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Is the Treasury Planning on a Near Term Recovery in Bank Stocks?

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Reader M&M called my attention to a Bloomberg story I was really hoping to avoid, “U.S. Sets a Six-Month Deadline for New Bank Capital“. The opening:

The government set a six-month deadline for the biggest 19 U.S. banks to raise any new capital deemed necessary after a mandatory review of their balance sheets.

The regulators will oversee the so-called stress tests by the end of April, which will identify how much extra cushion each bank will need, the Treasury said today in Washington. Lenders will have six months to raise private capital or accept government funds and the conditions that come with it.

“While the vast majority of U.S. banking organizations have capital in excess of the amounts required to be considered well capitalized, the uncertain economic environment has eroded confidence in the amount and quality of capital held by some,” the Treasury said, announcing guidelines for new bank reviews.

Let’s work through this starting with the last paragraph. The new Administration has been in office only a bit more than a month, and the double-speak has already started to wear thin. If anyone really believed these banks’ capital was adequate, would we have this never-ending parade of special facilities, rate cuts to near zero levels, and programs to rescue stressed borrowers? All the interventions say loud and clear that most if not all of the big banks are in parlous shape, but the Administration keeps repeating the canard that the banks have more capital than needed “to be considered well capitalized.” Well, either the standards for capital adequacy are rubbish or all the weekend specials and Congressional high stakes poker have been a complete waste of taxpayer money. You can’t have it both ways, and you reduce your credibility by peddling this sort of thing. And this isn’t just my reaction; readers who have seen this sort of formulation (it has shown up before) find it either comic or pathetic.

Let us return to the first part, which is even more remarkable. The government is giving banks six months to raise more equity if they are deemed to need it, and if not, they will have to take government funding on whatever terms are on offer.

Anyone with a passing familiarity with the banks suspected of being in most urgent need of new funding, Citigroup and Bank of America, knows that their stock prices have fallen to levels that suggest serious doubts about their survival. Meredith Whitney, the bank stock analyst whose forecasts have been most accurate, said her best idea was to short Ciitgroup, last week, even at super depressed levels.

So my assumption in reading this post was that this was the Team Obama approach to nationalization, or whatever term they use to try to rebrand the process. Show you’ve bent over backwards by given banks every chance to dig their way out of their mess (six month is long enough that they could try a restructuring or breakup, as well as conventional fundraising) and then do what needs to be done.

But my assumptions may be uncharacteristically optimistic. Tom Ferguson (via e-mail) has another take:

The stress test “worst” scenario is pretty silly and optimistic; 3.3 % decline this year, small rise next year. So not too much stress. That sets the parameters of necessary capital. If you believe Bernanke, most pass. They just won’t lend.

While I agree that the stress test scenarios are not dire enough (and others, see here and here share that view). Even the anodyne New York Times casts doubts:

But analysts say the administration’s worst projections, which it describes as unlikely, are not much more dire than what many private forecasters already expect.

According to the new Treasury Department guidelines, the banks would have to assume that the economy contracts by 3.3 percent this year and remains almost flat in 2010. They would also have to assume that housing prices fall another 22 percent this year and that unemployment would shoot to 8.9 percent this year and hit 10.3 percent in 2010.

“I don’t think they are harsh enough,” said David Hendler, an analyst at CreditSights, who said the dire projection was itself too optimistic about the growth that would be generated from President Obama’s stimulus program. “That would be a pleasant outcome, but you have to plan for the worst.”

However, there has also been language in some of the pronouncements on the stress tests that it would call for capital above normal levels. That may simply be to finesse the difference with regulatory requirements, but the wording was sufficiently imprecise as to give the impression the new buffer might be temporary (forgive me for failing to find it, but I have to be on an early flight tomorrow, and was unable to locate it in the five minutes I could spare). Thus even with the less than dreadful worse case, banks could still be required to stump up more equity.

But the scary view comes from Ed Harrison:

Obviously, Geithner, Bernanke, et al. believe ‘irrational despondence’ is the source of what ails us and that propping up asset prices will be the cure.

Witness remarks made by Ben Bernanke just recently before Congress:

Federal Reserve Chairman Ben Bernanke said Wednesday recent sharp declines in stock prices mostly reflected investor attitudes about risk and had become detached from real U.S. economic fundamentals.

