Chris Whalen: "Barnanke and Geithner don't seem to have a clue what to do about the big banks"

[Better Believe It]

Stress Test Zombies: Not Too Big To Fail? Tough Tootsies Little Banks!
by Chris Whalen
March 13, 2009

Last week, we learned from Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner that Washington lacks the guts to fix the problems eating away at the US financial system, at least so far. So large are the derivative-fueled losses and so majestic the collective incompetence of the Congress, regulators and the Sell Side dealers on Wall Street in enabling these losses, that the judgment of the single party state called Washington is to simply hide the problem under an ever-widening public TARP.

Now, in most parts of the country, a TARP is used to cover unneeded things, usually a pile of stuff nobody wants, far in the back yard. This is essentially the plan articulated by Bernanke and Geithner: Buy the bad assets, invest more capital in the zombie banks, and hope asset prices eventually recover. This is not a plan to do anything but buy time and extend losses. The scary part is that nobody else in the Obama White House seems to know enough about finance to argue the point.

As we told the subscribers to IRA's Advisory Service, the Fed and Treasury have created a rule without reason, a ridiculous standard that only ensures the unsoundness and instability of the US financial system. Apparently, banks that fail the Supervisory Capital Assessment Program stress test will not be broken up as required by law, but instead given more capital at taxpayer expense. This is the solution to the financial crisis embraced by President Barack Obama. There is no market discipline, no bad results for the bond holders who stupidly funded these giant derivatives-driven, risk-creation machines.

We see two issues facing Bernanke, Geithner and the Obama Administration when it comes to the cowardly "feed the zombies" approach articulated last week. First, it is not sustainable financially and must eventually be changed because of funding constraints. And two, the policy of subsidizing the bond holders of the largest banks is unworkable politically and must eventually also be changed to conform with domestic political reality. That's right, at some point the Obama Administration may need to choose between our foreign creditors and American voters.

Bottom line: The policy decision articulated this week by Bernanke and Geithner represents the largest transfer of wealth in American history, yet no legislation and been passed and no meaningful debate has occurred. The biggest danger facing the markets is that Ben and Tim still do not seem to have a clue what to do about the big banks -- other than to write more checks against the public trust. The conflict over this decision to pass the cost to the taxpayer, between the Fed, Treasury and the Congress, on the one hand, and the Wall Street dealer banks is staggering, yet nothing is said in the Big Media.

If we wish to preserve some semblance of market discipline in the US, an alternative strategy must be found. Until somebody, somehow gets to President Obama and effectively refutes the self-serving argument of the Fed and Treasury that we can't resolve C or AIG, the cost of the zombie dance party can only grow. The way you end the need for public subsidy is by resolving these firms via a restructuring and forcing the bond and equity holders of the bank's public parent company to absorb the cost of marking assets to market. If we establish a hard rule regarding solvency and break up rather than recapitalize zombie firms, then we have started to apply a real solution.

Please read the complete article at:

http://www.rgemonitor.com/financemarkets-monitor/255984/stress_test_zombies_not_too_big_to_fail_tough_tootsies_little_banks

[rollingrock]

1. Let's funnel another 500 billion or so to the zombie banks

Yeah, that should do the trick. Never mind that no one has any clue what happened to the first 700 billion.

What was the point of replacing Paulson with this Geithner guy anyway?
They're virtually the same person.

[Better Believe It]

2. The Really Scary Part as Whalen points out is that .....

"nobody else in the Obama White House seems to know enough about finance to argue the point."

[snowbear]

3. Makes one wonder about this Whalen dude..

.
.

[Better Believe It]

4. You think he might be one of those "commie pinkos" who favors nationalization of the big banks?

:) :) :)

[snowbear]

6. You better believe it.. ......LOL, get it?

.
.

YOU "Better Believe It"

ME "snowbear"

..

.

Ok... I have officially lost it..

[rollingrock]

5. He essentially replaced Dumb with Dumber

good one, Barack.

[snowbear]

7. OMG, not another one..

.
.

[rollingrock]

8. What do you expect

from a guy who doesn't even know how to pay his taxes. lol.

