Markets Cheer Stress Test Double Speak « naked capitalism

Saturday, April 25, 2009

Markets Cheer Stress Test Double Speak

Forgive me for sounding even crankier than usual, but the reason deception sells is that so many people line up for it.

The release claiming to describe how the stress tests were conducted in fact provided no new information. Some analysts were more than a tad dismissive:

The central bank released a so-called white paper today describing methods used by examiners from the Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency to calculate the capital buffer the banks will require through 2011 under two economic scenarios.

“The anticipation over the white paper appears to be much ado about nothing,” said Josh Rosner, an analyst at independent research firm Graham Fisher & Co. in New York. “The most significant numbers provided by the Fed in the paper appear to be the page numbers.”

Financial stocks did well on the belief that most of the big banks would get clean bills of health. But that was the plan from the outset, to validate that the system was more or less OK so that if the poor chump taxpayer had to stump up more money, it could be positioned as due to completely unforeseen events (thanks to having put on very big blinkers) yet still a good risk.

The cheer seems a naive view. Citi is far from out of the woods, with a half trillion of foreign deposits, plus roughly $1 trillion in off balance sheet exposures (remember those SIVs, the watchword of late 2007?). Dislocation there would have far bigger ramifications.

The Financial Times, looking at more or less the same fact set, comes to less upbeat conclusions. Is this the result of being further from the spinmeisters?

From the Financial Times:

Some of the country’s biggest banks will be asked to raise more capital by US authorities following the completion of bank stress tests, senior Federal Reserve officials said on Friday.

A second, larger, group of leading banks will be asked to improve the quality of their capital by increasing their amount of common equity, the officials indicated.

Yves here. A surprisingly large number of market participants are of the view that the current rally is at least in part the result of market manipulation. I can’t recall ever seeing so much commentary to that effect. It amounts to an open secret. Even during the commodities run-up of last year, if you dared suggest there was a speculative component, you were treated as a conspiracy theorist. Now a fair number of commentators are making more aggressive claims, and they don’t seem terribly far out.

The latest sign of something out of whack is via Jesse, who tells us that insider sales are at high levels. When did that last happen? October 2007. Admittedly, not long ago, but nevertheless not a sign of confidence.

Now back to the FT. The officialdom has wanted banks to raise more equity since the Bear collapse. They fantasized that the banks would be able to get enough done in that recovery to stave off disaster. But as John Dizard pointed out at the time, the needs were so massive that (and he was serious) that central bankers would need to help conduct road shows.

That didn’t happen, needless to say. A year later, same problem, bank stocks much cheaper even post rally, so any equity raise more dilutive. And the powers that be have to hope all these banks that need more capital (admittedly reduced considerably thanks to the kindness of taxpayers) raise funds in this window.

The best of breed (for now) Goldman offering was a bit sloppy. Think all these banks, particularly with the stigma of a stress test forced raise, will get their deals done? The vast majority will be back at the government feed bucket, yet Mr. Market is acting as if everything is all for the best in this best of all possible worlds. Back to the FT:

Meanwhile, people familiar with the situation said regulators indicated that Citigroup might need more capital beyond a planned conversion of preferred shares into common stock that will give the government a 36 per cent shareholding.

If Citi has to raise more funds from the government, the authorities might force out Vikram Pandit, its chief executive. However, they added that no decision had been made and each bank had a week to discuss the results of the tests with regulators. Citi declined to comment.

While banks will be encouraged to raise the equity needed from the market, those unable to do so may have to ask the government to convert the preferred shares it holds in them into common equity. This could result in the US government ending up owning – at least temporarily – stakes in a number of the top US financial institutions.

Recall that banks (Citi et al.) that can’t raise the needed capital in six months then have to take more TARP funding. And recall further that the “stress” scenario is increasing looking like the mainstream forecast.

The Wall Street Journal has a similar report, with the addition than three of the 19 are to bolster their equity levels:

The identities of the banks, among the 19 institutions that were subjected to federal “stress tests,” couldn’t be learned. Analysts believe they likely include regional banks with large exposures to commercial real estate in the Midwest and Southeast. Three people familiar with the matter said at least three banks are in this position.

As we said, if the stress test fingers Fifth Third (clean reporting, well managed God-awful geographic footprint) and not Citi, you know the the priority is finding examples to validate its seriousness, and not really discovering real risks.

The problem with the tests is that the focus on the loan books (as reported by the AP) is missing the fact that loans decay more gracefully than bad structured debt or derivatives exposure. Outlier events will hit the big capital markets players far worse than traditional banks. But those scenarios have been deliberately omitted.