The risk appetite of investors changes over time and right now the standard measures of the risk premium that investors are charging to hold stocks are at very high levels relative to anything we have seen in recent decades,” Mr. Bernanke said in semi-annual testimony to Congress.

The stock values reflect not so much the fundamentals, the long-term profitability of the economy, but they also reflect investor attitudes about risk and uncertainty which right now are at very high levels,” he told lawmakers during questions.

U.S. stocks have fallen to 12-year lows this month, with the benchmark S&P 500 down about 15% and the Dow Jones industrial average off about 16% since the start of 2009.

This goes to the mindset here. What Ben Bernanke does not say but clearly suggests is that asset prices are being depressed artificially by ‘irrational despondence.’ Stepping in to offer a bid to these assets will lift them — at which point the despondence will go away and all will be fine with the world.

This view is misguided because many asset prices are still above their long-term trend. This is certainly the case with house prices, where renting is still significantly cheaper than purchasing in many locales.

Yves again. Looking at “recent” norms with stock prices is also misleading. Martin Wolf, who had no axe to grind, pointed out that equities were overvalued in March 2007. Indeed, a significant deviation from long-term trends started in late 1996 (remember Greenspan’s “irrational exuberance” remark?) and the excess of that decade was enough to shift long term averages. When I was a young person on Wall Street, market PEs of 16 were peak multiples. They came to be seen as normal.

What is amazing is the degree to which Bernanke has been unable to process what has happened over the last year and a half. It isn’t simply that he is trying to restore status quo ante; he seems to see the only possible operative paradigm as the status quo ante. Worse, he has a romanticized view of it too.

We had a massive stock market bubble, followed by an even bigger asset orgy, with housing at the epicenter, but plenty of other types got dragged along with it. Having asset appreciation fueled by debt is NOT how a healthy economy operates. It is going to take some time for the excesses to work themselves through. Carmine Reinhart and Kenneth Rogoff’s study of major postwar financial crises have found stock prices take 3 1/2 years to bottom.

But Ben believes the trend from here has to be up, and seems unable to consider that rather than the risk appetite being irrationally low now, it may have been irrationally complacent earlier.

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47 comments

  1. Mikkel

    I thought the same about the unemployment rates until I saw the footnote that it said “annual average” and then did a calculation to see how quickly unemployment would have to rise in order to break 8.9% average. I think it’s realistic. I also think the housing price drops sound realistic and the GDP of -3.3% sounds pretty right with all the government injection into the economy (I have no opinion about next year’s GDP).

    But my skepticism comes not from their scenarios but the dynamics of the stress test itself. I seriously doubt that a -3.3% GDP drop from Fed tightening has anywhere close to the same impact on asset prices and default rates as a -3.3% GDP drop in a deflationary environment and a large spike from government spending. Same thing with housing prices…another 17% drop is going to start cutting severely into the people that still think of themselves as responsible and have positive equity, what will happen then? I don’t think any of this stuff has enough precedent to model.

  2. Anonymous

    Since Congress refuses to leash and collar the Fed and Treasury to force them to put the interests of taxpayers above those of bondholders, shareholders, and counterparties, we need to find a way to sue the Fed / Treasury to thrown sand in the gears and slow down this systematic abuse of the taxpayer.

    If the Fed/Treasury overpay in buying assets from or investments in the big 6 banks and GS and MS, we can try to have small banks sue, maybe under the administrative procedure act for abuse of discretion in favoring the big banks, and maybe under the APA for putting these programs in place without a notice and comment period so they can object, and maybe under the small business act for the Fed/Treasury not doing analysis of the impact their programs have on small businesses, and maybe on some set of laws designed to protect minority owned businesses (banks here) against big business.

    If Treasury/Fed let banks pay bonuses, maybe we can have bondholders sue for fraudulent conveyance. Hell we can buy bonds just to have a right to sue.

    If the Fed/Treasury do start complying with the APA and having a notice/comment period for the public to comment on their proposed programs and hearings, we can organize protests.

    I think it is key to find Congress people who favor small businesses over big businesses, someone who has helped community bankers associations in various states that have them, like Georgia, Illinois, Arkansas, etc.

    We need to find ways to take action. Lawsuits can slow the corrupt Fed and Treasury down, so they can’t steal money as quickly from the taxpayer to bail out rich bondholders of banks, like PIMCO, and rich counterparties of AIG/C, like GS.

