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Everything's fine. Stress tests passed.

Please disregard the fact that BofA still needs $36 billion after already taking $163 billion in govt assistance and risky asset guarantees. That's what ventilators and bypasses are for.

Oh and Citi - Citi has taken $45 billion in TARP funds. We have guaranteed $306 billion against losses in risky assets. SO, except for the $351 billion in govt assistance Citi's doing fine.

BofA and Citi are doing so well, they've been buying even more toxic assets.

They must really like Geithner's plan, too. If it's good enough for Ken and Vikram. It's good enough for me. Good job on your report card guys.

Except, I do wonder - what happens under the Geithner plan when they sell at a loss? Does the gov't cover the spread there, too? Do we just keep insuring losses.

Are we USAIG now? I have so many doubts about Gethner's plan.

For everyone who holds Roubini's faint praise of Geithner's plan up as a weapon against reality, remember that it relies on some caveats:

  1. Roubini says it would only work for solvent banks.

Which begs two questions -

a. if they're truly solvent, why do they need our help?
b. Are these banks really solvent?

  1. Roubini says banks must be forced to fully participate, seeming to acknowledge Stiglitz's point

The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets that they think the market overestimates (and thus is willing to pay too much for).

But the market is likely to recognize this, which will drive down the price that it is willing to pay. Only the government’s picking up enough of the losses overcomes this "adverse selection" effect. With the government absorbing the losses, the market doesn’t care if the banks are "cheating" them by selling their lousiest assets, because the government(taxpayer) bears the cost.

  1. That banks would follow the spirit as well as the letter of the plan. As Sach's lays out, it would be impossible to identify-

..the gaming of the system doesn't have to be as crude as Citibank setting up its own CPPIF. There are lots of ways that it can do this indirectly, for example, buying assets of other banks which in turn buy Citi's assets. Or other stakeholders in Citi, such as groups of bondholders and shareholders, could do the same.

If any economist has been assessing the potential of the Geithner Plan in a vacuum it has been Roubini. However, his "caveats" are starting to pile up and reflect those of his contemporaries.

Originally posted to JerichoJ8 on Thu Apr 09, 2009 at 02:35 PM PDT.

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Comment Preferences

  •  TJar (10+ / 0-)

    Code Pink Rocks - Why are women the only one's with balls lately?

    by JerichoJ8 on Thu Apr 09, 2009 at 02:36:05 PM PDT

  •  Everytime I (5+ / 0-)

    see anything about Treasury, I just want to kick their [Geithner, BO] butts---really , really hard.

    Bush's presidency is now inextricably yoked to the policies of aggression and subjugation. Mike Whitney

    by dfarrah on Thu Apr 09, 2009 at 02:39:05 PM PDT

    •  What would you... (0+ / 0-)

      be doing differently?  Nationalizing the banks?

      "President Obama will be the most liberal President of our lifetime."

      by rashomon on Thu Apr 09, 2009 at 03:00:09 PM PDT

      [ Parent ]

      •  What's wrong with that? n/t (1+ / 0-)
        Recommended by:
        costello7

        Code Pink Rocks - Why are women the only one's with balls lately?

        by JerichoJ8 on Thu Apr 09, 2009 at 03:00:41 PM PDT

        [ Parent ]

        •  Nothing... (0+ / 0-)

          other than we lack a regulatory structure to do it.  Unless you're going to try the FDIC, which is already pretty low on funds.

          "Nationalizing the banks" is going to require Congressional legislation.  And those votes don't exist.  At least not yet.

          "President Obama will be the most liberal President of our lifetime."

          by rashomon on Thu Apr 09, 2009 at 03:02:39 PM PDT

          [ Parent ]

          •  Except that Congress (2+ / 0-)
            Recommended by:
            JerichoJ8, yellow dog in NJ

            gave the FDIC a $500 bn line of credit. You can do anything when you are printing money.

            In every cry of every man, In every infant's cry of fear, In every voice, in every ban, The mind-forged manacles I hear

            by Areopagitica on Thu Apr 09, 2009 at 03:12:20 PM PDT

            [ Parent ]

          •  'We lack the regulatory structure' (0+ / 0-)

            True. We need a regulatory structure because it's been eviscerated in the name of modernisation. But we also need a resolution structure for failed banks, and that's what Congress needs to give us. Kinda like Bush 41 did with Congress during the S&L crisis and created the RTC. Which was a success but would've cost much less if it had been implemented 5 years earlier under Reagan when the crisis actually happenend.

