Smoke-and-mirrors - Hiding bank insolvency - Hole in Geithner's Bucket

[WhiskeyGirl]

There's A Hole In Your Bucket, Dear Geithner...

...the amount of bad debts in the banking system is increasing faster than the rate at which new taxpayers' money can be poured in.  There's a hole in Tim Geithner's bucket.

I agree.

...the vast amount of debt created in the bubble can no longer be supported by an economy that is shifting quite rapidly to a lower level of activity.  Bailouts merely have the effect of replacing private debt with public debt, with resulting tax rises and a depressing effect on the population that has to pay them.

I agree.  Why should failure be socialized? 

...there really is no way out, in my view, except to recognise that part of the vast stock of bubble-generated debt is not going to be repaid.

I agree, what common sense.

And this is what the monetary authorities are seeking to avoid at all costs, as it will mean banks' shareholders being wiped out but, more importantly, bank bond holders also taking a hit.  But the rigid opposition to a partial writedown of debts makes less and less sense.

Why not start with a fresh page, and banks that are well run, and solvent?

Of course this would mean the end of the current power base of Wall Street, as many large institutions would get taken over in bankruptcy or broken up.

Is that a bad thing?  What about giving the growth opportunity to other banks?  Spread the opportunity and prosperity?

Maybe bankruptcy or broken up into more manageable pieces is a better idea?

But if the powers-that-be try to convince us that this prospect is the end of the world, I disagree.  Markets and economies have dealt with large-scale debt defaults before, many times, and survived.

If Wall Street is to big to continue, there are others that will carry on.  I believe the business world calls this "right sizing" - for America.

If the authorities keep trying to muddle through and save the markets with smoke-and-mirrors schemes like MLEC, TARP, and the latest plan, all of which are designed to hide the basic fact of bank insolvency rather than to address it, then I think the outlook for the markets and the economy is very bleak indeed.  Confidence can be restored only by facing reality.

The market went due to the failure of enough of those in government to reform the failing mortage industry for the past ten years.  Insolvency.  No pretty way to dress up that pig - even with lipstick.

http://www.indexuniverse.com/blog/5375-theres-a-hole-in-your-bucket-dear-geithner.html

How about that truth commission Mr. President?  Let's look to the past so that we CAN identify what went wrong, fix it and move forward.  Represent the best in American government - bring back integrity, don't be part of the problem.

No economic revival in sight.

jmho

[WhiskeyGirl]

"American people have lost faith in the leaders of our financial institutions and are skeptical that their government has — to this point — used taxpayers' money in ways that will benefit them," Geithner said.

"The spectacle of huge amounts of taxpayer money being provided to the same institutions that helped cause the crisis, with limited transparency and oversight, added to public distrust."

http://www.canada.com/Business/Wall+Street+tumbles+stimulus+package+passes/1274726/story.html

I'd like to know from Tim who really owns the U.S. Federal Reserve?  Who profits from all these bailouts that Americans will be paying for?  Generations in bondage to debt and billions of dollars in interest payments to the Fed?  Who gets rich off of the misery of the American people?

[WhiskeyGirl]

Not only that but the Obama administration’s $787 billion (£545 billion) fiscal stimulus of government spending and tax cuts intended to kick-start the economy, which was finally approved by Congress on Friday night, was derided in the United States as poorly targeted and too slow-acting to make a difference.

Even Giulio Tremonti, the Italian finance minister and host of yesterday’s meeting, added his voice to the criticism. “If the problem is an excess of debt, the cure is not adding more debt, whether that debt is private or public,” he said.

Nouriel Roubini, the maverick economist who has made his name during the credit crunch, says the banking system’s losses are likely to reach $3.6 trillion, about half of them borne by American banks, a far cry from the initial estimates of $200 billion. Propping up failed banks would be ineffective and encouraging troubled banks to merge was “like having two drunks trying to help each other to stand up”.

“A lot of the focus is on the ‘bad bank’ idea [where a government siphons off toxic assets], but another way would be for the government to stimulate new entry into the banking system,” said Martin Weale, director of Britain’s National Institute of Economic and Social Research.