  3. Anonymous

    “But Ben believes the trend from here has to be up, and seems unable to consider that rather than the risk appetite being irrationally low now, it may have been irrationally complacent earlier.”

    The only way for Ben to revive the insane optimism that supported the bubble would be for him to legalize cocaine and force feed it to people. Or wait 10 or 15 years, until people forget the idiocy of their ways.

  4. DanyBoy

    Yves:
    Agree on Bernanke’s vapid, condescending Congressional testimony. Get the feeling he’s not paid for insight or anticipation. Just America’s economic fire commissioner.

    The hidden hand of China:

    No coincidence that the Administration announces new austerity measures (halving the Federal deficit in 4 years) on the very day that the Secretary of State visits China (last week). Message: They don’t want the Fed to jeopardize the value of their holdings (via inflation). They want to take it out of our hides (via increased taxes (already announced) and fiscal austerity ).

    Bye bye recovery, hello lost decade

    The theatrical Bank Rescap Show (complete with flags and bunting) is also an integral part of the administration’s response to the “Clean Up Your Act, America” message received from the East. One can picture a new President being arm-twisted by threats made on US debt and which could include demanding higher yield or diminished volume, both crippling to the Administration’s agenda. Promises of big trading dollars from the shop-till-you-drop nation only elicit serpentine grins at this point with the docks at Shenzne and Singapore at near standstill.

  5. Jim in MN

    So the next wave of bankruptcies, including both corporate and governmental entities, some quite large, has somehow been factored into the Nu-Masters thinking?

    It’s just mind boggling. If nothing else bad happens, maybe (maybe) the bleeding just sort of trails off, and the patient, you know, kind of moans and doesn’t immediately die, and perhaps even manages to crawl some way on their own.

    OK, fixed! Yay! Stop that rubbernecking now, folks.

    Uh, sorry, but this is actually a very crowded freeway and many more large objects are going to hit these banks.

  6. CDR

    Does anyone have any insight into how likely it is that the govt will end up removing mark to market accounting?

  7. Sion

    I’m still new to the ropes of finance and economic commentary by the powers that be but it seems to me that they have chosen a lull in the flow of earnings reports etc to try to paint a pretty picture in the hope that people will be fooled into buy stocks and shares and houses etc.

    Surly they realize that with the securitization model of business basically dead, banks not able to lend, no one is buying their toxic securities, house prices are going to fall further, the building industry is going to contract further, more people are going to lose their jobs.

    Enough already! This is old news get with the picture is what I say.

    Johnny Mack knows all this. He along with the rest of the Banksters just don’t want to admit the Golder Goose is dead.

  8. Anonymous

    “Federal Reserve Chairman Ben Bernanke said Wednesday recent sharp declines in stock prices mostly reflected investor attitudes about risk and had become detached from real U.S. economic fundamentals……”

    How is it that Bernanke can see “irrational despondency” but he claims not to be able to recognize bubbles?

    I saw no sign of him saying anything like this….

    Federal Reserve Chairman Ben Bernanke said Wednesday recent sharp RALLIES in stock prices mostly reflected investor attitudes about risk and had become detached from real U.S. economic fundamentals.

    The risk appetite of investors changes over time and right now the standard measures of the risk premium that investors are charging to hold stocks are at very LOW levels relative to anything we have seen in recent decades,” Mr. Bernanke said in semi-annual testimony to Congress.

    The stock values reflect not so much the fundamentals, the long-term profitability of the economy, but they also reflect investor attitudes about risk and uncertainty which right now are at very LOW levels,” he told lawmakers during questions.

    …on the way up.

  9. alex black

    To Anonymous at 11:39

    Re: force-feeding people cocaine to move the stock market up. I could totally see someone suggesting that as a joke at meeting of O, Bernanke, Geithner, et al, and eveyone laughing for a few seconds, and then they all stop laughing at the same time and look at each other very seriously for several minutes….

  10. Steve

    Citi can’t pay dividends and shareholders will be diluted by the government stake. Further injections and dilution seem not unlikely. Yep, a rally’s comin’! The sort of rally that AIG, FRE, FNM had for a couple of days as not-smart money poured in for a gov’t-guaranteed bargain.

