The Long Crisis

Posts Tagged ‘Geithner’

Tim Geithner and Ben Bernanke must rue the day that they agreed that a stress test and making public the results of the tests would be just the thing to assure the markets that all is well within the US banking system. Or not.

The problem with the stress tests from the beginning was that it is a lose-lose deal for the government. If the test results as released by Uncle Sam show that all 19 banks tested by the government pass the tests the credibility of the results would be blown away as market analysts and traders know full well that at least a few of the big banks are insolvent.

However, if at least a few banks are deemed to be short of capital and fail the tests the market may well gang up on the weaker banks and immediately punish their share prices, making it all the more difficult for them to raise the capital they need without further dilution to shareholders.

The Fed and the Treasury Department must be having some late night sessions trying to decide how best to spin the results. Yesterday a paper was released that was supposed to show the methods used for the tests. The paper revealed few details.

“The market may be disappointed by the lack of details, as there is not much new in the report, but at the margin, it does sound as if regulators will give each company a real review, rather than a rubber stamp of approval,” said Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia.

This was the kindest remark that I have seen about the report. One analyst said that the only significant numbers in the report were those that told you what page you were on in the 21 page report.

The full report is supposed to be released to the public during the week of May 4th. In the meantime the markets will probably be extremely volatile as leaks and rumors about the results of the test find their way into public view.

The tragic thing in all of this is that the banks and government have not faced up to the fact that the big money center banks are still sitting on trillions of dollars of toxic assets. The hope is that over time the real estate markets will recover and that when held to maturity the value of the securities secured by the real estate will be at par.

This hope does not take into account how quickly vacant homes, shopping malls, and office space deteriorate once left vacant. Not only does the weather have its effect on poorly maintained structures but vandals quickly move in a strip the facilities of anything of value. The banks have just been overwhelmed by the numbers of distressed foreclosed real estate properties now showing up on their books as non performing assets. In addition, they have been swamped by the number of borrowers who are walking away from homes with under water mortgages.

The stress tests have likely understated the size of these unprecedented problems. Securities may be revalued by the banks from mark to market to mark to model by the use of accounting trickery but eventually the true value of these “assets” will surface. Assets now valued by banks at from 80% to 95% of par may eventually prove to be nearly worthless.

Now whether banks pass or fail the present stress tests that day of reckoning will produce some genuine stress within the financial system.

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The contrast in two reports as to the state of the US and world economic condition issued by the IMF and as set forth by US Secretary of the Treasury Tim (No Problems) Geithner in congressional testimony could not be more striking. It is amazing that the forecasts are being issued on the same subject on the same day.

Here is the IMF take on the financial crisis:
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Worldwide losses tied to distressed loans and securitized assets may reach $4.1 trillion by the end of 2010 as the recession and credit crisis exact a higher toll on financial institutions, the International Monetary Fund said.

Banks will shoulder about 61 percent of the writedowns, with insurers, pension funds and other nonbanks assuming the rest, the Washington-based lender said in a report released today on the state of the global financial system. The fund forecast $2.7 trillion in losses from U.S.-originated loans and assets, compared to its estimates of $2.2 trillion in January and $1.4 trillion in October.

“Stabilizing the financial system remains a key priority and, although progress is being made, further policy efforts will be required,” the fund said in its report. “Without a thorough cleansing of banks’ balance sheets of impaired assets, accompanied by restructuring and, where needed, recapitalization, risks remain that banks’ problems will continue to exert downward pressure on economic activity.”
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Now look at what the starry eyed optimistic blowing smoke up the committee’s ass Tim Geithner has to say as reported on Bloomberg:
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Treasury Secretary Timothy Geithner told a congressional panel that the “vast majority” of U.S. banks have more capital than needed.

He also said there are signs of thawing in credit markets and some indication that confidence is beginning to return.

“Indicators on interbank lending, corporate issuance and credit spreads generally suggest improvements in confidence in the stability of the system and some thawing in credit markets,” Geithner said in prepared testimony to the committee overseeing the Troubled Asset Relief Program.