            See that's what I'm afraid of. That we dither until someone steps in maybe a few years after and we still have to nationalise and it will be even more expensive up front.

            The opponents of nationalisation don't realize that we're actually already there in nationalisation land. We just don't want to put the hard word on the banks in the same way as we have with GM and Chrysler. On the evidence I see, it's regulatory capture.

  •  Recommened for (1+ / 0-)
    Recommended by:
    JerichoJ8

    Escher Curve

    Wish you would have drawn one!

    "What we've seen the last few days is nothing less than the final verdict on an economic philosophy that has completely failed." -- Barack Obama

    by TomP on Thu Apr 09, 2009 at 02:44:46 PM PDT

  •  Gaming (4+ / 0-)

    Been pitching the scam argument for quite a while.

    Unfortunately, it should be clear to all of us that this is the entire strategy of Baghdad Tim: the public is supposed to be confused, it's supposed to look at WFC's earnings report (gee, where are you marking your assets) and think the world is fine.

    They say no one can make you feel inferior without your consent.  Well, the Republican talking point for the first 45 days was that the market was tanking on Obama's watch.  This so freaked out the Administration that ever since it has sacrificed every principle to goose the market.

    It was lousy of the Bush Administration to pump the housing bubble to overcome the dotcom bust and it is equally lousy of the Obama Administration to lie to us about the financial sector to inflate the market.

    •  This is what Jeffrey Sachs (3+ / 0-)

      said. Teh banks can create dummy corporations to buy their assets at inflated prices and the taxpayer loses a cool trillion. And if the assets do actually pay off, then the banks make out like bandits while the taxpayer gets a nice, crappy return if anything.

      It's so genius.

      In every cry of every man, In every infant's cry of fear, In every voice, in every ban, The mind-forged manacles I hear

      by Areopagitica on Thu Apr 09, 2009 at 03:11:22 PM PDT

      [ Parent ]

  •  Wells Fargo . . . (2+ / 0-)
    Recommended by:
    costello7, yellow dog in NJ

    . . . posted a record profit for the first quarter today.

    We must get them a bailout, and STAT!

    It's working! It's really working!

    •  Well's Fargo did well. They focus on mortgages (0+ / 0-)

      and brick and mortar banking. Not heavy in markets.

      Code Pink Rocks - Why are women the only one's with balls lately?

      by JerichoJ8 on Thu Apr 09, 2009 at 02:52:29 PM PDT

      [ Parent ]

      •  Bull (0+ / 0-)

        WFC lies more than the other folks.  That's it.

        WFC is a retail bank focused on the California and desert southwest market.  Their assets are asset-backed loans to Californians (houses, cars, etc) and unsecured loans to Californians (credit cards).  You think they are fine?  You think they are better than the other guys?  Bull.

        WFC is taking advantage of a difference in accounting treatment.  If you are C and you hold your assets through traded securities, you (historically) take markdowns when those traded securities lose value.  If you are WFC and you hold whole mortgages, you obstinately keep your mortgages at "fair" value ("fair" meaning the price that makes you fairly happy).

        Diversification of a mortgage pool by slicing it up and reconstituting it into a security does not magically improve it, since the same economic downturn can hit all constituent parts at once.  But it sure as hell doesn't make it worse, which is what WFC would have you believe.  Somehow there they are, right in the eye of the storm, and it's only the other guys who are getting hit.

        •  I was only commenting on their first Q results. (0+ / 0-)

          Thank you for clarifying what may be going on behind the scenes.

          I imagine they're holding on to quite a few foreclosed assets and not writing them down.

          Code Pink Rocks - Why are women the only one's with balls lately?

          by JerichoJ8 on Thu Apr 09, 2009 at 03:08:01 PM PDT

          [ Parent ]

          •  Which are lies! (0+ / 0-)

            Given the all-time spreads in the business (cost of borrowing from the Fed: damn near 0%; cost of most folks' credit cards: through the roof), of course they are making money on new business.

            However, their old business has to be killing them.  Look at the Case-Schiller indicies for any of WFC's major markets (LA, SF, SD) - every mortgage issued in the last five years has to be underwater, since even a completely conventional 80/20 house has lost over 20% of its value.  Plus the job losses, which have to be killing the credit card business.