    Bernanke likes to talk about `restarting’ markets. But there’s a big difference between a depressed market and a failed one. Securitization–at least the complex high fee generating stuff that drove bank profits for years–ain’t coming back. Even the simple stuff has pretty much one buyer these days–Bernanke’s Fed. Holding stuff on balance sheet means even more deleveraging and weakened profits at the banks. I don’t think he’s self-delusive, but it must gall him that his critique of the 1930s Fed hasn’t led him to a solution to today’s problems. So he winds up falling back on a variant of Keynes’s `magneto trouble’ metaphor–except Keynes wasn’t talking about the financial markets.

  11. Anonymous

    A digression:
    On TV tonight, I saw a bunch of examples of vicarious revolt.

    On “Criminal Minds,” disgust with the culture of sexual impunity amongst male power players prompts a young lady to become a serial Siren.

    On “Life” and “Law and Order,” the victims were money managers.

    I watch too much TV. And I’m too embarassed to append a name to this “contribution.”

  12. alex black

    Anonymous 1:08

    That’s actually an excellent contribution. Shows a new meme taking hold in the collective psyche.

  13. Tim Geithener's Mom

    Ben Bernanke and Fundamentals Feb 25 2009:

    “Federal Reserve Chairman Ben Bernanke said Wednesday recent sharp declines in stock prices mostly reflected investor attitudes about risk and had become detached from real U.S. economic fundamentals…The stock values reflect not so much the fundamentals…”

    Ben Bernanke and Fundamentals Oct 27 2005:

    “Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst…U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke…But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.”

    http://www.washingtonpost.com/wp-dyn/content/article/2005/10/26/AR2005102602255_pf.html

    Ben B, “fundamentals”? I do not think that word means what you think it means…

  14. Tim Geithener's Mom

    Ben Bernanke and Fundamentals Feb 25 2009:

    “Federal Reserve Chairman Ben Bernanke said Wednesday recent sharp declines in stock prices mostly reflected investor attitudes about risk and had become detached from real U.S. economic fundamentals…The stock values reflect not so much the fundamentals…”

    Ben Bernanke and Fundamentals Oct 27 2005:

    “Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst…U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke…But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.”

    http://www.washingtonpost.com/wp-dyn/content/article/2005/10/26/AR2005102602255_pf.html

    Ben B, “fundamentals”? I do not think that word means what you think it means…

  15. d4winds

    One leaked observation about US military planning during the Bush administration, in paraphrase, went as follows: In previous admins. everyone came prepared to debate at meetings and drank the Kool-aide afterward; in this one, you had to drink it before the meeting.

    Different admin., same mindset, but now w.r.t. the economy.

  16. Swedish Lex

    I have not seen the details of the “new capital in 6 months or your are dead” proposal, but I was (again) utterly confused. Another step in the wrong direction.

    There is no up-side for the Administration in setting a fictonal deadline that the markets, the political opposition, etc. immediately will use as a weapon. Why is the Administration painting itself into a corner?

    Available capital now knows how long they will have to wait to get a better deal. By then, the prey will be dead, the fresh meat that was left will be rotten and prices will thus be at vulture levels.

    Now, THAT, is wealth destruction.

  17. Swedish Lex

    I have not seen the details of the “new capital in 6 months or your are dead” proposal, but I was (again) utterly confused. Another step in the wrong direction.

    There is no up-side for the Administration in setting a fictonal deadline that the markets, the political opposition, etc. immediately will use as a weapon. Why is the Administration painting itself into a corner?

    Available capital now knows how long they will have to wait to get a better deal. By then, the prey will be dead, the fresh meat that was left will be rotten and prices will thus be at vulture levels.

    Now, THAT, is wealth destruction.

  18. Anonymous

    Banks depend on the perception of trust and strength to win probably a majority of their business transactions. If you don’t have great confidence that a bank counterparty would still be there in a year, would you trade a 6-month interest-rate swap with them? If a corporate client were to consider whether to give a major capital market assignment to a bank, wouldn’t the thought that the bank Managing Directors would not be around to support the client’s next revolver or term loan borrowing give pause? These are obvious thoughts.

    So saying the banks will be subject to a stress test to be completed over the next 2-3 months is basically sentencing a financial institution to death. (See what has happened to AIG’s once-formidable insurance operations.) That anyone would put a bank in limbo for such a long period of time while sumultaneously declaring them well-capitalized and promising them new gov’t capital indicates to me that Bernanke and Geithner aren’t acting nefariously – they are simply unaware of what can happen to a bank business model in a few short months. They are sentencing C to death.