(snip)

The “new bank” idea has plenty of supporters, particularly in the United States. Even with government guarantees, the old banks will be encumbered with toxic debt for years to come and unable to provide an adequate supply of credit for the economy.

Paul Romer, a professor at Stanford University and one of the world’s leading experts on economic growth, says that instead of propping up old banks, governments should instead put taxpayers’ money into new ones.

“If the government starts as a shareholder in new, healthy banks that eventually end up entirely in the hands of the private sector, the political risks start small and diminish,” he said. “If instead the government combines open-ended and opaque financial support for troubled banks with promises of tight supervision and punishment for bad behaviour, the risks are large and grow.”

In Britain, Fathom, an economic consultancy, says that instead of buying assets from the banks, the government should spend £50 billion buying houses from homeowners under threat of repossession.

Why not buy direct from the consumer? 

http://business.timesonline.co.uk/tol/business/economics/article5734058.ece

[A's Fever]

What is the point of this article?  It offers no new information, stokes anger and fear through rhetoric yet but provides no solutions.

Everyone and their mother knows that the financial system is becoming more unstable each day due to increasing levels of toxic debt and compounded by increasingly weak real estate loans.  The hole is not in Geithner’s bucket; he is attempting to plug holes in the financial system.
 
We know that the toxic debt is not going to be repaid.  I don’t see where any bank is saying they can deal with it. The question is how to price it on banks’ balance sheets, or how to get rid of it (which goes back to pricing).  No one knows how to price it, so there is no accounting for it yet.

“The end of the current power base of Wall Street…”  Sounds great, let’s make the big guys take the fall.  But what is the power base of Wall Street that is referred to? Traditionally Wall Street refers to the big investment banks which are operated completely differently than the big banks and subject to less regulation.  Of these, Bear Stearns and Lehman are gone, and Merrill Lynch is now owned by B of A.  The two remaining big investment houses are Goldman Sachs and Morgan Stanley, both of whom have strong balance sheets.  They have written off their toxic debt and expect to repay their TARP funds within a year.  They do not want government intervention and it appears that they will not be a burden to the taxpayer.  Note that they have no consumer exposure.  So, what exactly is the current power base??

The big banks speak more to Main Street than Wall Street.  Of B of A, Wells, and Citi, only Citi is headquartered in NY.  These banks, in addition to having toxic debt on their books, also have great consumer exposure, and commercial real estate exposure.  Commercial real estate has yet to generate much press, but it is weakening and will be the next leg of the economy to weaken.  Many commercial loans that are not real estate loans have a second or third deed of trust as collateral, so weakening commercial real estate will have a widespread impact on banks large and small.

Finally, the bread and butter of commercial banks is commercial lending, and their customers are under pressure.  Most lenders place conditions on loans such in such areas as current ratio, debt to equity, minimum net worth, profitability.  They often have RE collateral.  Obviously in this economy many clients will not be able to meet those loan covenants and/or will fail, bad loans will increase, further weakening the balance sheet of banks.

I ask you this:  in the face of these economic challenges, can you find many banks that are “well run and solvent”?  Even the best run, conservative banks (no toxic paper) will come under pressure due to the deteriorating real estate market and the economy in general.  Increases in loan losses or loan loss reserves hit the balance sheet directly.

What about giving the growth opportunity to other banks?  Sounds great.  But banks have capital restrictions on lending that cannot be exceded.  All banks have restrictions on how much aggregate debt can be extended to a single borrower; the total amount of credit commitments; and what percentage of loans are made to individual sectors.  Where would the capital come from?  In addition to commercial loans to keep Main Street in business, who will be able to fund the huge amount of credit cards, auto loans and student loans that are now capitalized by big banks?

So if the big banks are allowed to fail, you have a bunch of regional banks and community banks that  are not structured to do really large lending. Who  would lend to the Ciscos and P&G’s and McDonalds of the world?  And companies not quite as large, but larger than the restrictions on regional banks would allow?  Where would the capital come from, and the sophisticated services companies expect from banks to do business?  The computer systems, regulations, all would have to be reconfigured and upgraded. 

Not saying that it would be impossible to do, but it would take a very long time to set up and make workable (years I would think) and would take a very very large amount of capital.  So I don’t see how the taxpayer comes out better here. 