And per Bill Black, the emphasis on loans is a charade without inspection of the underlying loan files. And the number of inspectors was clearly insufficient for that to have happened.

The strategy is TinkerBell: if enough people applaud, belief alone will restore goners. That may work in theater, but I’m loath to rely on mere faith in matters of consequence. And as this blog has stressed, there does not seem to be a Plan B (the ideas of Paul Volcker and others not in the Summers/Geithner camp have been relegated to a policy gulag).

More on this topic (What's this?)

Watch Out for Bank Stress Tests (Investment U, 4/16/09)

EPIC Insights Mid-Week Analysis, Banks and Stress Tests (Stock Trading To Go, 4/22/09)

The Banks Stress Over the Stress Tests (Wealth Daily, 4/23/09)

Read more on Bank Stress Tests at Wikinvest

28 Comments:

Richard Kline says:

April 25, 2009 at 3:51 am

There is no stomach in this country for reality, and hasn’t been for thirty years. This is why those specializing in The Big Lie have done so well on the hustings. So we, as a country will get an advanced education via the Nosecone Index. This is a stress measure calculated when one’s nose collides with a brickwall or other immovable object subject to the laws of nature not those of faith, hope, or charity.

We know that governments lie damnably when at war, seeing this is permissible in extremis. But now we see the problem which such precedents are set: they and their policy actors lie damnably whenever they feel the strain. Oh well, you go to Hell with the leadership you have, not the leadership you want.

Marlowe says:

April 25, 2009 at 4:27 am

Thanks for staying up late and swinging for us, ma’am.

skippy says:

April 25, 2009 at 6:59 am

What can you say, stress tests that amount to prodding with a blunt stick, threats to lop off heads of banks or industry’s not playing the game and for what, to create the illusion of restructuring, dealing with the problem.

Its becoming quite clear that the rule of law only applies to the lower classes, upon reaching a certain level, a new level of law is applied and the preservation of this higher level seems to be the root of all our problems, for with out this higher level we would all cease to exist, poof, en fin.

In school we have drummed into us that America is the land of the free, free to be misinformed, free to be ripped off, free to be forced in to plea deals, in fear of the out comes no matter the reality’s, free to be sucked dry to make hole those that brought destruction to our houses, with sophisticated mechanisms beyond most peoples wildest dreams, free to be governed by a system that in effect protects at all cost the 1% of the population with little fear of the future. They will always have means to fulfill their needs, housing, food, lifestyle.

skippy…two people lost in the desert must work together, no matter the cut of their dress, mutual understanding or rule of law/agreement/consensus in matters is what saves them.

Independent Accountant says:

April 25, 2009 at 7:37 am

YS:
“Much ado about nothing”. Precisely.

Dan Duncan says:

April 25, 2009 at 8:15 am

Really…what did you expect?

To Richard Kline…This isn’t about “lying”. A lie, like bullshit, has substance to it. A lie can at least be exposed and hurled back at the liar’s face.

It’s hard to even classify what’s occurring here because it has no weight; no mass. The Unbearable Lightness of Being…and not only is “resistance futile”, but frustration is futile as well.

Take yesterday:

We’re mad, we’re frustrated, so they give us this “Important Speech”… and now we have the ball in our hands.

Only, it’s nothing but a goddamn whiffle ball…and they know it.

No matter how hard we throw it, they won’t feel a thing.

I know many get all gooey and excited with the transformational powers of the internet….

But why—when each of us literally has more information accessible at our finger tips than all combined universities 30 years prior—are we dumber than we were 30 years ago? And, if we’re not dumber, then why aren’t we at least smarter—even by a little?

What we need is a good Russian novelist. One who will write a grand epic about what happens to a culture when information is mistaken for knowledge…bias replaces belief… and opinion is substituted for thought.

Of course nobody will read it… since we stopped reading books.

wu ming says:

April 25, 2009 at 9:12 am

“skippy…two people lost in the desert must work together”

have you read mcteague?

richard, dan: how about a good Russian trickster mystic?

