Page 2 of 2 Oh, impotent Washington
By Julian Delasantellis
Similar objections were raised when it was learned that the stress testers had
spent most of their time investigating so called "first" mortgage loans, not
the collateralized debt obligations a few deals away from the primary note,
where many believe the problem actually metastasized to its present frightening
dimensions.
But the most ingenious trick that Geithner is allowing the banks to try relates
to just how they are going to get the $75 billion to meet the requirements of
the most pessimistic scenario.
If they can't raise it from the private capital markets, Geithner is going to,
in essence, allow the banks to create it out of thin air. Nice work if you can
get it.
When the TARP initiative of Henry Paulson, Geithner's
predecessor at the Treasury, first floundered away from purchasing toxic
securities to buying equity stakes in banks, the operating methodology had the
banks "selling " to the US government preferred, interest-bearing stock; the
process would be "transparent" in that it would be done publicly - everybody
could see the banks participating in it.
Thus, if the stress testers came to the conclusion that a bank was deficient in
its quality and quantity of its loan portfolio, all the banks would have to do
would be to convert their preferred stock into common equity stock positions.
On the surface, at least, the banks would have an extra fillup of government
equity, obtained without the government spending an additional dime - not that
the government, in particular Congress, would have given the now wildly
unpopular banks either an extra dime or another $700 billion TARP.
No matter.
In essence, for a bank to convert preferred stock to common stock is not all
that much harder than doing a cut and paste job from one cell in your
spreadsheet to another. The net amount of actual capital in the bank remains
unchanged. It is in this, the crediting to banks of capital that the banks had
to make no real ,sacrifice or exertion to earn, that best illustrates the
essential shallowness and outright duplicity of the entire stress-test
initiative.
Taken together with the stress test's implied assumption that the easy profits
available to the banks through the steep yield curve, which allows the banks to
borrow at short term rates near zero and lend out at 4% to 6% or higher, will
still be available once the Federal Reserve is forced to start raising
short-term rates, and the basic nature of the stress test strategy is clear.
Instead of seeking a solution to the banks' problems, an effort that has led to
nothing but tears and frustration, the government is going to pin the solution
on hopes that the banks will soon be "growing" out of the problem. To that end,
the Geithner Treasury people are taking off their dark-blue, policy-wonk
business suits and putting on cheerleader costumes and pom poms, rah-rahing the
financial sector along to victory after victory that will, they hope, soon make
the travails of the past two years a distant memory.
Never will be heard a discouraging word from the Treasury regarding the banking
system ever again, and it is hoped that, if the private sector can keep its
lips buttoned up as well, that will be enough to muddle through until real
economic growth resumes.
And what of the toxic mortgage loans in the vaults of the "zombie" banks, the
very problem that for two years we've been told must be addressed before the
financial system can return to normal function? Well, we're just not going to
talk about them anymore. According to guest blogger "Gonzalo Lira" ("hey, is
that your real name?") on the Naked Capitalism blog:
Regardless, the
banks are zombies - and they will remain zombies indefinitely. Zombie banks can
undercut solvent competitive banks, strangling financial competition and
ironically curtailing market liquidity, because the zombies know they will
always be propped up by Uncle Sam (sorry for the mixed metaphors, but you get
the idea). This is exactly what happened - and is still happening - in Japan.
Zombie banks will take the government's largesse, lend out no money, squeeze
out their non-zombie competition, and wind up turning the entire financial
industry zombie - and Team Obama has no idea how to stop this, aside from
shoveling even more liquidity in their direction. Or maybe they DO know what
has to be done - put an FDIC [Federal Deposit Insurance Corporation]
receivership bullet in the brains of these zombies - but lack the political
courage to do so.
Either way, the result is the same: Zombies everywhere, killing everything,
ironically curtailing liquidity even as they are propped up in the name of
improving liquidity. The charitable conclusion here is, this shows Team Obama
doesn't have the foresight to envision the obvious traps of allowing zombie
banks to exist. Hence they don't have an overall plan for the banking sector -
if they did, they'd realize the perniciousness of zombie banks and therefore
put a stop to them by setting up a real stress test and putting the banks that
failed it - no matter their size - into receivership.
