Tim Geithner has a clever new way to "recapitalize" banks that fail the stress test: Convert the taxpayer's preferred stock to common stock.
From Geithner's perspective, this technique has several advantages:
- The banks will suddenly seem healthy, because their assets-to-common equity ratios will rise.
- Geithner doesn't have to ask Congress for more baillout money yet.
- Taxpayers won't understand that they're giving up a nice dividend and a safer security just to make the banks look better.
- If Geithner is right that what's wrong with the banks is just a temporary liquidity problem, the taxpayer should do well when the stocks rise. (We don't think he's right.)
Unfortunately, the plan also has two major flaws: First, it's smoke and mirrors. Second, the taxpayers will be even more exposed to losses than they are now.
Because the banks will still have the same amount of crap assets on their balance sheets, and they'll have no more capital available to absorb these losses when they hit. The only thing that will change is that the taxpayer will now get hit first as these losses flow through, instead of getting hit second, as is the case now. The banks' bondholders, meanwhile, will still be protected to the tune of 100 cents on the dollar (by administration policy). If the common equity is wiped out by the losses, therefore, the government will have to dig into the taxpayer's pockets to cover any shortfall. (See Paul Kasriel's detailed explanation below).
In other words, Geithner has hatched yet another plan to avoid dealing with the bank problem once and for all.
In sum, Treasury’s plan to enhance the capitalization of some financial institutions by beating
preferred equity shares into common equity shares is accounting alchemy.
PLENTY OF ACCOMPLICES WHICH IS WHY WE ARE ABSOLUTELY SCREWED!
The bulls rejoiced that the "Stress Tests" didn't pronounce a bunch of banks dead, never mind that we knew that wouldn't happen anyway (can you imagine the panic if even onebank was pronounced insolvent?)
But government hasn't stopped lying. Not for a second. Indeed, they're lying even more than usual these days, with the following ditty being particularly interesting:
The bill also makes changes to the FDIC’s insurance program requested by Chairwoman Sheila Bair, including expanding the agency’s borrowing authority from the Treasury to as much as $500 billion through 2010. The FDIC’s federal credit line was permanently increased to $100 billion from $30 billion, and the agency’s coverage on individual bank accounts was raised to $250,000 from $100,000.
Bair has asked Congress for an increase in its borrowing authority from the Treasury to protect the agency’s reserves, drained by 29 bank failures this year. The agency has estimated that additional bank failures may cost the deposit insurance fund $65 billion through 2013.
Well let me see if I can do the math. The FDIC credit line was already increased from $30 billion to $100 billion. They started with $50 billion, and managed to blow something like $17 billion on IndyMac alone, with some significant part of that being due to the OTS being involved in a scheme to fraudulently shift the date of deposit receipts, thereby keeping regulatory intervention out of there until the losses had mounted materially. That is, it was government malfeasance that was the proximate cause of the loss.
I'm not real sure how much the FDIC has left of the $50 billion, but let's be impolite and say they might have squandered $30 billion of it. After all, we've seen lots of 50 cent recoveries (on the dollar) in recent bank closures, which is a strong indictment of the regulatory system (The entire purpose of excess capital requirements is to catch the bank before it goes under zero in asset to liability ratios, thereby making the loss nil. Obviously that is not happening, ergo, the losses.)
But if Bair thinks she might lose $65 billion through 2013, four years hence, and yet she intends to raise premiums on banks, and the FDIC can already borrow $100 billion, why do they need the ability to borrow $500 billion?
Specifically, what is it you're not telling us Ms. Bair?
I'll tell you what I think it is - its right here:
May 4 (Bloomberg) -- We might be looking at a lost generation for U.S. home values.
That's the polite way of putting it.
The more-lengthy explanation is this:
- There are 19 million empty homes in America and the builders are still building.
- Prices were cranked far too high and still have not come down to historical norms in terms of price-to-income ratios. Until they do, a normal market cannot be restored.
- Everyone in government has been attempting to prevent (2) for the last three years, and have blown hundreds of billions attempting it. They have and will fail.
- The boomers will not be needing all those extra homes. They're starting to retire. This is a demographic disaster that is just beginning; these folks have no need for a 4 or 5-bedroom house; a 1 or 2-bedroom condo is just fine when the kids are all gone and you're retired.
- There are only 44 million "Gen Xers" and they're stuffed to the gills with college loans (thanks Boomers for rooking them into that deal instead of standing up for your kids and telling the ivy league to get bent.) They can't afford the 4 and 5-bedroom houses.
The bottom line is that these "stress tests" are a joke and have been chock full of yet more violations of the law. Reg-FD is supposed to mandate that material information is released to everyone at the same time. But that of course isn't what has happened; there has been leak after leak after leak, some of them false. Will we see indictments? Of course not, given that most of the leaks are coming from the Treasury itself, and are being used as a means to pump up asset prices!