What we call ordinary life is played out within a field of energies whose limits are strictly circumscribed, and which, using the musical metaphor, rise and fall within a small number of scales. Thus the level of our awareness is low, our power of thought is limited, and these energies produce little vision. little purpose. Gurdjieff demonstrates that there are two exact points in every scale where an evolving movement comes to a stop, where there is an interval that can be bridged only by the introduction of a new vibration of precisely the necessary quality. Otherwise. as nothing in the universe can stay still, the rising energy will inevitably sink again to its starting point. This is an astonishing and radical notion: it implies that all energies, and consequently all human activities, can only rise up to a certain point on their own initiative, like the arrow shot into the into the sky which must at a certain point exhaust the impulse that launched it, so that it reaches its peak and curries downward toward the earth. However, if the crucial point where the first energy begins to fade can be accurately observed, at this point what Gurdjieff calls a “shock” can occur – which is the conscious introduction of a new impulse that will carry the rising movement across the incisible barrier and permit it to continue in its upward path. This imagee enables us to understand how it is that without this “shock” lives decay, enterprises and empires pass into decline, calculations are proved false, and heroic revolutions turn back on themselves and betray their great ideals. The same laws show that a certain force exactly applied could have prevented this return to zero, but the basic principle is seldom recognized. So we blame others and ourselves with bitterness and frustration.

http://www.kheper.net/topics/Gurdjieff/Summary.htm

fisheryc says:

April 25, 2009 at 10:13 am

Yves, thanks for the forum; typo in your paragraph 4, Citi off balance sheet exposure initially rumored to be in excess of $1.1 tillion. These days 1 billion is a rounding error. Citi continues as the epicenter and posterchild of this whole disgusting charade.

VG Chicago says:

April 25, 2009 at 10:19 am

Skippy,

You are correct, but despite all the problems you listed, America remains the most desirable place on Earth. Take it form a guy who maintains double residence in the US and Europe.

Our weakness but also our strength, as Americans, is that we are natural idealists. It is a weakness because we constantly self-analyze ourselves, and express critical opinions, which unfortunately leads those outside to conclude we are in worse shape than we actually are, and then rejoice at this distorted picture of reality. As a strength, it enables us to dream, hope, strive for better, and overcome any problems.

Personally, I am amused by some of the European contributors to this and other blogs, who obsessively focus so much of their energies on America, while ignoring similar (and usually worse) problems in their on countries. That is demagoguery, hypocrisy, denial, and, to keep with the theme of this article, plain and simple misinformation. It is yet another expression of the “insidious” anti-Americanism that Obama mentioned during his speech in France earlier this month. I would take the contributions of these Europeans with a grain of salt… well, for safety, make that a pound of salt.

Vinny GOLDberg

Dan Duncan says:

April 25, 2009 at 11:27 am

Sorry to double post, but…

To Wu Ming who writes:

“This is an astonishing and radical notion: it implies that all energies, and consequently all human activities, can only rise up to a certain point on their own initiative, like the arrow shot into the into the sky which must at a certain point exhaust the impulse that launched it, so that it reaches its peak and curries downward toward the earth.”

I swear: I’m not being sarcastic, when I write what I’m about to write, but…

Isn’t this just–”What goes up must come down”?

As for the “Russian Mystic” link: There’s no such thing as a ‘Russian Mystic’, anymore than there’s such a thing as a Chinese Mystic or an African Mystic. I think the reason for this is that once a mystic become a mystic, he ceases to come from anywhere but that magical, mysterious Land of Mysticism—where they ALL speak the same language called… Mystic.

With as many mystics as there are, why aren’t any of them named Bob?

I can see it now:

“I’ve been overtaken by a profound new reality! It’s the New Paradigm where the quantum shift penetrates the universal consciousness that entangles our reality into The Matrix of Knowledge and Knowingness. So says Bob. A mystic from Iowa.”

Seriously, though, Gurdjieff seems to just be mysticizing Carnot, the 2nd Law and entropy…only like most mystics, he’s getting it wrong…but in that magical mysterious way mystics have of talking about science, but without the science part.

Gurdjieff would, however, make a great Viagra spokesperson:

I can hear his mystical voice as the backdrop to the “mature” couple in their respective bathtubs overlooking a scenic vista…[Play mystical music here, preferably some Yanni]

“However, if the crucial point where the first energy begins to fade can be accurately observed, a “shock” can occur – which is the conscious introduction of ‘The Little Blue Pill. Let this Pill be the new impulse that will carry the rising movement across the incisible barrier and permit it to continue in its upward path.”

Let the good times roll, Baby!

Sy Krass says:

April 25, 2009 at 11:38 am

Am I here?

DownSouth says:

April 25, 2009 at 12:12 pm

Richard Kline, Dan Duncan and wu ming,

I can’t help but drag into this conversation the Forbes’ article on Pastor Joel Osteen (see today’s links). I think Susan Lee’s lumping Osteen together with Greenspan in the title offers a penetrating insight, for surely there’s little difference between the prosperity gospel Osteen preaches and the “religion” Greenspan professes.