Personally, I think that the big banks ARE too big to fail, because main street relies so heavily upon them to do business.  This is the definition of systemic.

Personally, I think the banks should be temporarily nationalized until such time as the government can clean up the balance sheets and stabilize the capital base.  That said, I don’t think it will do any good until the mortgage foreclosure situation is stabilized.

Articles like this spout the politically correct view from a certain side of the aisle but fail to really look at the complexity of the situation.  Few things are ever black and white and this situation is certainly complex.  If the fix was easy the Bush admin could have taken care of it. 

Geithner’s mistake was in announcing a plan before it was fully formed.  He was correct in stating to congress that it will take time to shape policy and that he is willing to disappoint Wall Street and take a little more time to get it right.  Seems like the prudent approach to me.

My opinions only and I do not expect any one else to agree, nor do I wish to change anyone else’s point of view.

[nonesuche]

WG thanks for the article, I am very interested in the perspective of global leaders and also a think-tank like Stanford on the choices Obama is making regarding our banks. Geithner stumbled in his delivery, appeared unprepared and shaky.........whether he needs more time due to complexities or not, he has not inspired confidence. He clearly was the wrong choice here.

History may prove that the democrats were mistaken to shoulder up the banks with more funds prior to addressing the mortgage aka bad debt. Yes it's all very complex but isn't Obama stating over and over he has the "best economic minds" on this? 

We all knew these were very complex issues or at least we thinking voters did, Obama signed up for this, his campaign staff is even "thanking" Palin for handing them the election last fall.

I ask Obama as a result in return, was it about the competition? If not he needs to muzzle his David Plouffe(former lobbyist/campaign mgr) buddy quickly. Plouffe is looking like an ass now.

[WhiskeyGirl]

Aren't there public audits for banks?  Performed by outside entities?  Don't corporations file papers with various government agencies?

How is it possible that after all this time, it's been years (from my reading) that know one is able to determine how many loans are in default, what their total book value is?   From that point, there should be electronic data to show what current sales are...

I read one article that suggested home that lost 50% of their value in the past year probably won't gain it back for maybe 20 years?  That is speculation I can believe in.

How many loans were made and no one ever made a payment - maybe due to fraud?  How long and how many?

I recall one map recently that depicted the concentration of failed/TARP/bailout banks.  Roughly speaking, they seemed to be located in the areas with the largest drops in housing values, high defaults.  California, New York, and a few others were at the top of the list.  Why?

My area has some vacant, never sold homes, and some home that were boarded up and resold.  Other areas seem to have cycled through some of their boarded up homes.  Someone in my area snapped up a house that sold for about 75% of it's previous sold price, IIRC, like in 2001 or 2002.

What did the Federal Reserve contribute to the current crisis?  From my reading they added a lot of money to the money supply.  All that money and no place to grow.  Cheap credit.  Lots of money earned through fees. 

Consumers lost in their 401ks, and other investments.  All the bailouts added trillions to the losses.  Now more bailouts and the bucket is still leaking.

One thing I do believe that I've read - With all the bailout money spent, the Government could have paid off every home mortgage in America.  That is something I believe.  I don't know where that person came up with that.

Where is all this money going?  Just to increased national debt.  Nothing to show for it.

Trillions of dollars of debt and no way to pay for it, jobs continuing to be outsourced, and our hard earned money buy imported goods that used to (in many cases) be made in America.

All this money transformed into taxpayer debt.  Who's going to pay for it?  Rich people with $6,000 401ks?  Somehow the rich are the new targets.  Rather than kill them and steal their goods, or perhaps nationalize their property, it's just wiped out through all this financial hocus-pocus.  In my mind, that a form of theft.  What's left will be taxed to pay for the ever increasing national debt.

Any sound financial policies in the offering?  Who really owns the Federal Reserve?  Who has financial interests in all these bailout recipients?  Any conflicts of interest?

"Team player" is a code word for "turn the other way" while we ripoff...

just my humble opinions

[WhiskeyGirl]

One thing I've noticed, Hawaii has a state insurance scheme (socialized medicine) and little exposure to the banking/toxic waste problem.  Hawaii seems to balance the needs of residents, business, and community interests - just plain common sense.  Maybe not perfect, but I believe Madelyn Dunham, the presidential grandmother, worked for a bank that remained in good financial shape.

