Trophies for everyone!

“Too big to fail” evidently means “too big to fail a stress test,” too.  Although the results of the recently conducted stress tests on the nineteen largest U.S. banks won’t be made public until May 4, the advance word on Friday, April 24 was a Whole Lotta RosieFrom the NYT:

‘On Friday, the Federal Reserve reported that the banks whose books it had analyzed recently had enough capital to offset a raft of new losses, . . .’

So everybody’s solvent!  And those toxic assets are both nutritious and delicious!  I bet my students would love it if I could get Tim Geithner or the Fed to write my final exams — nobody would be allowed to fail.

‘. . . reinforcing the belief that the government would support the largest banks even if their financial health eroded, and buoying the stock market.’

Um, didn’t the government already do that, to the tune of $700 billion, not counting the Fed’s waves of loan/subsidies?  But of course those subsidies came with some conditions, from the understandable ($500,000 pay cap) to the asinine (don’t hire no foreigners), so the big banks are naturally eager to pay back those loans and return to looting.  As long as they can still count on a fresh round of bailouts when their losses become too gaping to hide, they’re in a perfect position.  The old mantra of “privatize the profits, socialize the losses” doesn’t quite convey the apparent duplicity at work here.  It leaves out the “fabricate the profits” and “hide the losses” steps.

That to me was the most astounding part of the story, but it wasn’t really the gist of it.  The article went on to say that the Fed

‘. . . warned that banks would need a new cushion of financing on top of the current minimum levels as a buffer against higher losses if the economy worsened. That guideline, analysts say, could force at least a handful of banks, including several regional lenders, to sell large amounts of common stock to the government or private investors.’

If obtaining the needed financing from private sources were that easy, the banks’ stock prices would be a lot higher.  I’m guessing the Fed’s preliminary report is supposed to goose the stock prices of these banks by giving them a clean bill of health right now — it seemed to work on Friday — so that they can raise more capital (or dilute less of their equity) from selling new stock.   And if the Times is correct that the report somehow reinforces the government’s commitment to the too-big-to-fail policy, then the big bank stocks look even better to investors.  But it looks like the plan just kicks the problem a little farther down the road: as long as the housing and job markets stay in the doldrums, loan defaults are likely to mount, and bank assets and capital are likely to continue their slide.  The banks could burn through their newly raised capital in short order, and then we’re back to where we started.  The International Monetary Fund estimates that total global credit losses will come to $4 trillion, and the Financial Times assumes banks will account for three-fourths of those losses, which would be about $2.1 more trillion than they’re estimated to have lost already.

William K. Black, former Senior Regulator in the resolution of the S & L scandal, has some wise words on the subject here (hat tip: Yves Smith at Naked Capitalism) and here.  A key point is that the stress tests will be fairly useless because the banks no longer have the basic loan files that go with the securitized toxic assets they hold.  So it’ll be like grading tests in the dark.  The big banks’ holdings of these securitized assets are staggering — according to recent FDIC statistics (sorry, no available link to post), the 509 depository institutions with over $1 billion in assets hold 86.9% of total depository institution assets but 97.1% of privately issued mortgage-backed securities and 99.6% of other asset-backed securities.  How do you value these assets if you don’t have the loan files?  I think that’s why we used mark-to-market in the first place.

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One Response to “Trophies for everyone!”

  1. democommie Says:


    I’d like to comment, but I’m too busy vomiting after reading what the fed did!

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