It’s another bloodbath in the stock markets today, as shares in the big money center banks are bouncing around their new support level of zero. I think this sets the stage for one of those increasingly frequent wild weekends of panic-stricken negotiations between Wall Street CEOs, the Treasury, and the Federal Reserve. My guess is that another large bank, probably Citibank, is going to be "disappeared" by merger or be "rescued" come Monday.
I do not like ascribing undue influence to the financial markets, but the fact is that the reaction to the policies and pronouncements of President Obama and Sceretary of the Treasury Geithner (especially Geithner’s announcement of his plan that’s not really a plan last week), have been extremely negative, destroying in three weeks one third of the equity value in large U.S. banks – a feat that took Bush and Paulson nearly 18 months to accomplish.
The pressure on financial stocks is starting to have some very interesting effects.
More downstairs . . . .
I do not believe, and do not wish to imply, that our government’s policies ought to be crafted with an eye toward gaining approval in the financial markets. As I wrote two weeks ago, in If I were President . . . [Ending Wall Street's rule]:
we have reached the point where we must decide to either save the financial markets, or save the nation. In large part, the financial markets have caused the problems we now confront. So I urge you, over these next few days, to ignore the wild fluctuations of the financial markets. There will be great weeping and gnashing of teeth as financial assets lose billions, even trillions of dollars in price. But to continue to attempt to prop up these prices would be a fatal mistake for our country, and for our future. We cannot allow the financial markets to dictate the terms of survival for our nation. Once we have restructured our economy, and begun the physical task of building the economic capacities that our children, and their children, and many future generations will use, then the financial markets will return to sanity and normalcy, and will once again be a reliable indicator of the underlying economic health and vitality of the country.
With that said, I want to present the proposed solution put forward yesterday by Karl Denninger at MarketTicker, who rips into President Obama and Secretary of the Treasury Geithner, before laying out a clear and ruthless plan for cleaning up the excesses of Wall Street (hat tip to Sean Paul Kelley at The Agonist):
If Taxcheating Timmy is unable or unwilling to discharge his duty as Secretary of the Treasury, I'll do the job. You probably wouldn't like how I'd do it, but I'd do it. Here's my prescription:
1. The memo goes out in the AM to every bank in America: No more lies. If you lie, even once, your bank gets seized and you will be criminally charged personally. Period. I am particularly interested in Mr. Lewis' claims on national television (CNBC) that Bank America had a "great" January. That sounds an awful lot like Dick Fuld who said he was going to "burn the shorts" and was "well-capitalized". Oh by the way, I'd refer Mr. Fuld's statements over to Justice immediately, along with everyone else who said something similar (Bear Stearns anyone?)
2. I would then amend OTS and OCC rules: All bank examinations are public data. All examinations must either have every asset marked to the market or the full model and data inputs must be disclosed, without exception.
3. Next, I would take the stage and give every bank in America 72 hours to disclose their current Tier Capital numbers under those rules. They have 'em in the possession of their Risk Manager. Let's have it. In public. You publish it, we print it. Everyone who is under-capitalized and has been hiding it - your shares are suspended. We'll get to you.
4. For those who are under-capitalized: If you have sufficient capital in your debt to be crammed down, that's what happens. Your common equity is gone. Preferred is crammed down, if that's insufficient it is gone. Next we do subordinateds, and repeat until sufficient capital is restored. End of discussion.
5. For those who cannot be crammed down we seize you. Your deposits and good assets are auctioned off to sound institutions, spread among the physical locations of those assets and deposits so no concentration of more than 5% in one bank occurs. The rest of the assets go the FDIC and are run down or auctioned off as they deem appropriate.
6. Any bank with more than 5% of the deposit base has 12 months to reduce it to under 5%. This affects fewer than 20 institutions.
7. No bank may transact in any instrument that is (1) not a whole loan or (2) is not traded on an exchange. Period. Any such "assets" currently held must be disposed of within six months. No exceptions. I recognize that this makes banks a "utility" - entities that take deposits and make loans. So what? Its a good and profitable business, has been for hundreds of years, and forces proper underwriting since you must retain the risk.
8. Any bank that finds (7) onerous (and most will) is free to split itself into two firms, one a bank and the second a non-bank affiliate held by the parent. The affiliate may not utilize depositor capital or otherwise be cross-contaminated with bank assets and support, but is of course free to raise money via debt offerings in the marketplace such as it is. Said non-bank firm may trade in whatever it would like, however, it will not receive any government support of any kind. Cross-contamination of any sort between a regulated bank and a non-bank sub will be treated and prosecuted as bank fraud. Any existing "affiliate" bank credit lines must be extinguished within 90 days and "23A letters" are explicitly disallowed.
9. Reserve ratios are set at 8% with no exceptions.
10. Bernanke will do as the above directs without complaint or I will exercise my lawful and Constitutional authority to issue United States Notes, bypassing The Fed entirely. Ben and The Fed work under my direction, not the other way around. End of discussion.
11. Any bank that does not want TARP money may repay it immediately. If you keep it, no employee may receive total compensation exceeding that of the President of The United States, without exception and in all forms, including stock, options as valued under Black-Scholes, deferred compensation, benefits and cash. Period. You are working for us, therefore we set your salaries.
There 'ya go. Cards on the table, face up. No bullshit. If you're broke, you're broke. We'll protect depositors and everyone else can twist in the wind. Those who are bankrupt must be recognized as bankrupt so the system can clear and the market can function.
What is especially interesting is that the bloodbath in financial stocks is starting to fracture the monolithic façade of the financial oligarchy, with some of the smaller players on Wall Street beginning to realize that the only way big Wall Street and money center banks (namely, Citigroup, JP Morgan, Goldman Sachs, Morgan Stanley, Bank America, Wells Fargo) are going to be kept alive is to enslave the entire U.S. economy in debt peonage – including them, the smaller players. That’s why I think Denninger’s piece is so interesting. He’s basically only proposing what people like Ian Walsh, Stirling Newberry, Michael Hudson, Dean Baker, and others have been proposing for months.
In fact Denninger explains exactly what Billmon explained in his brilliant diary yesterday.
AIG still hasn't been forced to disgorge and close their CDS [credit default swap] book, despite over $100 billion in direct support. Why not BEN [Bernanke]? Is it because AIG's liability under those contracts might be several hundred billion more, and if you net them and then close the book you'd have to make good on it or default them, and the guys on the other side are your banking buddies?
That's right - the truth is almost certainly that firms like JP Morgan, Goldman and Morgan Stanley (along with Bank America and others) are, to no small extent, the people who are long those contracts from AIG. If they're netted and then the book is closed the fact that these contracts are worth zero would be revealed and that could cause every one of these firms to detonate at once.
One last note, folks. As I and others have pointed out, the Political Power of Just 6 Banks is the Problem. But there is plenty of evidence that many of the top people on Wall Street, including the enabling lawyers and media executives, have committed federal crimes of tax fraud and tax evasion. There are the 9,800 Wall Streeters who had an escort service provide false invoices so that they could use company funds to pay prostitutes.
Now, there is a list of 52,000 Americans who probably committed tax fraud using the tax shelter schemes marketed by UBS, the firm where former Texas Senator Phil Gramm is a top officer.
All we need to do to destroy the political power of Wall Street is to insist on justice.
Is justice too much to ask?
We are about to find out.