I fell behind on my reading this week and only now am catching up.

In light of the banks re-negotiating with the regulators more favorable terms for the stress tests, ie. measuring Tier 1 common instead of tangible common equity, Goldman’s Jan Hatzius (whose insights I generally respect because he has earned that) either has to revise his opinion about the stringency and sufficiency of the stress-tests or be dead wrong. Hatzius believed the stress-tests loan default rate assumptions would be set sufficiently high enough to create a plan that could withstand those losses. From my understanding of Tier 1 common, that formula is permitted to strip out goodwill, impairments, and net unrealized losses.

I suspect he has already restated his opinion to his clients, and agree that we’d be better advised to hear the independent Meredith Whitnew weigh in.

I have been critical of your not fully dissecting the issues. These two articles by you are certainly eye opening for this manufacturing/econ person. While I am the bull on the manufacturing floor, I hope someone of purpose reads your words.

Thank you

My response must have fallen on deaf ears because it seems nothing has changed in the past 18 months!
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Hi,

I have lived in Australia for the past 8 years, but I’m originally a native San Franciscan and an ex-U.S. Mortgage Banker of some 20 plus years. (What in the Hell is going on back there?)

It appears from here everybody (and I mean everybody) from Government Officials, Government Regulators, Banking Industry Giants, Wall Street, Investors and the Media have absolutely lost your collective minds.

Since when has it become a good thing when the watch dog (Government) helps the burgular (Mortgage Industry, Banks, Investment Bankers, Bond Brokers, Bond & Mortgage Insurers, etc…) escape with the loot?

Someone please stand up and just say, “NO, this has to stop now and everyone accountable needs to take your licks. PERIOD!”

COVER UP, SMOKE AND MIRRORS AND ALL OF THE OTHER ACCOUNTING GAMES GETTING PLAYED IS ONLY DELAYING WHAT WOULD BE A TOUGH RECESSION AND DRIVING THE ECONOMY DIRECTLY INTO WHAT WILL BE THE SECOND GREAT DEPRESSION!

Hank Paulson! Has that man completely lost his mind? Super SIV? Freeze the Rates? How stupid can one man be and the rest of you act like the “King isn’t naked.” He’s Naked folkes and he doesn’t have a clue! Throw him out of office and get someone with some balls in there that will call a “Spade a Spade” and fix the problem with the sensible solution of holding the guilty accountable.

No more games, all of the cards on the table now and deal with it!

My children and grand children still live in the U.S. I need someone to stand up and take control of the mess back there so I can sleep at night knowing my loved ones will be OK.

Respectfully,

Jim T.
American & Australian Citizen

Friday, November 30, 2007 at 7:10 pm | Permalink

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The Bush Administration Started it and now the Obama Administration continues the same FAILED POLICIES!

WE ARE IN BIG TROUBLE!

I suggest you read former SEC chairman Arthur Levitt’s book, Take on the Street, as to how Congress regularly threatened to cut the SEC’s budget repeatedly and forced him to cut enforcement staff and curtail enforcement actions. He was SEC chairman from 1993 to 2001.

Overall budgets tell you nada about enforcement staffing and policies. Remember, the SEC introduced Edgar during that time period. I have no idea how much of the increase in expense that accounted for, but that alone would have a significant cost and operational impact.

As for the FRB, again, Greenspan was completely anti-regulation and openly so. The Fed has been criticized before Congress for failing to implement even basic bank reporting requirements under the Home Owner Equity Protection Act, which even bank friendly OCC took seriously. And there was more to HOEPA than reporting….

These are the word that everyone wants to avoid confronting with. Those should be the words to be used by Treasury. The sooner the better.

We live in a Potemkin Country with Potemkin Media, Potemkin Government and a Potemkin Financial system …

We are going Japanese a la 1990 and our economic trajectory will be the same …

Asking Fiat to take Chrysler was a dead giveaway as to the intent of TPTB. We will be a soft Fascist State … capitalism for the populace and welfare for the corporations and rich … Now Murdoch can take over all our media, just as Berlusconi has in Italy.

While there is utility in estimating how adverse macroenconomic trends will affect loan quality and in testing capital adequacy in a forward looking scenario, one also needs a measurement in the instant “spot of time” that separates the knowable from the guestimate.

The acid test is the extent to which a bank’s liquid assets cover the liabilities that have been insured or guaranteed by the FDIC.

By liquid assets, I mean cash, marketable securities at market and collectible performing loans. The definition would include derivates and swaps that can be unwound at market.

Just what is the value of assets that are not marked down, written down, impaired, valued using estimates and artistry, and not watchlisted or adversely classified (to use bank regulatory language)?

Net, in order immediately to pay off deposits and guarantied bonds in a bank seizure, would the FDIC have to make payments out of its insurance fund?

If the cushion under the FDIC exposure is inadequate, the bank will have to raise new capital in any way it can and it will have to suspend payments of interest and dividends to junior creditors and claimants until it rights itself.

More and more FDIC guaranteed bonds could be used to restore bank capital from the perspective of trading counterparties. Bankruptcy, conversion of bonds and preferred shares to common may not be necessary or desireable.

From there we go to the joke process of having precisely the most dubious banks go out to try to raise private funds (like that is going to happen) before coming back for more government handouts.

And who looks to have done best in the stress tests? The two BINOs: Goldman and Morgan Stanley. (BINO: bank in name only)

As for Leonhardt at the NYT, he is an idiot. What we are seeing here is the creation and validation of what Wall Street and Washington (Wall Street on the Potomac) are putting forth as the official narrative. The stress tests are legitimate. They show problems but the problems are manageable. So we should all trust them and go back to sleep. We should all forget that if the banks were solvent they wouldn’t need trillions, and that they need trillions means they aren’t solvent. Reality has been superseded. Happy talk remains the dominant economic philosophy. The math when properly massaged proves this conclusively. And besides, depression is a state of mind.

We are so screwed.

I also wait for Mike May, Meredith Whitney, and Bove to give the truth about bank stress, not this fake “stress test”.

Regulations do not exist so how can regulators, well, regulate?

Your first paragraph says it all so why then do you find it necessary to look for some cause for the regulatory failures. These are not regulatory “failures” but CORRUPTION and MANIULATION and good old-fashioned Dog and Pony shows.

KEEP UP THE GOOD WORKS, but don’t try to find a rationale for human corruption. It just is and we are knee deep in it…