What is Greenspan’s religion? finemrespice.com (see NC link yesterday to Steve Waldman) calls it “The Cult of Buoyancy.”

http://finemrespice.com/node/35

But “The Cult of Buoyancy” is deeply rooted in Western, and more specifically American, history, religion and culture. It is far from being anything new, and though it did fall somewhat out of favor for a while, the “nearly three decades of constant and unwavering reinforcement” that finemrespice speaks of precipiatated a revival, not a germination, of the creed. This cultural and religious underpinning may help to explain why it gains such easy acceptance amongst the American electorate, despite rapidly accumulating empirical evidence that runs counter to it. Its appeal is quasi-religous, not rational.

Christianity historically held that the rewards of God’s salvation were to be gained in another world–heaven. The idea that God could reward his followers in the here-and-now seems to have first gained credence with the 17th-century Puritans (see Jacques Barzun’s chapter on “Puritans as Democrats” in From Dawn to Decadence: 500 Years of Western Cultural Life).

The Enlightenment entailed the secularization of another Christian creed–milleniarianism. In the Christian version, Christ will reign on Earth and usher in the ideal society. In the secular Enlightenment version, it is science that will reign and usher in an ideal worldly paradise.

As John Gray points out in Al Qaeda and What it Means to be Modern, “The Cult of Buoyancy,” referred to as neo-liberalism by Gray, is only the latest manifestation of secular milleniarianism. Earlier examples were Soviet Communism and German and Italian Fascism. As Gray explains:

One of the props of this (neo-liberal) project was the belief that the US had discovered the secret of uninterrupted prosperity. Through a combination of deregulation in financial markets, free trade and new technology, it was claimed, the US had abolished the business cycle and achieved a permanent increase in American productivity.Gray also points out that this idea of never-ending progress, culminating in earthly paradise, is a uniquely Occidental/Christian concept:

Hegel and Marx followed Judaism and Chritianity in seeing history as a moral drama whose last act is salvation. In other cultures this view is unknown. For the Greeks and Romans as for the Indians and Chinese, history has no overarching meaning. It is a series of cycles, no different from those we find in the natural world.The problem we have created for ourselves by committing ourselves to Greenspan’s and Osteen’s religion was described by Reinhold Niebuhr in The Irony of American History:

For, from the later Puritans to present day we have variously attributed American prosperity to our superior diligence, our greater skill or (more recently) to our more fervent devotion to the ideals of freedom. We thereby have complicated our spiritual problem for the days of adversity which we are bound to experience. We have forgotten to what degree the wealth of our natural resources and the fortuitous circumstance that we conquered a continent just when the advancement of technics made it possible to organize that continent into a single political and economic unit, lay at the foundation of our prosperity.Or as Gray so succinctly put it:

The social engineers who labour to install free markets in every last corner of the globe see themselves as scientific rationalists, but they are actually disciples of a forgotten cult.

Sy Krass says:

April 25, 2009 at 12:21 pm

This is ridiculous this piece of crap blogger thing is making me jump through hoops just to comment. How the hell do keep from reregistering every goddammed time? F— YOU google!

Sy Krass says:

April 25, 2009 at 12:23 pm

No, I’m not deleting anything!

Sy Krass says:

April 25, 2009 at 12:25 pm

Testing 1,2,3…

Mr.Candid says:

April 25, 2009 at 12:58 pm

Citi has $1.1Trillion off balance sheet asset, whereas in this article you’ve mentioned $1billion.

DownSouth says:

April 25, 2009 at 1:10 pm

A couple of more observations in regard to the subject of Steve Waldman’s (along with comments to his post) and Yves’ posts on the Bernanke-Paulson-Lewis imbroglio.

If one frames this as a quasi-religious dispute, Bernanke and Paulson believing they are following the “one true faith,” then it makes it easy for them to justify their immoral and/or illegal actions against Bank of America.

The fact that their own personal interests can be construed to coincide and become indistinguishable from the more universal interests of US citizens and/or citizens of the world also fits neatly within this paradigm. We see it repeated over and over again in history, for instance when officers of the Inquisition took confiscated property for their own or when the Nazis did the same with Jewish property, or with the Communist tyrants, as Niebuhr points out:

The powers of human self-deception are seemingly endless. The communist tyrants may well legitimize their cruelties not only to the conscience of their devotees but to their own by recourse to an official theory which proves their innocency “by definition.”