But what
about Wall Street and the rest of the financial industry, a group that prides
itself on being able to sniff out a phony balance sheet the same way a
bloodhound can the trail of a fleeing fugitive? They love the stress-test
results, as evidenced by the billions of dollars in new bank equity raised in
the market since Monday. Egad! Less than two years after the bursting of one
bubble, is another being blown?
In his remarkable 1979 book, Godel, Escher, Bach: An Eternal Golden Braid,
Douglas Hofstadter explored the phenomenon of ant colonies with perhaps
millions of individual ants, each with their own brain, working together in
such a way that the colony itself displayed its own, unique intelligence. He
likened each individual ant to individual neurons in the brain, which, although
acting independently, together make up the phenomenon of human consciousness
and intelligence.
So how different are the players on Wall Street from the ants? (Don't answer if
you're still smarting from having your broker recommend a buy of Bear Stearns
two years ago at $170). Wall Street, whether you define it as the financial
community as a whole or the individual financial workers operating within the
business, is accepting the stress tests because it desperately wants to.
It's tired of two years of getting obscene screams and curses in response to
each cold call. It's tired of having to make a decision between funding their
kids or their mistresses. It wants its bonuses back. Most hedge fund
supermanagers have already put in one bad year; they know that another one in
succession and it's back to the horror of teaching remedial statistics at the
local community college.
And, as I noted above, there's always the burning hatred of TARPism, the
reviled totalitarian ideology that posits that the Street should learn what
it's like to live like an average American until it is willing to temper its
avariciousness for the benefit of the society as a whole. The prospect of all
the positive outcomes, along with the smashing of TARPism, would be enhanced
with a stock market rally led by the financial sector. It all leads all the
ants to march in the same direction, accepting the stress tests, bidding up
stock prices - whether they're striving for a morsel of sugar or another stock
commission is, in the final analysis, just a matter of species specific tastes
and preferences.
To me, the saddest part of the ultimately degrading spectacle of the stress
tests is how impotent they indicate the American government is now as regards
to its ability to address national problems which necessitate a sacrifice by
well-heeled interest groups. Every attempt to solve the toxic assets crisis was
met by implacable opposition by the banks who would have had to make sacrifices
in order for the attempt to work; finally, Geithner and the government got so
worn down that they gave up and essentially agreed to work with the banks to
cheerlead the financial system in general, and the toxic assets in particular,
sufficiently to drive the assets up to values of the banks' liking.
Hillary and and former president Bill Clinton discovered the same thing with
the failure of their healthcare initiative in 1994 in the face of implacable
opposition by the health insurance industry. Other attempts to address problems
such as global warming, education, immigration and entitlement spending have
also foundered when the time came for politically connected groups to make
sacrifices.
Some time soon, Barack Obama will have to face down the healthcare industry in
the same manner which he is now failing to do with the financial services
industry. If he can't, his healthcare proposal will fail; if he can, then
perhaps he will deserve the sarcastic moniker of "the Messiah" the Republicans
pinned on him last year.
Nine years after their first fateful rematch, Leonard and Duran met in the ring
again, in Las Vegas, but by then both fighters were too old to put on much of a
show. Perhaps a more instructive lesson for today's times can be drawn from the
example of Terry Malloy, (Marlon Brando) in 1954's On the Waterfront. In
one scene, Malloy, a former boxer-turned-longshoreman, looks back on a former
career that included throwing a fight for gambling interests.
"I coulda' had class. I coulda' been a contender. I coulda' been somebody,
instead of a bum."
Beware, Timothy Geithner, if you continue on your present course continually
throwing fights for the financial industry, that some dark day in the future
does not see you ruing "I coulda had class. I coulda been somebody. I coulda
been a real Secretary of the Treasury."
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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