Some Like It with Financial Amnesia

By Static Chaos

Considering it was just a year ago when we were jolted into this banking-induced recession, you can imagine my astonishment when I read this recent Forbes headline:

“Dubai's Failure Exposes A U.S. Advantage

The well-regulated U.S. financial sector has a lot to show for itself.”

I’m also equally perplexed by Dick Bove, a widely followed banking analyst, suggesting “Bank of America (BAC) should beg Ken Lewis to stay,” and that “The success of this bank is due to the brilliance of Ken Lewis as a visionary and tactician.”

We are talking about Ken Lewis, who has failed his fiducially duty to shareholders by not disclosing the Merrill Lynch loss, and who literally charged Bank of America (BAC) into bankruptcy all the way till the end if not for the taxpayers.

Many experts have debated whether the systemic problem is the excessive consumer debt or primarily an issue of leverage within the financial system. Although a high US consumer debt was certainly a contributory factor, arguably it was the excessive leverage within the financial system that pushed us into this recession.

The mark-to-market accounting further exacerbated the net impact of this high leverage after the U.S. housing bubble burst. That subsequently led to a domino effect spreading across the globe due to the interconnected global banking system.

Since then, lending has come to a screeching halt as financial institutions hoarded cash (from the government, i.e., taxpayers) to shore up their balance sheet. Businesses reacted to the credit freeze by cutting production, deferring spending, and slashing employment, leading to the current 10% headline unemployment rate.

Worse yet, the mess from the over-leveraged financial sector may not be over. The International Monetary Fund's chief, Dominique Strauss-Kahn, was quoted last week as saying half of the losses suffered by banks could still be hidden in their balance sheets, more so in Europe than in the United States.

Reuters also reported that U.S. banks held $1.65 trillion of commercial real estate loans on their balance sheets as of November 4th, and that the banks could still face a “major commercial real estate storm.”

This means a possible second or even third bailout may be on the horizon at a time when the U.S. national debt has hit a record $12 trillion, and is expected to soon exceed the $12.1 trillion maximum amount of debt allowed by law.

Moreover, there are deeper and wider issues surrounding off-balance sheet disclosure and reporting (remember Enron?). For instance, Wells Fargo (WFC) could face up to $1.1 trillion in off-balance sheet exposure, which might partly explain why Wells Fargo has not paid back its $25 billion in TARP borrowings yet.

Another example of the questionable banking regulation lies with the derivatives market - the billions of dollars in derivatives profit masked by the opacity of the market, but controlled by the biggest dealers like J. P. Morgan (JPM) and Goldman Sachs (GS). These same big bankers are now feverishly lobbying Congress for exemptions from the proposed derivatives legislation.

A recent IMF study of 88 post-war banking crises showed that on average, the typical banking crisis results in a permanent loss of output near 10% of GDP. Main Street is already paying dearly for Wall Street. The U.S. Treasury admitted for the first time that taxpayers lost $30 billion on the AIG bailout. This week, the Obama Administration decided to extend the TARP program until next October, while projecting losses from the bailout program at about $141 billion.

Banks have only profited this year thanks to the bailout, various government programs, and the Fed's easy money policies. Under these measures, banks are able to borrow at a virtual zero interest rate and invest in high return assets. The return to profits also has prompted a resurgence of outlandish bonuses and vigorous defense of established vested interests.

But it is simply not acceptable to taxpayers that they have to foot the bill for losses in a deep downturn, while institutions enjoy all the gains as the economy recovers. This crisis has made us recognize the dire need of a tighter global financial regulatory approach on leverage and transparency to reduce the risk to the taxpayer for the longer term, and to prevent the hidden risk that almost destroyed the global economy.  

For once, U.S. banks do not seem to have as much exposure as their European counterparties in the Dubai debt debacle, but don’t become complacent towards the state of our financial sector either. Nonetheless, a naiveté seems to have emerged as an unexpected "Dubai effect" when JP Morgan Chase CEO Jamie Dimon received a ringing endorsement from Bove as a possible replacement for Treasury Timothy Geithner.

Now seriously, is Wall Street the best candidate to watch over Main Street?  