            For an analogy: guy falls off thirty story building.  When he passes the tenth floor, he still hasn't hit anything.  But he most certainly isn't fine.

            C and BAC and the other folks who have their consumer exposure through securitized products have to admit that they are close to the ground and approaching rapidly - or at least did before the end of mark to market.  WFC doesn't.  So sure, their earnings reports are sunny - they only tell you that the wind is rustling their hair and they have a great view.

            Baghdad Tim wants to make that the model for the entire sector.  He wants everyone to go back to work and forget the falling bodies, and Treasury will clean things up when impact comes.  So he is lying to us, and he is encouraging the banks to lie as well.

  •  Uh...minor point. (0+ / 0-)

    If any bank is actually going to fail the stress test, the way we'll hear about it is when it's seized by the FDIC.  Not in a leak to the NYTimes.

    If Treasury said anything otherwise before acting, you'd just prompt a run on whichever banks are "failing"...and it would become a self-fulfilling prophecy.

    I mean, how hard is that to understand?

    "President Obama will be the most liberal President of our lifetime."

    by rashomon on Thu Apr 09, 2009 at 02:57:10 PM PDT

    •  Not to mention... (0+ / 0-)

      The Krugman "nationalization" plan will require billions more...and legislation from Congress.

      That ain't gonna happen, unless total collapse is obvious to everyone.  And even then...

      "President Obama will be the most liberal President of our lifetime."

      by rashomon on Thu Apr 09, 2009 at 02:59:28 PM PDT

      [ Parent ]

      •  If you say so. n/t (2+ / 0-)
        Recommended by:
        rashomon, costello7

        Code Pink Rocks - Why are women the only one's with balls lately?

        by JerichoJ8 on Thu Apr 09, 2009 at 03:01:02 PM PDT

        [ Parent ]

        •  You don't have to take my word for it. (0+ / 0-)

          When Sweden implemented the "Swedish Model" during their bank collapse, one of the key elements was providing 100% backing for ALL banking debts.  In every single Swedish bank.

          How much money do you think that would require here?  And do you think the President could do it unilaterally?

          "President Obama will be the most liberal President of our lifetime."

          by rashomon on Thu Apr 09, 2009 at 03:05:28 PM PDT

          [ Parent ]

          •  Noone said every single bank. n/t (1+ / 0-)
            Recommended by:
            rashomon

            Code Pink Rocks - Why are women the only one's with balls lately?

            by JerichoJ8 on Thu Apr 09, 2009 at 03:09:33 PM PDT

            [ Parent ]

            •  That's what Sweden did. (0+ / 0-)

              It's step one.

              From the NYTimes:

              After a series of bank failures and ad hoc solutions, the moment of truth arrived in September 1992, when the government of Prime Minister Carl Bildt decided it was time to clear the decks.

              Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt’s conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation’s 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.

              Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years

              Link:

              http://www.nytimes.com/...

              "President Obama will be the most liberal President of our lifetime."

              by rashomon on Thu Apr 09, 2009 at 03:14:22 PM PDT

              [ Parent ]

      •  Billions (3+ / 0-)

        Good bank restructuring doesn't require a dollar upfront, and never will if balance sheets are accurate.

        It may require many dollars if the price of bondholder failure is too high (insurance companies, pension funds, etc).  But then we would know who needed the money, how much they needed, and get meaningful stakes in those entities.

        The Swedish plan absorbed all bondholder obligations, which is incredibly generous.  The Swedes did that in large part out of foreign policy considerations, and because the koruna is a small currency and they didn't want to start a run on it when the German banks who owned bonds all dumped it for deutsche marks.

        We don't have those problems.  We have the problem of a Treasury that is determined not to level with us about the severity of our problems because it considers the S&P 500 a referendum on the Administration.

    •  Unless they're floating a balloon. n/t (1+ / 0-)
      Recommended by:
      rashomon

      Code Pink Rocks - Why are women the only one's with balls lately?

      by JerichoJ8 on Thu Apr 09, 2009 at 03:02:48 PM PDT

      [ Parent ]

      •  You wouldn't float... (0+ / 0-)

        a balloon with bad news.  That's why I think the "news" that all 19 banks passes the stress test is meaningless.  That just tells us that banks could be solvent, under certain circumstances with certain levels of capital.  Not really much of a surprise.  It's the info in the stress test itself (which we won't see, at least not yet) that will be much more valuable.