John Adams in his warnings to Thomas Jefferson would seem to have had a premonition of this kind of politics. At any rate, he understood the human situation well enough to have stated a theory which comprehended what we now see in communism. “Power,” he wrote, “always thinks it has a great soul and vast views beyond the comprehension of the weak; and that it is doing God’s service when it is violating all His laws. Our passions, ambitions, avarice, love and resentment, etc., possess so much metaphysical subtlety and so much overpowering eloquence that they insinuate themselves into the understanding and the conscience and convert both to their party.” Adams’s understanding of the power of the self’s passions and ambitions to corrupt the self’s reason is a simple recognition of the facts of life which refute all theories, whether liberal or Marxist, about the possibility of a completely disinterested self. Adams, as every Christian understanding of man has done, nicely anticipated the Marxist theory of an “ideological taint” in reason when men reason about each other’s affairs and arrive at conclusions about each other’s virtues, interests and motives. The crowning irony of the Marxist theory of ideology is that it foolishly and self-righteously confined the source of this taint to economic interest and to a particular class. It was, therefore, incpable of recognizing all the corruptions of ambition and power which would creep inevitably into its paradise of innocency.

emca says:

April 25, 2009 at 1:39 pm

I was going to link the article about colony collapse disorder with the one on Osteen but my computer decided to engage the infamous brick wall mentioned above.
Suffice it to say if honey bees had to wait for Jabez’s God to relieve their predicament rather than science, we would be seeing a radical shift downward in agricultural fortunes.

Sy Krass/
don’t understand your problem as I’m seeing all your (frustrated) posts.
In my own case I sometimes have to keep retyping again and again to make it stick. My attitude is, I will not let god Google stand in way of freedom of expression.

Dan D/
knowledge does not equate to wisdom (read VaR)nor is optimism a particularly good replacement for caution.

Don says:

April 25, 2009 at 3:52 pm

Yves. Thanks for bringing up the Dizard. It allows me to comment on Bears and its importance for this crisis. I could just write it up, but I’m a commenter, and by nature passive. I’m passive with women as well. In fact, passivity is the theme of my second novel.

So, let’s look at Dizard:

“The Fed itself would have to be a co-sponsor in some form.”

“For all the chicanery of speculators and hedgers on the exchanges, there have been no fears of contagion, of one participant’s failure leading to others, of the sort that led to the Bear Stearns bail-out/ takeover/near collapse.”

So, I made the following assumptions from Bear:
1) The govt fears Debt-Deflation
2) The govt fears we’re in a bubble
3) There’s no Plan B
4) There’s no free market plan
5) The govt will have to guarantee everything
I couldn’t explain the bailout without these assumptions.

Now, I could be wrong, but I thought that I read at the time that Bernanke was a follower of Fisher and that explained his view on Bear. Of course, since then, there are a number of commenters who say that Bernanke doesn’t understand Fisher. In any case, I have to admit being fooled, and assuming that we could handle this crisis well.

Here’s Paulson in March 2008:

“We are working to get through the current period of market turmoil while minimizing its impact on our economy. And, as we do so, risk is being re-priced and markets are de-leveraging. This is creating liquidity challenges and, as a result, credit markets are not functioning as normal. We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies; we need these institutions to continue to lend and facilitate economic growth.”

I take the risk of the de-leveraging to be Debt-Deflation. So, again, I thought that everybody understood where we were. Consequently, I’m having a hard time understanding the govt’s responses since Bear.

Okay. Let’s go to Fannie/Freddie:

“Assumed guarantees

There is a wide belief that FNMA securities are backed by some sort of implied federal guarantee, and a majority of investors believe that the government would prevent a disastrous default. Vernon L. Smith, 2002 Nobel Laureate in economics, has called FHLMC and FNMA “implicitly taxpayer-backed agencies”.[27] The Economist has referred to “[t]he implicit government guarantee”[28] of FHLMC and FNMA. In testimony before the House and Senate Banking Committee in 2004, Alan Greenspan expressed the belief that Fannie Mae’s (weak) financial position was the result of markets believing that the U.S. Government would never allow Fannie Mae (or Freddie Mac) to fail.[29]“

My assumption:
1) The govt will bailout Fannie/Freddie, with 5 above still in place.
And it did, but it did so in a way that led investors to believe that the govt was not going to guarantee everything. If you look at when China started selling Agencies, you’ll see that it’s August 2008.