    Whitney is right.

    jult52

  19. AC Heart

    On C-Span last night, Republican Leader Mitch Mcconnel gave a great speech. I liked most of his material, but not his comments about banking or free trade.

    It’s too much banking bailout so we should consider this. On the political side we have to keep influencing our Congressmen. The Dems may be useful in this regard (I can’t think of any other way they offer any value, but they do want to improve our infrastructure).

    Will be interesting to see what those who are neither too tich, nor too poor in the rest of the world do. The Republicans should be stabilizing; those inthe middle are their natural constituency. We’ll make sure they are more stabilizing than they even planned to be.

    Biden also spoke, and it was a joke. But what was he supposed to do? Obviously, he’s a man without a clue and he’s trying to deliver the message of a pathetic party. The Dems are flailing in quick-sand. We can give them an issue that will make them more legit— stopping these ridiculous auto bailouts.

  20. Anonymous

    When they announce that the vast majority of U.S. banking organizations have capital in excess of the amounts required I get a bit concerned. It is claimed the average US bank has a Tier 1 ratio of 10.2 per cent. This is much better than banks in Europe apparently yet people forget that tier 1 rules are different in different countries. For instance goodwill and deferred tax assets can be counted as tier 1 capital in the US ,hybrid securities that are closer to debt than equity can be used to count towards a firm’s Tier 1 capital, losses on certain assets like mortgage-backed securities that are deemed to be temporary are not accounted for, IFRS contrary to US GAAP, is quite restrictive as to the extent to which derivative assets and liabilities positions can be netted out on the balance sheet.
    This is why investors are ignoring Tier 1 claims by the banks when assessing the financial stability of banks. TCE levels shrank from 3.5 per cent to 2.1 per cent during last year with Citigroup’s TCE falling to around 1.5 per cent by the end of last year. Investors are not that impressed and probably rightly so.

    Still everything rallies after Obama’s speech about how we need to get credit moving. The assumption being that banks are lending a lot less, and people and companies need to borrow. Apparently the ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll. This plainly is not true for many countries around the world and describes a specific economic weakness in the US which the authorities seem reluctant to address.

    Regardless of whether we think the stress tests are hard enough or the accounts are fudged, 6 months seems like a very long time for banks. Personally I think they have underestimated the potential further decline coming from outside and are acting too slowly. Like Yves I cannot help wondering whether we are closer to the norm now than we have been in the last twenty years in which case politicians and the FED seem unable to shed off the idea that pre credit crunch was normal.

  21. robert

    @ swedish lex

    just a quick correction- it is not “6 months to raise private capital or you’re dead” it is the incredible “6 months to raise private capital but if you can’t the USG will inject capital.” WOW- seems like a win win for the banks and lose lose for the taxpayers because the banks aren’t going to find any private capital.

  22. Anonymous

    Remeber that old saying…it is the man who pretends to sleep that is the hardest to wake.

    Bernanke willfully refuses to acknowledge what so many see;he will do/say anything to prop the zombie banks. That was, is and will always be his mission. US taxpaper be damned.

  23. sailorman

    Did anybody notice that the “stress test” will be conducted by the banks themselves using the macroeconomic data given by the government? (Read FAQ section of press release, http://www.federalreserve.gov/newsevents/press/bcreg/20090225a.htm) The regulators will only review the results and decide the amount of capital required.

    Am I missing something? As far as I can tell this is just another kabuki dance to head fake the media/public which they have dutifully taken. Can anybody trust the banks to produce useful stress test on themselves?

    Yves previous comments regarding the woeful lack of human capital to do the job right anyway fit this conclusion nicely.

  24. Anonymous

    People should write the house and senate committees on small businesses, and say that the bailout of the big 6 banks is hurting small banks accross the country. The committee members on the small business committees probably haven’t taken a lot of campaign contributions from the big banks, so they can probably safely oppose them. Also, write to state community bank organizations.

