Guest Post: More Spin And Geithner Gobbledygook

Submitted by Nomi Prins

More Spin And Geithner Gobbledygook

On the right hand side of the Treasury Department website homepage, under the subheading Wall Street Reform, is the following lofty statement: 

"It is time to restore responsibility and accountability to our financial system."

That's the spin. Now, it's been spinning there awhile, so it's not exactly news.

But today, in complete contrast to the meaning of that statement, Geithner suggested backing a 'risk-retention' proposal that excludes banks that meet high underwriting standards (probably those that got high marks on the latest Fed stress tests for which the Fed isn't releasing any details) from having to retain portions of the deals they securitize, you know, of having to maintain a stake in the outcome of those deals and the performance and integrity of their underlying loans.

To recap, as a result of the 2008 debacle, banks that passed their stress tests, effectively borrow money at next to zero percent. The aftermath of the financial crisis is the loosest monetary policy in our nation's history. Even with all that help, banks don't want to be bothered holding anything that could screw around with their capital ratios. Of course.

The watery and verbose Dodd-Frank bill did very little to change the banking landscape (okay less than nothing, big banks got bigger, Glass-Steagall wasn't resurrected, rating agencies remain in control of rubber stamping deals and debt, funky derivatives are excluded from exchanges, etc.) But it did manage to churn out some language that suggested banks keep some 'skin in the game' and retain up to 5% of each securitized deal they manufacture. 

Today, Geithner reconfirmed that any potentially useful pieces of that bill (and you have to look really hard for them to begin with) would be rendered impotent or be axed. Shocking. So comforting he's leading the super-spin systemic-risk-reducing-but-not-really, taxpayer funded Financial Stability Oversight Council Board.

It's no surprise that the banks that received trillions of dollars of federal backing don't want to hold more of their concocted crap in the future. That would mean holding more capital behind the crap too. That would mean not being able to use that capital to create new crap. 

But it's not just them. It's the regulators that manufacture their future employees too. Having apparently forgotten everything that happened in the last few years, the FDIC voted 5-0 to consider this proposal. The SEC's going to have a think about it later this week. How about - no that's a dumb ass proposal that flies against everything we've been babbling about when we talk about containing systemic risk?  Course not.

It'll happen. The most powerful banks will be deemed the highest quality issuers and nothing will have changed - again. And what's the likelihood that JPM Chase, for example, is the first exemption? High.

What's the likelihood that the collateral underlying their loan portfolios retains the same value it had when those loans were contracted? Zero.  If that were the case, then only in JPM Chase land, for example, would the value of homes not have deteriorated. Which isn't reality. But that doesn't matter. Because they, and every other bank, can continue to pretend that until a default happens or a foreclosure is completed, there's no need to re-evaluate any of their loan portfolios because they are under-collateralized on every single loan, or admit their true risk. Certainly no accounting rule is going to make them.

Yep, banks know enough to lobby against retaining a higher stake of risk in those loans and their related deals. Which tells us something about how weak and shady the banking system remains and how strong the Treasury, Federal Reserve, Regulatory and Congressional spin to the contrary is.


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