s tell us all again: the Geithner bank stress tests are a sham. The Treasury controls the outcome of the tests and insolvent banks will not be identified…unless the bank is not “playing ball” with the Obama administration.
Bill Moyers interviews Bill Black, a former regulator involved in the liquidation of the S&L’s. Hat tip Option ARMegeddon. Mr. Black details how liars’ loans were used to defraud as regulators never examined loan files under the Bush administration. The recent attempts to cover up the banking problems by Geithner and company is one focus of his attention:
“Geithner is…covering up. Just like Paulson did before him. Geithner is publicly saying that it’s going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they’re allowing all the banks to report that they’re not only solvent, but fully capitalized. Both statements can’t be true. It can’t be that they need $2 trillion, because they have massive losses, and that they’re fine.”
There is much more. How can the American people fix these guys? …check out the video (1 of 3):
The EIU’s Robin Bew was interviewed on April 1 about his current expectations for the world economy. He finds little to indicate a quick turn around. Here are a few excerpts from the transcript (we added the emphasis).
Regarding a growth forecast and the time until world recovery begins:
“It became clear that the pace of economic decline actually accelerated during the fourth quarter and the monthly data that we’ve been getting since then (at the moment we have figures for January and some numbers for February) suggests that there was no slackening in that pace of decline. In fact, if anything, it might have got even worse. So we’re now looking at a situation where output is declining very rapidly in a number of major markets – America, as you said the eurozone, also Japan.
So a very, very significant negative outcome. And even if you did see a recovery later on this year, and we think that’s highly unlikely, you would still end up with a terrible number for the year as a whole. In reality, I think we’re not looking at a recovery until well into 2010 or maybe even 2011.”
Regarding world trade:
“Our forecast at the moment for world trade volumes is that they will shrink by about 6 per cent this year, something like that. Now in cash terms, it’s a whole lot worse. If you look at a market like China, which is one of the world’s biggest trading powers, trade there, cash value of their exports is off 20 per cent. Some markets (Japan for example) off 50 per cent. So ‘collapse’ is not too strong a word.“
Regarding the banks and lending:
“Obviously many banks have been nationalised, the ones that haven’t are still taking a lot of money from the governments and they’re desperately trying to repair their balance sheets, so it is going to be very unlikely to start extending credit until that balance sheet repair is done and we’re a long way off that.
But I also think it is important to remember that actually demand for many types of credit has also collapsed.”
Regarding oil prices:
“Well, we’re in an environment now where demand is not rising very quickly at all. In fact, in many markets it is falling and that’s a recipe for oil prices to stay relatively depressed.”
By way of summary:
“Our expectation is by the time you get to the end of this year the best you can say is that perhaps we’ve stopped falling. But in terms of actually getting some growth, even very modest growth, I think you’re looking into 2010 for that and in terms of the sorts of growth which is going to make a difference to how you and I actually feel, I think you’re looking probably to the end of 2010″
Obviously, the Economist’s forecast differs sharply from those expecting a V shaped recovery in the second half of 2009.