U.S. Banks Doomed to Fail
Within days after the legalized accounting fantasy masquerading as first quarter earnings for several of America's largest banks and financial institutions were released, the markets began to catch on. After several days of a sucker's rally on Wall Street, the Dow Jones went into retreat as more savvy investors caught on to the charade. That is when Timothy Geithner, U.S. Treasury Secretary, ran to the rescue, ready-made script in hand.
In advance of the so-called "stress test" that is supposed to establish the fiscal health of U.S. banks, Geithner released a sneak preview. "Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators," boasted Obama's Treasury Secretary. With Pavlovian instincts, the market bought Timothy Geithner's fiscal fantasy, at least for a day.
A few weeks before these antics a more sober assessment of America's banking health was delivered at the National Press Club in Washington by Dr. Martin D. Weiss, the head of Weiss Research, a global investment research firm. Previously, Weiss had accurately forecast the demise of Bear Stearns and the implosion of the U.S. investment-banking sector. However, at the National Press Club he offered a more chilling prediction: 1,568 U.S. banks and thrifts risk failure. Included in that number are several of the largest American banks, including J.P. Morgan Chase, Goldman Sachs, Citigroup, Wells Fargo, Sun Trust Bank and HSBC Bank USA. The numbers and depth of the banking problem highlighted by Dr. Weiss are far larger and much more ominous than has been portrayed by the Federal Reserve, Treasury Department and FDIC. He backed up his dire analysis with documentation and precise mathematical modeling. For example, he refers to the government's justification for a hideously expensive taxpayer bailout of AIG, based on the firm's exposure to the fragile investment vehicles known as Credit Default Swaps, or CDS. The policymakers maintain that AIG's $2 trillion in CDS exposure represented an unacceptable systemic risk, meaning AIG was "too big to fail." However, Weiss points out that Citigroup alone holds a portfolio of $2.9 trillion in Credit Default Swaps, while J.P. Morgan Chase possesses a staggering $9.2 trillion of these toxic instruments, about five times the exposure that led AIG to demand that the government rescue it, or see the global financial system implode.
The essential point Dr. Weiss made at his press conference is that the degree of exposure U.S. banks have to a variety of toxic assets is beyond what the U.S. government and, by extension, the American taxpayer is financially capable of rescuing. Continued bailouts of insolvent banking institutions will not repair a broken financial order, but may very well cripple the overall economy.
Earlier, NYU economics professor Nouriel Roubini had already gone on record as declaring that much of the U.S. banking sector was functionally insolvent, and that bailing out zombie financial institutions would only replicate the Japanese "lost decade" of the 1990s, when Tokyo's preference for keeping alive insolvent banks instead of closing them down led to a prolonged L-shaped recession. Roubini and other critics of both Bush and Obama administration policies on bank bailouts have looked to the Swedish model for resolving a profound banking crisis, which involved temporary short-term nationalization, closing down insolvent banks, while those banks that can be salvaged are cleaned up of their toxic assets, recapitalized and then sold back to the private sector. "You have to take them over and you have to split them up into three or four national banks, rather than having a humongous monster that is too big to fail," Nouriel Roubini has argued.
According to the International Monetary Fund, the global financial and economic crisis has already created more than $4 trillion in credit losses due to toxic assets. If nothing else, the IMF estimate on the scale of the economic and financial disaster thus far should compel the Washington political establishment to face the painful yet necessary truths regarding America's precarious situation. However, it appears that fantasy is preferred over reality within the corridors of power.
The procrastination of policymakers in Washington in facing dark reality, and preference to avoid any public takeover of troubled banking institutions while simultaneously subsidizing these financial dead men walking with almost unlimited taxpayer funds, at the same time maintaining the fiction, as Timothy Geithner has just done, that all is basically fine with the "vast majority" of U.S. banks, is to insure the inevitability of a systemic banking collapse in the United States. The conglomeration of reckless, greed-induced banking practices by the oligarchs of finance and inept, reality-denying policymakers is sending much of the American banking sector on a Wagnerian death ride into a financial apocalypse. Many of the U.S. banks are in fact doomed to fail, and no contrived stress test or Geithner speech can alter that outcome. And that isn't even the worst part. For when mass banking failures occur in the United States and overseas, a global economic depression will be an irreversible outcome.