Comments

[Anonymous]

Straight from Wiki:

Features of a banana republic

A collusion between the overweening state and certain favored monopolistic concerns, whereby the profits can be privatized and the debts socialized.
Devalued paper currency in the international community.
Kleptocracy -- those in positions of influence use their time in office to maximize their own gains, always ensuring that any shortfall is made up by those unfortunates whose daily life involves earning money rather than making it.
There must be no principle of accountability within the government so that the political corruption by which the Banana Republic operates is left unchecked. The members of the national legislature will be (a) largely for sale and (b) consulted only for ceremonial and rubber-stamp purposes some time after all the truly important decisions have already been made elsewhere.
"a money class fleeces the banking system while the very trunk of the national tree is permitted to rot and crash" -- Christopher Hitchens [9]

[ATG]

http://www.americanbanker.com/boty/

Banks rolled over W 14 October:

http://stockcharts.com/charts/gallery.html?$BKX

Oy...

[Anonymous]

JD may have been "Banker of the Year", but us stooges got "Honorable Mention":

Honorable Mention: The American Taxpayer
American Banker | Monday, December 7, 2009

By Steven Sloan

It would be easy to forget that none of the success over the past year would have been possible without the seemingly endless support of the American taxpayer...

http://www.americanbanker.com/specialreports/174_24/the-american-taxpaye...

[Anonymous]

excerpted from: Army Of Avarice Plunders America Into Calamity That Did Not Have To Happen

Getting away with so many fraud-based practices for so long has emboldened the wrongdoers to almost obsessively believe they can get away with anything. Years of successfully bilking the public without fear of being caught or punished has imbued them with the kind of blinding arrogance that boldly shoves 3 pages at Congress and says with a straight face: Give us the dough ($700 billion)-- ours to do with as we will, free from liability or accountability—or else. And now they’re being rewarded for it with the biggest profits and bonuses ever. Why?

Why were all the safeguards so intentionally set in place in 1933 and 1934 abandoned? Because those empowered to make and enforce our laws— sworn to be good stewards of the public interest— allowed themselves to be seduced and inducted to serve private interests, not the least of which their own, courtesy of campaign contributions, lobbyist largess, lucrative job prospects, and other co-optive emoluments known anywhere else in the world as bribes. When will we learn that it’s not about politics, ideology or principle? It’s about the money! But drop me a line the next time you hear any corporate or mainstream media pro daring to talk or write about it in those terms. Somehow, as obvious and pernicious a role as it plays in our political process, discussing venal motive is off limits, part of the pretense that our elected officials actually represent the best interests of the people who voted for them (as distinguished from those who bankroll them).

view the full article at: http://calltoaccount.wordpress.com/

[ATG]

Dimon just made the same cover Ken Lewis and

other fallen angels disgraced. Yes, TG needs to

go potty, but how about someone from Main

Street instead of Wall Street? Mark to Market

accounting dropped BRK's earnings 96% last year

this time. When will Banks use it? Oh...

Maybe that's why banks rolled over... 

[Anonymous]

My 14 year old son asked me about the bailout. So I explained patently that the banks made many bad loans and the government intervened and lent them money to tie them over while they are doing their best to recover or sell off the bad assets.

His next question was, where did the money come from and I explained from the government, and he asked but where did th egovernment get the money. My answer was that the government borrows the money in essense from us, the regular people who put money in the bank and the banks lend to the government, which lends it to the banks so they can make loans to the industry to stimulate the economy.

Now here is his answer:

Dad, it sounds a little too complicated for me, but I think it is stupid to do it this way, Why doesn't governemnt reduce taxes so we can spend more and stimulate the economy that way?!

[hbjork1]

When people write for Forbes, are they generally paid for their output?  If so, are they paid by the word or by the column inch? 

In order to make a living, writers have to find something novel and entertaining to write about.  Plausibility helps if it can be worked in.   Sometimes the writers even capture the hidden truth in a situation but that is only a matter of luck.

Gotta sell those magazines. 

People writing for blogs are a little further up on Maslow’s hierarchy of needs.

[Selah]

The Palm is sinking, despite this article's proclamation:

http://www.thenational.ae/apps/pbcs.dll/article?AID=/20091209/BUSINESS/7...

However, it is more of a metaphorical "sinking"...

[carbonmutant]

It's obvious that the engineers at Nakheel haven't come up to speed on the inconvenience in Mr. Gore's presentation.

[Miyagi_san]

Bove is an ass , I wish Paul Miller would speak more 

[curbyourrisk]

I know the FASB requirements for the off balance sheet and SIV were supposed to begin in November......so, are we expecting bad quarters in Q1 for the banks due to this? or will they just ignore the rule?

[Anonymous]

the rule will be delayed

[Anonymous]

Wah...

DavidC