I also recall that small banks that maintained conservative banking practiced aren't in so much trouble.

Bank of Hawaii Corporation Declines to Participate in the U.S. Treasury Capital Purchase Program

Honolulu, Hawaii (December 22, 2008) - Bank of Hawaii Corporation (NYSE: BOH) today announced that the Company does not plan to participate in the Treasury’s Capital Purchase Program.  The program is part of the federal government’s Troubled Assets Relief Program approved by Congress to strengthen the banking system by providing banks with additional capital to increase lending capabilities.

“After careful consideration by management and our Board of Directors, we have decided not to participate in the Capital Purchase Program,” said Allan R. Landon, Chairman and CEO. “Bank of Hawaii has the resources to meet the needs of our customers and support our growth.  We believe that Bank of Hawaii is safe, balanced and prepared to face the challenging operating conditions as the economy slows without government investment.”

As of September 30, 2008, the Company’s capital position was "well capitalized" by all regulatory standards.  The Company’s Leverage Ratio was 7.27 percent and the Tier 1 Capital Ratio was 11.14 percent.

 

https://www.boh.com/about/newsroom/387_1990.asp

The real fear for America?  There doesn't seem to be any government interest in reining in the Federal Reserve - all that excessive credit - does things all on it's own and taxpayers are responsible for their actions.  Who really owns the Federal Reserve?  Who profits from all the money sent their?

It's one thing for individuals or business to be generous and share their prosperity, it another for government to dig into the pockets of honest and hardworking Americans.  It's beyond words when government digs the financial hole so deep that there doesn't seem to be any chance of recovery - for generations.  Will "Generational Debt" be the Obama legacy?  Collapsing the currency so that 'only the world government can help us'?

The same people who helped determine the size of the hole, when it was dug, and how quickly - are they likely to stop digging?  Same people in charge?

'fear and anger' - why isn't government hearing, listening to, or acting in such a way that will instill confidence?  I have a few idea, I try to keep them to myself.

Those same politicians that have promoted easy credit, are they the ones that seem to think that only rich people have 401ks?  It's ok to go after the 401k money, but not expect the Federal Reserve and banks to act responsibly?  Expect borrowers to repay loans? 

Taxpayer money continues to try and fill a mysterous financial black hole that no one in government wants to investigate?

just my opinions 

[nonesuche]

The other shoe dropped just as Congress voted the stimulus through........Barney Frank slipped in a requirement that all banking execs delay any bonus awards until the banks are in fiscal health. Prior in the week Obama had stated only certain banks would require this, but Frank changed it to ALL banks receiving federal TARP. It doesn't mean they won't eventually get paid those glorious bonus' but they can't receive them until their banks are in the black again 

I can hear the explosion from miles away.......

I have a dear friend/former client who called me on Friday to discuss a meeting he has with BoFA on Tuesday of next week. He's a VP with a financial provider for payment systems, they have been in discussions off and on for seven years with BoFA. He related that in those seven years that within his bi-annual discussions with BoFA regarding a possible contract for product and services, that only one individual in the group of 16 he meets with at BoFA, has been there over the last 7 years. All the rest have been like a revolving door. From a sales perspective that's a real challenge for you basically start over from square one in your negotiations/presentations with that level of attrition within the decision makers.

If that attrition holds true, I hope the banks also require execs who bounce out the door before the bank is in the black, are signing away that potential bonus to be paid as well.

Double whammy, it might help to make some of these execs realize they are accountable for their decisions and their work.

[nonesuche]

http://www.foxnews.com/politics/first100days/2009/02/15/white-house-considers-changes-executive-pay-limits-outlined-stimulus/

I was incorrect, it was Chris Dodd who added the stronger clause around the exec compensation, but Barney Frank does appear to be supporting it as well.