Never mind that the results of these "tests" are based not on detailed bank examinations but instead are taken from the banks providing the data to Treasury themselves! This is akin to an open-book test where the student has obtained the answer key and there is no penalty for cheating, since the goal is to attempt to blow another asset bubble in the stock market.
Steve Liesman give us the "money quote" this morning on CNBC: None of these banks would survive at 11 or 12% unemployment.
Has anyone looked at U-6? I keep pounding the table on it with every employment release, and with good reason. That's the actual unemployment rate in the country - it includes those who are "discouraged" (they've given up) along with those who are working part-time because they can't find full-time work.
It is well over 12% right now!
It is actual (not "cooked") unemployment that matters when it comes to people being able to pay their bills, not some Goebbels-style government mish-mash of wishes, dreams and outright lies.
Then there are the so-called "valuations" of these bank assets, which are pure fantasy. We have no more transparency there than we had a year ago - that is, zero.
Never mind "VaR", or "Value At Risk" in these institutions. You can bet the banks made that figure up too, simply because there is no way to accurately compute the compound nature of it in a market where someone else might blow up.
In short this entire "Stress Test" game is a sham, concocted by The Obama Administration in a puerile attempt to blow yet another asset bubble - this time in equities.
The "usual suspects" are of course participating in the scam and "doing their part." Goldman upgraded essentially the entire banking sector yesterday. Where were they when the SPX was at 666 and the XLF at $6? The XLF has doubled since then; now Goldman puts a buy on the stocks? After they have risen in value by 100%?
Why all the upgrades now? Gee, who's running the book on the public secondary offerings? This pattern is reminiscent of the 1990s, when an "investment bank" would run a public stock offering and of course rate the stock "Strong Buy". Unmentioned except in the fine print was the fact that the firm had held back 10% of the offering for itself and was selling into the first-day pop, skimming off hundreds of millions of dollars that could have otherwise gone to the offering firm. Oh, and of course most of those firms were "strong buys" only to the extent that such a claim helped the offering firm fob off its stock on you, since most of these companies ultimately collapsed and were worth zero.
And by the way, as one of the guys who used to get mouse-size "allocations" in these IPOs from time to time, the rules were quite clear: If you sold into the opening pop you'd never get another one, and your brokerage, of course, could (and did) look at your account activity to see if you sold or not. This was all but explicitly stated by the brokerages. You the investor were thus "prohibited" from selling into that initial-day pop, but the underwriting firms were doing it in essentially every case.
I'll bet $10,000 that not one of these so-called "independent, chinese-walled research departments" gets indicted this time around but they are doing the same damn thing they were in the 90s, running the secondaries and pocketing the fees.
Again: If there is such a good case for recovery in the economy now, why wasn't there two months ago? Why wasn't the market a "strong buy" at 666 when the market was 30% cheaper than it is today?
Answer: The S&P 500 estimated FY 09 earnings are now $42. This is down by 66% from where it was in the second quarter of last year, when the "analysts" were projecting nearly $150 in earnings!
Are you really going to try to tell me that the market at a P/E of over 20 is a "strong buy"? Oh, don't look at the WSJ "data page" for the P/E either - they ignore those companies with negative earnings.
In the real world losses count.
Now square all this "hope and hype" with last month's California Tax Revenues: down 40%. That's "high-frequency" data - these taxes are collected and remitted every month and as such there is no "lag" in them - at all.
Other states are similar.
State sales tax statistics are unmitigated disasters and are pointing to insane levels of contraction in the economy.
There is no evidence of growth in consumer demand anywhere in those numbers. Period.
This is a direct consequence of what I've been talking about now in The Ticker for more than two years:
Consumers have too much leverage on their balance sheets and this means that they are being forced to draw back from "borrow and spend" as the wall on debt carrying capacity has been hit. That behavior will never return because the "business model" of ripping people off in the credit markets has come to a permanent halt, putting millions of people out of work in the process. The consequence of this is that business (and thus GDP) has permanently been "reset" to a lower level of production - and consumption - one that is currently depressed and will stay there until the excesses are wrung out. But even when that process is complete, we will not go back to where we were; the behavior that led to this mess is gone for a generation, just as it was in the 1930s.
At the root of the problems we face today is the reality that we are overburdened with debt. Forcing interest rates down through game-playing such as "Quantitative Easing" is fraud on a grand scale, as it intentionally ignores and even worsens the problem. It is akin to giving someone suffering from pneumonia an inhaler full of Streptococcus pneumoniae and expecting them to get well.
Our debt addiction was no accident. Rooted in the belief that everyone deserves the best of everything, stoked by politicians, we devised grand schemes to hide credit risk and proclaim through the magic of alchemy the impossible - that risk could be removed or at least cut back by "proper structuring."
This is a lie. Risk can only be shifted.