And then Lehman. The real question is why did this happen? Did the govt think it would be a disaster? From Swagel:

“Free Markets Day
The way Congressman Barney Frank put it at a hearing at which I testified on
Wednesday, September 17 was that we should celebrate, Monday, September 15, as
“Free Market Day”— Lehman Brothers was allowed to fail and the free market to work
on that day. Now, the next day, Chairman Frank continued, AIG had been bailed out so
“the national commitment to the free market lasted one day,”3 (as quoted by WSJ.com),
but we should celebrate that day.
The decision not to save Lehman Brothers is no doubt the most hotly debated decision of
during the crisis. Secretary Paulson and Chairman Bernanke have made the point that
with the firm evidently insolvent, they did not have the authority save it—the Treasury
outright had no authority, while the Fed could provide liquidity, not capital. The Fed can
lend, however, against collateral to its satisfaction, so in principle the Fed could have lent
against unencumbered Lehman’s assets—essentially what it did with AIG. This would
not have saved the Lehman—indeed, it would have concentrated losses on the rest of the
firm—but it is possible such lending could have provided time for a more orderly
dissolution of the firm (indeed, there are estimates that the disorder bankruptcy reduced
the recovery value of the firm by billions of dollars). The feeling at Treasury, however,
was that Lehman’s management had been given abundant warning that no federal
assistance was in the offing, and market participants were aware of this and had time to
prepare. It was almost as if Lehman management was in a game of chicken and
determined not to swerve.”

China’s actions in August should have signaled trouble. I think that he understands this. As to being prepared, this is the main problem I have with his essay. Things had gotten worse, not better. Nor was this a short term problem.

Here again:

“A number of lessons of that weekend have received extensive discussion in the financial
press and in the academic literature, including the role of liquidity (as discussed by Allen
and Carletti (2008)), fragilities arising from counterparty risks embedded in the tri-party
repo system and the over the counter derivative markets, and the need for a resolution
mechanism for non-bank financial institutions. At Treasury, two additional lessons were
learned: (1) we had better get to work on plans in case things got worse, and (2) many
people (at least in Washington, DC) did not understand the implications of non-recourse
lending from the Fed. This latter lesson was somewhat fortuitous, in that it took some
time before the political class realized that the Fed had not just lent JP Morgan money to
26
buy Bear Stearns, but in effect now owned the downside of a portfolio of $29 billion of
dodgy assets. This discovery of the lack of transparency of non-recourse lending by the
Fed was to figure prominently in the financial rescue plans adopted in the first part of
2009.
The Fed’s announcement of the primary dealer credit facility (PDCF) immediately after
the collapse of Bear Stearns seemed to us and many Wall Street economists to remove
the tail risk of another large financial institution suffering a sudden and catastrophic
collapse. This was a time to plan for further events.
Part of the planning was for the long-term, on which Treasury on March 31, 2008
released a Blueprint for a Modernized Financial Regulatory Structure with a vision for a
long-term reshaping of financial sector regulation. This had long been in the works—
indeed, Treasury had requested public comments on the topic in October 2007—but the
timing of the report led to press reports that this was Treasury’s “response” to the crisis.
More near term in vision was work being done on so-called “break the glass” options—
the reference being to what to do in case of an emergency. This work evolved from a
recurring theme of the input we received from market participants over the prior year,
which was that the solution to the financial crisis was for Treasury to simply buy up and
hold the “toxic” assets on bank balance sheets. Indeed, this suggestion found its way into
some versions of the Frank-Dodd bill. Eventually a memo was written that listed options
to deal with a financial sector crisis arising from an undercapitalized system—indeed, the
memo went through more than a dozen iterations in discussions around Treasury and
with other agencies between March and April. The options ended up being to buy the
toxic assets, turn the Treasury into a monoline and insure the assets, directly buy stakes in
banks to inject capital, or use a massive scheme to refinance risky mortgages into
government-guaranteed loans and thus improve asset performance and firms’ capital
positions from the bottom up. With estimates in mind that U.S. financial institutions
would suffer $250 billion of losses from mortgage securities, we envisioned a
government fund of $500 billion. A mix of asset purchases, capital injections, and
additional private capital raising by banks would allow this amount to roughly offset the
forthcoming losses.
All of these options, however, would require Congressional action—this would move the
focus of financial markets policy back from the Fed to the Treasury, which would be
appropriate in what was a problem reflecting inadequate capital rather than insufficient
liquidity. But there was no prospect of getting approval for any of this. With growth
positive and the stimulus rebates only just beginning to go out in late-April, it was just
unimaginable then that Congress would give the Treasury Secretary such a fund. And it
was doubly unimaginable that the fund could be enacted without being used. Such a
massive intervention in financial markets could only be propose if Secretary Paulson and
Chairman Bernanke went up to Congress and told them that the financial system and
economy were on the verge of collapse. And we understood that by then it could well be
too late.”