 

[WhiskeyGirl]

I wonder what kind of creative idea some of those folks will come up with to keep the money tapper open.  Here are some tried and true suggestions -

1.  Ghost payrollers
2.  Large Expense Budgets
3.  Lavish gifts from direct reports
4.  "One hand wipes the other hand" with appointments to other boards and positions.
5.  Preferential treatment for friends and families that do business with these folks - one had washes the other...this is worth something...

Is the cash limit really a penalty?  Would the limits benefit stockholders?  Encourage people to invest?  Get at the 'root' of the problem these companies are in?  What about the payments to executive retirement plans?  Executive life and disability insurance programs?  Matching 401ks?  Car & driver programs?  Perks not widely available to other employees?  Mileage program bonuses? 

In some ways, I'm thinking the cash limit is just for show, there are so many other opportunities...

mo

[WhiskeyGirl]

The Government and the Reserve Bank have been at pains to point out that Australia has a much healthier banking system than much of the rest of the world...

Recognition of this is crucially important in avoiding the collapse in confidence in banks that has hit these countries and that governments are finding it extremely difficult to deal with. ..

To be clear, the problem is not that central banks are powerless once nominal interest rates hit zero.

The chairman of the US Federal Reserve, Ben Bernanke, made clear in a lecture at the London School of Economics in January that the Fed has an extensive policy tool kit to deal with this situation. But the reason the Fed is having to use this tool kit is because interest rates have proved ineffective, and because the US financial system had seized up, with its big banks arguably insolvent, so the Fed is operating as the banker to the system.

Neither of these things is true of Australia. Our banks are solvent and lending, and monetary policy here still has traction or, as central bankers like to say, the monetary transmission mechanism is working. ...

The reality is that after the excesses of the boom years, with their ridiculously low margins for risk, high debt and leverage, toxic financial innovations, perverse incentives and unsustainable balance of payments imbalances and associated capital flows, a painful adjustment to a more sustainable, less leveraged world is inevitable.

Governments and central banks can avoid a repeat of the '30s and ease the inevitable adjustment, but they can't prevent it, and the limits to policy need to be recognised.

Why isn't our government working on making the nation solvent again?  Recognizing that banks are involvent and probably won't recover?

Why aren't they changing the old policies that don't work?  One that comes to mind, is putting or keeping homeowners in homes they cannot afford.  Or, can afford if someone, in this case taxpayers through Freddie/Fannie, give the away - a generational gift from unborn taxpayers.

What ever happend to control the predatory practices of government?  Government policies that continue to bring massive debts to the nation?  Why isn't government practicing 'living within the means' available?  A nation in debt doesn't have money to throw around.  Maybe they should be looking at other alternative that don't involve debt and wealth transfer to other nations and global carpetbaggers.

http://www.theaustralian.news.com.au/story/0,25197,25079655-7583,00.html

jmho

[nonesuche]

Global carpetbaggers indeed WG

How did R. Allen Standard get away with it for soooooo long???????? NO ONE IS MINDING THE STORE, that's how.

This also evidences how much money is driven offshore !!

http://money.aol.com/news/articles/_a/bbdp/depositors-turned-away-from-stanford/349231

Stanford Bank Clients Can't Access Funds

ST. JOHN'S, Antigua (Feb. 18) - Panicky depositors were turned away from Stanford International Bank and some of its Latin American affiliates Wednesday, unable to withdraw their money after U.S. regulators accused Texas financier R. Allen Stanford of perpetrating an $8 billion fraud against his companies' investors.........

Stanford and his wife Susan also donated $931,100 of their own money, with 78 percent going to Democrats, including $4,600 to President Barack Obama's presidential campaign last May 31. Records show $2,300 of that was returned on the same day.

[caesu]

Stanford and his wife Susan also donated $931,100 of their own money, with 78 percent going to Democrats, including $4,600 to President Barack Obama's presidential campaign last May 31. Records show $2,300 of that was returned on the same day.

doesn't it speak for Obama/Democrats that this Stanford crook is now being exposed by de SEC, run by Mary Schapiro an Obama appointee?