    There are the house Reps on the small business committe:

    Democratic Members

    Chairwoman Nydia Velázquez of New York
    Congressman Dennis Moore of Kansas
    Congressman Heath Shuler of North Carolina
    Congresswoman Kathy Dahlkemper of Pennsylvania
    Congressman Kurt Schrader of Oregon
    Congresswoman Ann Kirkpatrick of Arizona
    Congressman Glenn Nye of Virginia
    Congressman Mike Michaud of Maine
    Congresswoman Melissa Bean of Illinois
    Congressman Daniel Lipinski of Illinois
    Congressman Jason Altmire of Pennsylvania
    Congresswoman Yvette Clarke of New York
    Congressman Brad Ellsworth of Indiana
    Congressman Joe Sestak of Pennsylvania
    Congressman Bobby Bright of Alabama
    Congressman Parker Griffith of Alabama
    Congresswoman Deborah Halvorson of Illinois

    Republican Members

    Ranking Member Sam Graves of Missouri
    Congressman Roscoe Bartlett of Maryland
    Congressman Todd Akin of Missouri
    Congressman Steve King of Iowa
    Congressman Lynn Westmoreland of Georgia
    Congressman Louie Gohmert of Texas
    Congresswoman Mary Fallin of Oklahoma
    Congressman Vern Buchanan of Florida
    Congressman Blaine Luetkemeyer of Missouri
    Congressman Aaron Schock of Illinois
    Congressman Glenn Thompson of Pennsylvania
    Congressman Mike Coffman of Colorado

    These are the Senators on the small business committee:

    Democrats (11)
    Republicans (8)

    Chair – Mary L. Landrieu (LA)

    John F. Kerry (MA)
    Carl Levin (MI)
    Tom Harkin (IA)
    Joseph I. Lieberman (CT)
    Maria Cantwell (WA)
    Evan Bayh (IN)
    Mark L. Pryor (AR)
    Benjamin L. Cardin (MD)
    Jeanne Shaheen (NH)
    Kay Hagan (NC)

    Ranking Member – Olympia J. Snowe (ME)

    Christopher S. Bond (MO)
    David Vitter (LA)
    John Thune (SD)
    Michael B. Enzi (WY)
    Johnny Isakson (GA)
    Roger Wicker (MS)

  25. john

    A few thoughts: Stress tests have been done repeatedly throughout 2007-2008 by banks and economists. There stress test models consistently undershoot. All stress-test models failed to hold up in this environment. It is a function of the inputs, you put optimistic garbabe in, you get garbage out.

    Economists and the financial community has an optimistic bias to all their modeling, so we are being screwed with this new non-sense about stress-testing banks. Noise like this is more screeching of the blackboard by the powers that be to market observers such as ourselves.

    Secondly, now that we are talking about irrational despondence creatively destroying irrational exuberance, it should be noted that the SP500 has yet to close the Dec 17 1996 Irrational Exuberance gap at 726. That is still 13 points or roughly 2% below the 2008-2009 lows.
    Irrational Exuberance continued for another 11 years, anyone want to bet the worst is over in less than a year and a half? Anyone want to bet irrational despondence will not overshoot on the downside?

  26. David

    Yves,
    The government has an interest in keeping these banks alive. BAC in particular will survive. Even if they will lose all of their capital over the next three years, they will make it back over the next 5. Bernanke said explicitly, “The Fed is going to stand firmly behind these banks”. Betting against them is foolish.

    Nationalization scenarios don’t really make sense. They are too big and too important. What would you do if you went to sell them back on the market and the only buyers that showed up were China and Saudi Arabia? Are you really going to hand over the US’s most important banks and primary Treasury dealers to a foreign country? No way. You can’t ignore the political implication of letting the free market solve the problem.

  27. Anonymous

    The government is giving banks six months to raise more equity if they are deemed to need it, and if not, they will have to take government funding on whatever terms are on offer.

    That’s a good one! Let’s see… the terms might look like this: “here’s another 750 billion at zero percent interest that you don’t really have to ever pay back. And, don’t forget to get back in line for more in 6 months or so… because we really can’t do without Citibank and BoA around.”

    Yeah, that’s harsh…LOL

    Vinny

  28. john

    Yves, you made comments in your william black article on Feb 17 that the whole purpose of stress-testing is to contemplate worst case scenarios and adjust risk to be able to absorb these outlier events. However that is not what is being done with this “Alt-more-adverse” scenario planning. And when it comes to “stress-testing” we must recognize that “alternative more adverse” is not equivalent for stress-testing for “worst-case scenarios.” Again, we are being screwed by the powers that be in this latest maneuvering to show the American public something productive is being done, when in fact, nothing is.

  29. Russ

    Well, either the standards for capital adequacy are rubbish or all the weekend specials and Congressional high stakes poker have been a complete waste of taxpayer money.