        "President Obama will be the most liberal President of our lifetime."

        by rashomon on Thu Apr 09, 2009 at 03:08:27 PM PDT

        [ Parent ]

    •  More options (4+ / 0-)

      Well, if the stress tests were for real, the first sign would be not announcing that everyone was going to pass.

      You could, for the same low price of calling your friendly NYT mouthpiece, say "we expect several banks will end up in receivership as we continue to defend the soundness of the banking system."  Folks would know that Treasury was credibly committed to defending depositors and not bondholders and certainly not equity holders.

      But that's exactly the opposite of what Treasury has done, isn't it?

      •  I'm not sure about that. (0+ / 0-)

        As soon as you say "we expect several banks to fail", that just sets off several rounds of speculation about WHICH banks.  And possible runs from there.

        And the FDIC is defending depositors.

        "President Obama will be the most liberal President of our lifetime."

        by rashomon on Thu Apr 09, 2009 at 03:11:04 PM PDT

        [ Parent ]

        •  Funny way of doing it (3+ / 0-)

          They are defending the depositors the same way we fought in Vietnam to keep the Communists from fighting us here.

          There are massive amounts of bondholders (and still some equity) between the depositors and impairment.  The depositors could much, much more effectively and transparently be protected with a good bank plan that moved them to an entirely different corporate structure.  That's how I know it isn't about the depositors.

          Right now we are spending taxpayer dollars to keep the bondholders at 100 cents.

    •  Then you don't say anything (3+ / 0-)

      If you float a piece of universal good news (all banks passed) while the evidence points to other factors (continuing to shovel money at the problem) you do nothing other than create doubt in the process.

      "Out on the edge you see all the kinds of things you can't see from the center." - Kurt Vonnegut

      by Mister Gloom on Thu Apr 09, 2009 at 03:20:52 PM PDT

      [ Parent ]

  •  Methinks Obama and Bernanke gave them all (3+ / 0-)

    passing grades a few weeks ago.

  •  It isn't Geithner that grades the tests (0+ / 0-)

    but there are 200 people who actually go through the bank books and do it.

    Those people are from the Fed while Geithner are from the Treasury.

    Too different entities.

    "Because we won...we have to win." Obama - 6/6/08. WELL WE DID IT!!! 11/4/08

    by Drdemocrat on Thu Apr 09, 2009 at 03:18:28 PM PDT

    •  200 people for 19 banks (2+ / 0-)
      Recommended by:
      JerichoJ8, Fire bad tree pretty

      It's impossible that any meaningful stress test was done.  During the S&L crisis, it was 160 people for one bank.

      What I've read is that the banks ran the stress tests on themselves.  That's kind of like Alex Rodriguez telling the Yankees, "Don't worry.  I gave myself a urine test at home.  It showed I was clean."

      One thing is for sure:  if this little tidbit about all the banks passing the stress test was supposed to inspire confidence, it is failing miserably.

    •  Banks Setting Own Values on Their Assets. (1+ / 0-)
      Recommended by:
      JerichoJ8

      According to the Warren TARP Oversight Committee report, the stress tests are using the same formula to estimate the value of the banks assets as that used by the risk analysts for the collateralized debt obligations and credit default swaps which worked so very well to bring our economy to its knees.

      According to Warren, the tests relied on the self-reporting of values from the tested banks.

      Thus, we can't trust the figures relied upon by the stress testers.  Did the banks use the original values of the loans?  Did they use an accurate estimate of the reduce value of the loans since their origination date?  Did they use the true present value of their loans?  Only the reporting  banks know for sure what figures they submitted to the testers.

      The "Stress Testing" is a bogus measure which tells us nothing about the real solvency or insolvency of our biggest banks.  Without scrutinizing the "loan tapes", the actual records for each loan, which Geithner has refused to do, we cannot know their value.

      We must demand that the loan tapes be examined by neutral auditors.  It may take a lot of auditors, but that would be a good way to boost our employment figures, so why not discover the truth?

      Genital Slicing IS Torture: Convict Bush and His War criminals.

      by Justina on Thu Apr 09, 2009 at 05:51:30 PM PDT

      [ Parent ]

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