I don’t know if this is true, but, if it is, congress would bear some heavy responsibility for this crisis. In my opinion, from Lehman, we’ve been in a slow-motion Debt-Deflation. The govt’s actions have done a lot, but we could have done a lot better. For one thing, we could have recognized that the govt has to guarantee everything in order to stop Debt-Deflation. Does that mean we want to spend a lot of money? Quite the contrary, it means that we expect the guarantee to stop the panic, the downward spiral, and allow:

“This would
not have saved the Lehman—indeed, it would have concentrated losses on the rest of the
firm—but it is possible such lending could have provided time for a more orderly
dissolution of the firm (indeed, there are estimates that the disorder bankruptcy reduced
the recovery value of the firm by billions of dollars).”

This could have saved an unknown amount of dollars and jobs. Now, I understand that many, if not most, people don’t agree with me, and that’s fine. But if you do, do you really believe that the blanket guarantees could have passed the congress or gotten our citizens behind it? From my point of view, we have a crony welfare state which caused and continues to hinder our solving the crisis, but we also have a system in which hard choices and tough news is constantly deferred and put off by everyone. We have the ghastly hybrid precisely because we disagree and have different solutions. Given that, it’s amazing that we seem to be lurching towards some decent solutions. One minority view, and tentative supporter of Geithner.

Don the libertarian Democrat

PS Contra Dizard, the Pharisees and Money Changers were not evil people. The Pharisees allowed the average Jew to act like a priest in everyday life, honoring the average person. The money changer allowed average worshipers, who’s offerings might be damaged in transport, to sell the offering locally, get cash for it at the Temple ( there were lots of currencies ) and buy an acceptable offering at the Temple. Again, a plan designed to help the average Jew.

VG Chicago says:

April 25, 2009 at 9:08 pm

Dan Duncan,

I hate to be the one to break the news to you, buddy, but you really should cut down on your intake of red, blue, and Viagra pills, because your post makes no sense. I’ve never seen so much absurd New Age BS anywhere else. You might also consider finding a better life philosophy than The Matrix, unless you’re a teenager, in which case it’s ok. One to consider is Razor’s Edge.” Finally, in addition to cutting down on the pills, I also recommend you reduce your alcohol consumption, before your obvious delirium becomes a permanent state.

Kindly yours,
Vinny GOLDberg (ROFL)

Yves Smith says:

April 25, 2009 at 9:25 pm

Vinny,

I generally like you comments, but there was a lot of ad hominem in that. I’m leaving the comment up for a wee bit so the curious can see what is over the line, and then it gets deleted.

You can argue with the philosophy or say it’s badly off topic, but you do not need to throw personal insults in as well.

And Dan wasn’t the guy who wrote what you found offensive either…..

kackermann says:

April 25, 2009 at 10:36 pm

A trick I learned a long time ago was to skip reading things that my descision-making apparatus told me to skip.

I really enjoyed reading these comments. I feel like I get to skip all the mundane stuff and only soak up information that others felt I should be exposed to.

I try to do the same for others, and just to make sure some basics are covered, I found it particularly interesting that Ayn Rand, when pressed on native American Indian land rights, didn’t exactly come out in favor of that.

It seems that it’s tough to talk and be consistent from the heights of a soapbox.

skippy says:

April 25, 2009 at 11:13 pm

@Wu ming, yes I have, although pontification of worldly matters in an authors reality can release us of our earthly bonds, one must still contend with the applications moving forward.

I have lived through many constructs of life (militarily-both Government and private, corporate and as a swag man roaming the planet) and the common/repetitive denominator in all these experiences was in order to have a beneficial relations, one must speak the truth. To reveal all and work out solutions to group survivability, as a group.
This is what I find missing today and for maybe the last 40 odd years in America, the inability of people to communicate on a personal level with out fear of being found wanting.

@VG Chicago said…America remains the most desirable place on Earth.

Um to some yes, but not to all and for what reasons. the casinos chance of wealth, the successful are splayed across the media, but what of the failed. The chances of higher success are akin to making the top ten of the GPA golf money makers, of all the people in the world that play golf only 6% play professionally and only 1% of those can make a living out of it. I find this observation very true to the wealth construct as a hole.

To the stament…Personally, I am amused by some of the European contributors to this and other blogs, who obsessively focus so much of their energies on America, while ignoring similar (and usually worse) problems in their own countries.

Could it be Americas projection of status/power over others lives, personal business. America made out quite well do to the North Atlantic treaty, effectively ending British colonialism, only to replace it with American corporatism. I think we rubbed them raw, cops worst nightmare is a domestic eh.