    No reason it can’t be both!

  30. Anonymous

    The market thinks the standards are rubbish, hence the stocks getting hammered. The government wastes money by giving it to the poor, misunderstood banks.

    The biggest mistake the government makes is the multiple injections. The first injection might fool enough investors to prop the price up a bit, subsequent injections only indicate how grave the situation really is.

  31. Anonymous

    The end game here is the vaults of the US treasury have been flung open and the bankrupting the citizens of this country for the benefit of our DC prostitutes and an elite oligarchy.

  32. doc holiday voodoo dolls

    Mark my words in stone, gold and pixels that the uptrend which Bernanke is alluding to and apparently betting on, is the same powerful trend that took Cisco out of the dotcom bubble, after it plunged from $77.31 in April 2000 towards an apparent bottom in October 2001 when the share price mellowed to $12.18. It has been a long journey upward, but after almost 8 years, Cisco is now a deal around $15.00. Bernanke is right to see that stocks and profits will trend up.

    However, as Bernanke will recall with his amazing background in Bullshit Economics:
    What cost $1.00 in 2000 would cost $1.19 in 2007.
    Also, if you were to buy exactly the same products in 2007 and 2000,
    they would cost you $1.00 and $0.83 respectively.

    As for 2008: The annual rate of U.S. inflation plunged to 0.1% in 2008, with consumer prices driven down by falling energy prices. The cost of living dropped for Americans as prices dipped for the third straight month, and showed the slowest 12-month gain since 1954, the Labor Department reported Friday.

    > Maybe there is a trend there and maybe Ben will do all within his ability to abuse power to help increase inflation, so that a loaf of bread will hit $8.00 or WTF, maybe we should just swap bank shares for bread and get on with valuation reality!

    This space intentionally left blank for cursing and swearing and shit like that: _____________________________________________________________________________ I mean the real stuff!, not just the blogger rants and ….never mind.

  33. Anonymous

    Shows a new meme taking hold in the collective psyche.

    More likely it simply shows either limited time to write decent stories or simple laziness. Could also be a network mandate to be “ripped from the headlines”.

  34. Anonymous

    Are you really going to hand over the US’s most important banks and primary Treasury dealers to a foreign country? No way.

    This is the exact same meme floated years ago when banks begged/lobbied regulators for increased leverage –
    “You don’t want us to be dwarfed by foreign banks, do you?”

  35. Anonymous

    Question: What happens to short positions if and when a bank is nationalized and shareholders are ‘wiped out’?

  36. Anonymous

    “Are you really going to hand over the US’s most important banks and primary Treasury dealers to a foreign country? No way.”

    We can authorize community banks to do everything the big banks do, like being primary dealers. And make it illegal for foreign banks to operate inside the US, except through US subsidiaries no bigger than the community banks.

    There is no reason we can’t haircut rich bondholders and swap counterparties of the big 6 banks and GS and MS. None. Every argument against it is a smokescreen to force the taxpayer to eat those losses. guess what Bill Gross and his peers chose to buy debt not backed by the US government. They don’t get a guarantee. Shaft them.

  37. Anonymous

    I don’t understand the hand-wringing over the specs of the worst case scenario. Most of these banks are insolvent now. I mean NOW. It’s just under fictive accounting that they are “solvent.” I had this argument over WaMu for a year. It was not deterioration that killed WaMu. WaMu was the walking dead for a year before the FDIC came in and wiped out shareholders and bondholders. Please, someone has to say it like it is. Yes, it’s going to get much worse, but no, it will make no difference to a bank like Citi. Bondholders have to wiped out, right now.

  38. Eric L. Prentis

    US bank “stress tests” being preformed by Geithner/Bernanke are a shame/political cover and cannot possibly tell whether banks are able to cope with a more severe economic downturn. Prof. William K. Black reports: http://www.huffingtonpost.com/william-k-black/the-two-documents-everyon_b_169813.html that the FBI, in 2004, uncovered epidemic mortgage “control fraud,” initiated 80 percent of the time by the lenders. The securitization of nonprime loans on the books of large banks coupled with not having the mortgage paperwork necessary to determine whether their nonprime loans are fraudulent will lead to an exercise in futility. Could the real reason that the government is performing bogus stress tests is so, wonder of wonder, they will turn out positive and the Fed/Treasury can justify more taxpayer money for their loser, insolvent, crony Wall Street banks.