[nonesuche]

Stanford and his wife Susan also donated $931,100 of their own money, with 78 percent going to Democrats, including $4,600 to President Barack Obama's presidential campaign last May 31. Records show $2,300 of that was returned on the same day.

doesn't it speak for Obama/Democrats that this Stanford crook is now being exposed by de SEC, run by Mary Schapiro an Obama appointee?

caesu, if we could trust our government and elected officials implicitly I would agree but unfortunately I no longer do. So much occurs behind the scenes and I can't validate this wasn't a pre-emptive strike?  Either way once again our regulators have let us down first and foremost, that isn't Obama or his staff.

[nonesuche]

let me revise that caesu, I know you can't watch our C-SPAN at least not in realtime. Shapiro was grilled pretty heavily by our congressional committee, I remembered her responses as often wavering and weak.

This was her position previously, therefore had she been doing her job then, the Stanford Bank should not have gone this long or this far into fraud.

Schapiro was previously the head of the Financial Industry Regulatory Authority, the largest non-governmental regulator for securities firms doing business with the public. Before that, she served as chairman of the Commodities Futures Trading Commission and six years as a member of the SEC.

[WhiskeyGirl]

Stanford and his wife Susan also donated $931,100 of their own money, with 78 percent going to Democrats, including $4,600 to President Barack Obama's presidential campaign last May 31. Records show $2,300 of that was returned on the same day.

doesn't it speak for Obama/Democrats that this Stanford crook is now being exposed by de SEC, run by Mary Schapiro an Obama appointee?

Trillions are being sucked into a black hole created by Wall Street, banks, people tricked into mortgages they can't afford, mortgage relief for these same folks...is anyone in the Obama administration looking for that money?

Looking for the crooks that disappeared TRILLIONS? 

[WhiskeyGirl]

let me revise that caesu, I know you can't watch our C-SPAN at least not in realtime. Shapiro was grilled pretty heavily by our congressional committee, I remembered her responses as often wavering and weak.

This was her position previously, therefore had she been doing her job then, the Stanford Bank should not have gone this long or this far into fraud.

Schapiro was previously the head of the Financial Industry Regulatory Authority, the largest non-governmental regulator for securities firms doing business with the public. Before that, she served as chairman of the Commodities Futures Trading Commission and six years as a member of the SEC.

Fences make good neighbors.  When is our new administration going to do some fence building and protect the economy of our nation from those global carpetbaggers?

...build a strong nation that can withstand the economic colds and flu which may affect other nations, and keep our nation from affecting others.  A nation which can withstand the next global Typhoid Mary...

Free trade and all the international financial hocus pocus has left us trillions in debt, a new tsunami of debt on the way thanks to reforms that failed due to Congress in 2004-2008.  Any reform in sight?  Just more trillions down the sucking hole...

I remember a time when a VA loan could be assumed from the original borrower to a new owner, without government approval.  This provision worked for many years.  When someone decided that to many of these passed loans were failing.  New VA loans at some point no longer had that provision.

If the VA/Congress (don't remember who exactly) can make that change, why did Fannie/Freddie fail?  Were some in Congress somehow blind to all the failing loans?  Red flags were everywhere.

Is justice going after all those lawyers and mortgage brokers/companies that tricked those people into loans?

[nonesuche]

HLN was running video last night of Nancy Pelosi physically embracing Stanford at the Democratic National Convention last year. He supposedly contributed 200K to democrats then running for their seats, as well as 23K to the Obama campaign.

CNN the most liberal of our networks is also openly discussing it. Pelosi is the disease at the heart of much of this and I think she's underestimated the disdain of many for her.

She may well prove to be the weakest link before all is said and done. If they can establish or prove any communication from her or her office to Burris, I would say she might get far more than she's bargained for. I hope so. I think she's a cancer on our nation's presidency.

[crazybabyborg]

HLN was running video last night of Nancy Pelosi physically embracing Stanford at the Democratic National Convention last year. He supposedly contributed 200K to democrats then running for their seats, as well as 23K to the Obama campaign.

CNN the most liberal of our networks is also openly discussing it. Pelosi is the disease at the heart of much of this and I think she's underestimated the disdain of many for her.

She may well prove to be the weakest link before all is said and done. If they can establish or prove any communication from her or her office to Burris, I would say she might get far more than she's bargained for. I hope so. I think she's a cancer on our nation's presidency.

Oh, I don't dare to even hope. That would be too good to be true!!!