As far as your comments on Dan D, I believe you better than that and as some here can testify, I have my moments too. I look forward to to more of your regular brand of comments mate.

@DownSouth…conccur with a hole lot of what you put forth. Puritan belief systems seemingly have this innate desire to reward good behaver, when its about ones soul and not the wallet. Boy did some one pick up that ball and run with it shezz, generation shift that Lenin would be envious of.

Skippy…again what a plesure it is to discuss these topics with all here. Oh, lest we forget!

skippy says:

April 25, 2009 at 11:17 pm

^^^PGA golf, amends,

skippy

Chindit13 says:

April 25, 2009 at 11:33 pm

I wonder where we are in this cycle when we have seemingly—at least as evidenced by this comment thread—moved from panic to disgust to the ethereal and reflective. I cannot figure if that suggests endgame or merely the eye of the storm. In any event, I greatly enjoyed the comments by Dan Duncan and Down South. When I read Mr. Duncan, I could not help but paraphrase Groucho “I wouldn’t belong to any church that would accept me as a member”. With Downsouth, the phrase “paradise of innocency” truly struck a chord and brought a broad smile to my face for reasons that would take too long to explain and are clearly not pertinent to this discussion. (Just think the ‘education’ of a retired WS trader turned NGO in a land guided by a belief in past lives and karma.)

Going back to the original topic (Stress Test White Paper), is there a better line in the entire thing than “traditional role of capital, especially common equity, is to absorb unexpected losses and thus to protect depositors and other creditors.”

Clearly America has broken with tradition and outsourced this function to the taxpayer.

B. Mull says:

April 26, 2009 at 2:54 am

I just have to repeat skippy’s masterful antiestablishment rant:

“In school we have drummed into us that America is the land of the free, free to be misinformed, free to be ripped off, free to be forced in to plea deals, in fear of the outcomes no matter the reality’s, free to be sucked dry to make hole those that brought destruction to our houses, with sophisticated mechanisms beyond most peoples wildest dreams, free to be governed by a system that in effect protects at all cost the 1% of the population with little fear of the future. They will always have means to fulfill their needs, housing, food, lifestyle.”

Hear, hear! In high school U.S. history I was taught that our country has never made a mistake and foreigners are to blame for everything that has gone wrong. Sad to say, most of the kids there with me still believe that.

kackermann says:

April 26, 2009 at 3:08 am

Personally, I am amused by some of the European contributors to this and other blogs, who obsessively focus so much of their energies on America, while ignoring similar (and usually worse) problems in their on countries.That’s because there used to be a place in the world called America. Not America 2000-2009, but a different America, whose faults were much easier to overlook. A place to maybe even hold up as special.

Now we stagger around like a lush, and hurl insults and spittle at them. We whipped it out in front of the world and peed all over the Middle East while passing out umbrellas that never opened.

We fought a cold war with Russia, but Europe fought a few hot ones. Still, we insist that Poland be defended against Iranian missiles by putting a useless missile shield right next to Russia’s butt crack.

Meanwhile, Georgia was wishing we developed a tank and artillery shield. Now there is something we could have sold.

They have to listen to us play “Remember When” as we steal their silverware and pocket bread from our own poor.

Everyone keeps waiting for America to check herself into Betty Ford, but that won’t do the trick. Not when you have politicians like this playing Stump-The-Nobel-Prize-Winner on Capitol Hill, and thinking he won.

wu ming says:

April 27, 2009 at 12:29 am

sorry for missing the fireworks

to skippy – hallajueh brother.

to dan – may the author credited in the link excuse me for forgetting quotes, but i can not take credit for the words.

as far as the white russian, aren't mystics & charlatans as much a product of the time & homeland as novelists?

and yes, gurdjieff would make a classic viagra spokesman, even better than orson welles.

to downsouth – yes, the profit prophets are coming out of the dark corners. but as dan says, they've always been here. gotta give it up to Pastor J tho for pulling the once and future present american zeitgeist right on the shrinking pursestrings.

to vinny – sorry to rile you with the new age BS papa. if you were to read pythagoras, you would see that the father of mathematics (for which we have used to imbed ourselves into an economic gordian knot as you well know) was also a serious musicologist.

besides, i've always been fond of that zen story about the monk who became enlightened when finding a pile of BS on the road.

cheers

Caro says:

April 27, 2009 at 8:33 am

>>the reason deception sells is that so many people line up for it.

My conclusion after last year's primary: Most of the people WANT TO BE FOOLED most of the time.

Carolyn Kay
MakeThemAccountable.com

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