  39. fledermaus

    “What is amazing is the degree to which Bernanke has been unable to process what has happened over the last year and a half. It isn’t simply that he is trying to restore status quo ante; he seems to see the only possible operative paradigm as the status quo ante. Worse, he has a romanticized view of it too.”

    One of the Nasty things about being in an exaulted/powerful position is the ability to avoid confronting harsh realities. He likely believes the above simply because at this point there is no personal consequence for him to believe it, and it no doubt comforts him to think that there is all a matter of “restoring confidence” or “showing leadership” the last 8 years have seen this in every area of Washington, DC.

    They operate under the illusion that because they are so powerful and important everyone will believe them over their lying eyes. And this belief is bolstered by our gullible and fawning press corps, who the elite mistakenly believe represent the views of everyone else.

  40. ben

    The end game here is the vaults of the US treasury have been flung open and the bankrupting the citizens of this country for the benefit of our DC prostitutes and an elite oligarchy.

    if you are unhappy with the government bailing out some of the big banks then try and convince people to take their deposits to other banks. i think there was a run on a bank like the citi the government would be forced to liquidate them.

  41. Juan

    Mikkel,

    Sufficient precedent that Marx could deal with it ~150 years ago. Patrick Bond did a nice job of summarizing in 2003…you may [or not] find it of interest, especially if more weight is given the hypertrophy of credit and ‘the control function’ exercised by financial capital:

    What Is a Crisis of Overproduction?

  42. Jim T

    I think Ben knows he has already lost the "WAR" and is just talking out of his arse to be up beat.

    Like Obama was told by Bill Clinton to lighten up on all of the Crisis Talk because "The People Know" there is a Crisis, they live in it every day! So stop reminding them and talk it up on how you're going to save the day!

    And Bill was right, did you see the poll numbers after Obama's speech? I think it was 82% of the idiots bought it hook, line & sinker! Obama is going to save the day, spending us into oblivion!

    Folks the "WAR" is over, look around it's just a matter of another month or so before the shit really hits the fan and everything collapses! Not really sure what the Final Straw will be (Europe's banking system, GM, Citi, B of A, AIG, GE, not sure what) but something will fall over and the dominos will make their final run of the table!

    To tyell you the truth, I can't wait for it to happen. Not because I want to see anyone hurt or made to suffer. It's because I truly believe the WAR is over and everything they are doing will not stop the End from coming. So I'm tired of waiting, I want us to hit bottom so we know what bottom really is and then "AND ONLY THEN" can we really start to rebuild.

  43. Doug

    Eric, thanks for the great article from William Black. The stress tests on these assets won’t be able to measure the “principal credit risk of nonprime mortgage lending” — fraud. That’s why the stress tests aren’t going to work.

    The whole issue of fraud as a (the?) major factor in these troubled assets still hasn’t gained any traction with the media. Why should the taxpayers pay for fraudulent assets through the TARP or any other mechanism?

  44. kparcell

    The key fact that’s escaping you all is that the current median home price of $170-180,000 is healthy by historic and median income measures. 55% of purchases last year were at market price, not distressed, so clearly the prices are no longer too high, and downward pressure comes from inventory glut – 3.7 million homes, which is 2 million more than a healthy 3-4 month supply. To stop mortgage default and foreclosure, reduce housing inventory: buy the excess. The price tag would be $340 billion at current median price, which is up there, for sure, but the risk of losing some of that should prices continue to tumble a little more before a turnaround is dwarfed by the risk of another Great Depression if foreclosures aren’t stopped.

    Kevin Parcell
    http://twomillionhomes.net

  45. mike kleiner

    As I understand it, Bank of America is a remnant of our former, truly, national bank. Why not go there again? Instead of continuing to dump money into these failed ventures, why not have our government charter a new national bank and allow people and busniesses move their accounts? The detritus left behind becomes part of the failed venture. This would accomplish, I hope:

    * the clean separation of healthy and toxic assets
    * assuage populist outrage over failed bank managers being allowed to play around with even more of our money by allowing those banks to just, plain, finally, fail
    * it would set up a bank that is “toxic asset free,” which could become the lender of choice for businesses and people who meet reasonable lending criteria

    If we truly have “a crisis of confidence” then we need a bank in which people can be confident.

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