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Take over these lumbering elephants. Fire the heads of these companies whom propagated this fiasco. Unbundle these derivitives; take the losses. Create new regional banks out of the "to big to fail" firms. Tax all transactions on wall street. Put back regulations that separate banks from investment entities. Start State banks like the Bank of North Dakota. Join a credit union. Deal with your local banker.
There are many ideas out there. We just have to get rid of this cabla of Goldman Sachs sycophants to implement them. A little backbone from our leaders would help also, instead of worrying about their next re-election.
The threat to investors continues. These rosy projections mask the reality. As more people pile inot the stock market, a new class is ready to be stung.
These financial institutions should have been delisted until, such time as they had their house in order. Changing tax rules to hide the Scam they perpetuated will cause more damage down the line.
You might find this amusing:
http://business.theglobeandmail.com/servlet/story/RTGAM.20090423.wreconomy0423/BNStory/Business/home
In contrast to that read Geithner's opinion piece in todays FT:
http://www.ft.com/cms/s/0/eefbab8e-3039-11de-88e3-00144feabdc0.html
Read it several times and see if you get anything of value in this piece. It is as garbled as his plan. He talks and talks and says nothing.
At the root of our economic troubles are structural trade imbalances and we've done absolutely nothing on that front. Let's suppose we jump start the financial system with this ill conceived banksters' plan. What happens next? We just cannot go back to the pre-crisis position and start this madness once again or we risk the final meltdown of our economy.
We have forgotten a very simple fact. The health and scope of a financial system is largely a reflection of the underlying real economy. Wall Street was wrong before, is wrong now and will be wrong in the future. Wall Street banksters and their manipulation of our own government is the biggest drag on our real economy. If we do not cut their power, and pare down their corporations to more reasonable scale and fashion our financial system to serve our real economy, it will take us decades to recover.
The most important fact to remember is that our problem is much larger than the banking crisis but if do not properly solve the problem created by banksters we will never address this larger problem. Our government's current actions almost assures a systemic failure.
It does not matter to some degfree if you hold 50 trillion in CDSs, anymore than if that much is bet on the super bowl...
Provided you have a good bookie, who takes/holds bets both ways (hedging)... to reduce exposure. Obviously however the more you hold, any mistake is more magnified... but then that moeny flows to anothe bank/instituion... just as CDS payments from AIG increased assets elsewhere in the system.
AIG was a bad bookie. However 150 Billion has covered their 2 trillion exposure, some bets they win... some they lose. And as I understand we have about a year more to work through their CDSs... which often have time limits... but again their loss is some one elses gain. The question is .. will we come closing to netting out...
If we dont turn the job situation around and make stuff/reduce imports/stop outsourcing (which takes a long time to do).. it does not matter how you try to solve the banking problem.. nothing will work.
Regards
Nobody knows anything. Kinda like this writer.
Somebody from the "I am freaking out and pissed off category" please explain to me how freaking out about the banking crisis is helpful. Telling me the sky is falling is important to hear because??? I'll miss it when it does? Because it is only through fear that anything gets done? Because its the only language anyone understands anymore? Thousands of banks failed during the great Depression. The result of those years and the war that followed led to a fair amount of useful change. "The only thing we have to fear is fear itself." I still believe that. You just might not be able to buy some dang much worthless crap. Boo hoo.
The whole poorly executed bailout is like the rush to war, the rush to get us into Iraq. The people behind it were Republicans (Paulson, etc). We are being hurried to do it wrong and hand over lots of money fast, with no transparency.
I do not think this is being done for the public interest and I cannot understand why Obama is OK with it. I really fear the consequences of doing it wrong. Its going to be a boondoggle, like the war, with no exit strategy. This could sink the US.
Torture is a serious issue but right now I think it is just a distraction while our pockets are being picked.
Some sound and defensible advice, Thermo. But therein lies the rub: derivatives do allow for the private investment houses and banks to cover their actions with fog. Transparency isn't a goal, and apparently neither is accountability. We aren't going to be allowed to know who picks our pockets.
The simple truth is that our leaders could take steps to free us from the most immediate threat - the unwinding of derivatives. They could do something similar to a moratorium on the "default events" that trigger CDS payouts. It would protect the rest of the economy from at least that one thing. I would like to hear details from experts.
The fact that they are not pursuing a global moratorium on derivatives makes me believe that interested parties ore running the show for their own profit, thru the US Treasury Department.
Are our guys really planning to pay for all that stuff? The amount is too huge. They simply can't pay for it all. And of course we do have plenty of other econ problems, but getting the derivatives out of the way would be a great start.