Earlier today, Geithner said the program has enough money for bank rescues even under “conservative” estimates.
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Clearly there is a vast disagreement here as to what lays ahead. IMHO the Obama administration is making a huge mistake in trying to paper over the insolvent position of many of the largest US banks. When the truth comes out, as it eventually will, the fallout for Obama will be devastating. The Treasury Secretary has very little creditability, if any, left to lose, and is becoming a huge liability to President Obama and to the nation.

Have you purchased your pitchfork yet?

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Goldman Sachs has always been a Wall Street firm with a mission. Greed, big brass ones, being the self proclaimed Masters of the Universe, and having the biggest swinging dicks of any of the New York investment banking firms, really of any investment banking firm anywhere, took Goldman far down the road to fulfilling that mission.

That mission was clearly to line their own pockets with as much money as possible, morals and ethics be damned. No doubt Goldman partners were and are smart people. So smart that they even outsmarted themselves. It’s hard to believe that one firm could become so powerful, perhaps even to having a very real influence and control over the affairs of a sovereign nation – the United States of America.

The partners at Goldman all work hard. They must feel that they are due the enormous financial rewards and multi million dollar bonuses that they bestow upon themselves. Even if their reckless and irresponsible actions had a great deal to do with the world’s financial markets meltdown.

Gee, who could have known that creating exotic financial derivatives could lead to so much trouble? All of those mortgages made by people who had no jobs couldn’t all go bad at once could they? The odds of Black Swans paying a visit are so small we don’t have to worry about them, right? What’s wrong with 40 to 1 leverage or more when the risk is so small?

Actually Goldman knew full well that the Black Swan would eventually swoop in and that the housing bubble would go bust. Remember, these are very smart finance educated guys and gals, most with advanced degrees from the best business schools in America.

No. It wasn’t that the Goldman crowd didn’t know that the boom would turn into bust, hell, they even hedged their exposure with counterparties like AIG. They know very well how toxic many of the mortgage packages were. They just didn’t care. Goldman made such tremendous profits from selling these terrible investments, stamped with a AAA rating by the corrupt rating services, that they were determined to feed at the money trough for as long as possible. Besides, Goldman was able to transfer much of the risk to other parties, even to taxpayers. As long as the money flowed in they just didn’t care.

Alas, as the boom turned to the worse bust since the great depression Goldman was forced to accept TARP funds from its close friends at the US Department of the Treasury. Goldman didn’t really want the money as they knew that restrictions would come with it. For one thing Goldman had to get a commercial banking licence, which meant that it would be considerably more regulated.

Which brings us to the present. Goldman doesn’t like regulation, especially any that limits the payouts to its employees. Well, it is understandable. It’s hard to go from multi million dollar bonuses to salary caps of only $500,000 a year. No one in America can hardly get by with that peanut payout. Right?

So Goldman wants to give back the TARP money and get out from close government supervision ASAP. Goldman must feel that regulation is for wimps, not big swinging dicks. What Goldman really wants is to go back to the way it was. To hell with risk management. If the potential payoff is big enough, go for it. Just find a sucker counterparty like AIG.

So what if the global economy was taken right to the edge of disaster, perhaps over the edge as we aren’t out of the mess yet? Goldman wants to be able to return to the Masters of the Universe days and appears to think that it can do it.

Unfortunately, the Obama administration seems to be wanting about the same thing. To return to the wonderful world of 2006 and 2007 when the boom was on. As far as I can tell everything so far out of Goldman and the Obama financial advisers is geared to taking us back to the glory days. Every effort is being made to sustain the unsustainable. The fix is on.

There seems to be no recognition that the world has changed. The converging consequences of peak oil, climate change, and the ongoing financial meltdown has and is changing the world as we will soon see. Goldman Sachs, the Obama administration, and most of the America people are in full denial. When reality sets in it will be harsh. The unprepared will stand a good chance of an early death.

The plan of Goldman Sachs to bring back the past and live once again as big swinging dicks seems to be admired by the Obama financial team. Certainly Bernanke and Geithner seem to be on board as Goldman cheerleaders and team Goldman players. The long crisis will be much longer than necessary with Goldman Sachs and Wall Street calling the shots. Who really controls our government, anyhow?

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