The second part of this lie is that one can treat an addiction with more of the drug that one is addicted to, in this case debt. Nobody would believe that if you attempted to run that line of garbage with regards to alcoholism or someone jacked on meth, but for some odd reason both the public and policy-makers "buy it" when the substance is debt. More is better, and more will save us.
The junkie believes that too - for a few hours.
We've gone so far with this deception that to admit the truth and repair it means bringing upon ourselves an economic Depression.
But to fail to admit the truth will bring upon ourselves a worse Depression or even political and economic collapse.
There is no free lunch, ever, anywhere in the Universe. All debts must be paid or defaulted, books always do balance even if you don't want them to, and if you try to hide the truth about the 20,000 cockroaches in your wall eventually you will find one winking at 'ya when you get up to use the can at 2:00 in the morning.
The truth is that most of the major banks are, today, insolvent. The truth is that Ms. Bair wouldn't ask for a $500 billion credit line if she didn't need it; she was, per her own words, covered with her existing facility. The truth is therefore that Ms. Bair is lying and she has every reason to believe she will need the $500 billion.
She's probably right, by the way.
Don't fall in love with the market or the so-called "green shoots." The Market rejoiced at a "better than expected" ADP report but we still lost nearly half a million jobs last month. You'd think from the market reaction there was a "+" sign in front of the number.
There was not.
Chrysler dealers are allegedly sitting on fence posts, expecting 1,000 or more to receive the axe come Friday. This has gotten no notice in the media, but its happening. All those people working in those 1,000 businesses will be out of work come Friday afternoon. General Motors will do the same thing within the next 2-3 weeks. The suppliers to both firms will get trashed as well. Expect another 2 million jobs to disappear into the ether as a direct result of the automaker implosions in the next few months and remember, those aren't in the numbers yet because they haven't happened - but we know they will with certainty.
Bernanke bought another $7 billion in Treasuries, effectively jacking the equity markets again. Guess who he bought those Ts from? You got it - the "primary dealers" - people like Goldman. You don't think they bought index futures with the money, do you? Or maybe financial stocks? Naw, they'd never trade - that is, speculate - with public funds would they? This problem, by the way, is the reason we had Glass-Steagall - to prevent not only speculation by banks that the government needed to be safe and sound but also to prevent various forms of circle-jerk games like this. Next question: Ben has been buying like crazy but has barely been able to keep the 10 year Treasury under the 200 day moving average (DMA), and in fact rates on the long end have been going up. What happens when (not if) he loses control? If he tries to increase the mount of money being QE'd he runs the risk of a currency run on the dollar, especially if he runs out of money before his self-imposed time has run. If he doesn't, the TNX may go to 5% almost immediately. Both of those outcomes aren't so good - would you prefer to be poisoned or shot in the head?
Can the market continue to move higher? Sure! What was the P/E of the Russell, Nasdaq or S&P at the top in early 2000? Did that last "blow-off" in the Nasdaq represent "value"? No - it represented distribution from the people making the "strong buy" and "attractive" calls to you, who then was left holding the bag!
Was it recognized immediately? Nope; the last six months of that blow-off top were extraordinarily violent and those who were right - those who were shorting the market - got relentlessly stampeded as the market raged higher, margining many of them out at or near the top!
While some of this is simple irrationality a good part of it is intentional distribution from those investment bankers and brokers who know full well they're full of crap and yet they make nothing if they can't sell their wares on to you, the rube.
This entire "stress test" game is about confidence, but it is not possible to get back to "the status quo" from whence we came. Claims that "we're all ok" when people are allowed to make up the numbers going into the test with no verification and the "standards" for the test are less stringent than the actual conditions that exist today make the so-called "tests" a fraud of the first order perpetrated upon the public.
GDP must come back to sustainable levels, and that means whether we like it or not, it must contract to a level consistent with current production rather than pulled-forward demand through ever-higher ratios of debt to current income.
The bad news is that this will happen whether anyone in the government likes it or not and those who are crooning with their "strong buy" calls know it.
When the world was falling apart I liked Citibank at $1, Ford at a buck and change, Alcoa at a few dollars and BAC well under $5. Today, with all of these issues having nearly doubled or in some cases having risen in price by 300% I've sold them all since I see no value in these stocks at current prices unless you can make the case that the economy can resume the HELOC-extraction spending of the 2000s, which we all know is impossible.
I believe that the market is trading on hype and intentional misrepresentation, just as it did in late 1999 and early 2000, or, for that matter, through 2007 and early 2008. My opinion will change when I see the high-frequency data (e.g. sales tax collections) level off and I am thus able to calibrate actual economic activity and relate that to GDP. From there I can formulate a reasonable place for both the market and economy to bottom.
Right here, right now, today, buying or remaining long the market is a wager that the government and financial institutions will be able to blow yet another bubble - in the stock market.
Congress may have a few dog and pony shows but nothing of value since it would show their own involvement and corruption so ultimately..