Thermo,
IMHO you are thinking quite intelligently. No one has proffered up anything to this level of thinking. When I was young I was told to not act in haste on economic concerns, especially under duress. But to take a hiatus to enable clear thinking.
That this is all being done essentially under duress causes me to suspect and to reiterate that truth.
It is amazing that zombie banks and their zombie (read: philosophically rejected) Republican supporters still have so much sway in Congress and the executive. These banks crashed the economic system, the Republicans lost their popular mandate, and yet they still powerfully sway national legislation in dealing with the mess. Let's use the ballot in 2010 to make more changes until we can get a sensible majority in Congress.
If you think this is because banks and the republicans are zombies, you are the zombie. Both of those entities knew precisely what they were doing and even plotted to do it. You are the victim of the most criminal cabal ever to control the fate of not just the U.S. but the entire world. The twittering you hear from the IMF is just smoke. The world bank is part of the collusion. If their shock treatment succeeds here, and it looks like it will given Pres.Obama's lack economic knowledge, then the whole house of cards falls. Then the banks own the world and the 6billion+slaves that inhabit it.
Thank decades of rule by Wall St.
A two months ago I had hope that maybe Obama would read some of the critics of Geithner and Summers and apply what he learned to solving the economic crisis, but it doesn't look like he is or that he is interested to applying that knowledge. Now I have to look beyond what he might know and wonder WHY he is not listening or applying. No, I don't think Bush and Cheney would have done anything either but that is almost a given since neither man is concerned at the total condition of the US of A. Bank failures are not the only danger to our nation. Having an insolvent financial system brings our economy to a complete standstill. Still, the ultra-rich will have their tax havens and at least one of their three or four homes to go to, but it is you and I, taxpayers....and commentators on HuffPo who will find ourselves lacking jobs, income from 401-Ks, SS benefits, unemployment benefits......and will not really be able to survive. Maybe some of you who post here can give me a reason or two as to why Obama isn't listening. Many of you have a lot more faith in him than I ever had..... So many dreams are going to go down the tubes.
There you go fellow traveler. Just about everything you mentioned is the reason. If the economy is destroyed to the point of huge losses in personal 401's, SS being rendered bankrupt (which it isn't, yet) and the unemployment rate so high the governments, Fed and State, no longer have the tax income to fund, then we are in a world of hurt. The fact that at least 35 states have huge, abnormal deficits tells you how much damage Bush and his cohorts did by destroying the Federal government with so-called privatization. That is shuffling money to corporations rather than back to the states as was usually done, with no increase in efficiency as claimed but alot more insanely expensive.
If banks fail, it will alter the dynamics of campaign fund-raising, won't it? And that can't be all bad...
In the past week, I've seen FAR fewer posts supporting administration's approach to the banks. If there's any good news, this is it. The public is becoming aware.
Have you wondered why Obama hasn't become more aware? I sure have.
Remove Summers.........Replace him with Nouriel Roubini........he may be Dr. Doom.....but atleast he is not in the pocket of Wall Street & makes his predictions based on facts.......his solution is to nationalize the banks.........Obama is too afraid to nationalize banks because socialist rants will become vigorous from the right wingers if he does that......Obama has to change that attitude & do what Roubini suggests.
Our greatest threat will not be how to keep the banks from going under, but rather, how to keep our government from going under in the process of repairing the banking system. Since history and economic trends tend to be repeatable or cyclable, when deflation finally hits us from all this printing of money, rising national and personal debt, and inflation, there is going to be concern about the stability of our government.
There are already growing signs of similarities to the causes of the French Revolution that we need to be concerned about. For example, there is growing social and political factors on the Internet, many of which involve resentments and aspirations. Just listen to all the hostilities in the comments to this article and others. Thus today's wealthy and politically influential (bourgeoisie) merchant class and banking interests project a similar image to that of the aristocratic ruling class of the French 1790's. What the banking interests are slowly coming to understand is that history tends to repeat itself and they, like the aristocratic ruling class, have become the burnt of growing resentment.
Check out:
http://pragmaticstatistic.blogspot.com/2009/03/today-has-too-many-similarities-to.html.
So when is Homeland Security going to realize that our greatest threat is not from the Middle East but rather from within Wall Street and Capital Hill.
Checkout:
http://pragmaticstatistic.blogspot.com/2009/04/goldman-sachs-has-too-much-influence-in.html
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