[truedelphi]

10. It's not only that Geithner doesn't know about paying his own taxes -

He tore asunder the re-building of Asian economies when the IMF sent him over there in 1997 and 1998. You can read about his bad judgement by following links here:
http://tinyurl.com/d2vszm

The links take you to article written by reporter for the Sydney Herald just a few days ago.

[MarjorieG]

12. Guess advisors like Volcker, Stiglitz, Reich don't know anything.

Absolutely everyone has a view, not all the same.

[Metta]

9. I think they want their Wall St. friends to get away with as much as possible.

So, they hem and haw and drag their feet. Many in Congress are also to blame for things being as they are.

[soryang]

11. Some notes on derivatives as "bank assets"

I've been following the melt down and the deceit in Washington and New York (and in the media) regarding the financial collapse. I discuss it regularly with my brother who is an unemployed financial professional. My background is law. For what its worth I've made these notes from discussions on another forum:


The derivatives markets are confusing, as well as the mortgage backed securities gridlock. The government bailout
is more than "dithering" while an unprecedented economic collapse takes place. Obama is making a terrible mistake
with Geitner et al. These people are covering up fraud in the MBS and derivatives markets. The mortgage backed
securities are defective in design and won't trade. This may have been intentionally done to siphon out all the
capital from the insurance and banking industry by a handful of investment banks. Derivatives as an "investment
product" are little more than gambling, and a very stupid gamble at that. Now that AIG and Citibank are dead men
walking, the investment bankers have their vampire fangs directly in the corpses while the taxpayer is donating
blood to the tune of approximately 4 billion a day via an absurd transfusion which comes from the poor to further
enrich the richest.

The unregulated derivatives markets need to be terminated. Investments cannot be insured. Risk cannot be elimnated. Contracts
have been purchased by those who dont even have an insurable interest or money at risk. Credit needs to go directly
to citizens and business bypassing gridlock. Jobs, infrastructure and industrial productivity need to be the goal.
To hell with the investment bankers. Obama's bills appropriate over 1.4 trillion directly to the bankers. This is a
complete waste of taxpayer money doing nothing for the economy.

Derivative contracts on structured financial products are regarded as proprietary and confidential precisely
because they do not withstand legal scrutiny. MBS are not really securities in the sense they purport to be because
they are not secured in the legal sense. They are defective because they are removed from their tangible basis in
real estate. A AAA rating therefore is little more than a fraud, even there were ever a justifiable basis for such
a rating which there wasn't. One really cannot package mortgages in the hundreds or thousands and pretend that they
are secured transactions. This is where the need for derivatives arose. If they were secured there wouldn't be an
apparent need for insurance. The notion of a private insurance contract on a financial investment is absurd on its
face because it is an intangible transaction. One always invests at risk and matheticians who felt that they could
calculate correlated risks in intangible investmests merely provided defective cover for confidence men. Those
fools or frauds who betrayed their fiduciary obligations and legal principles to issue such contracts (previously
against public policy) should be held personally liable for their tortious activities and prosecuted wherever
possible. The proceeds of these transactions should be followed for the establishment of constructive trusts to
recover the monies on behalf of taxpayers.

That the current administration needs to repudiate the derivatives market as it relates to mortgage administration
is too obvious to mention except that fraud and thievery are the order of the day. A holiday in derivatives of this
nature should be declared and anyone who holds a naked executory derivative claim should be told to piss off. I
don't agree with pundits (like Thom Hartman) who say my checking account or savings at the local bank will fail at
the local bank if GS and MS or various hedge funds don't get their ill gotten graft. In fact he and others provide
no factual basis for this widespread claim used to justify Obama Geitner policy of supporting further looting by the investment banks. I agree its a systemic failure but the financial institutions that did not participate in the lunacy are relatively
unaffected.


Mortgages are not derivatives they are an interest in real estate predating modern markets. Mortgage backed securities are derivative in nature, though as designed they have lost the legal characteristic of mortgages and are in this sense legally defective as instruments reflecting an interest in land. They are a "structured security" or creative financial product. The
derivatives I'm referring to either insure the MBS or other similar structured financial product, such as a bundle
of student loans or credit card debt.

I agree with the point made that not all derivatives are innately corrupt. I heard one expert analyst correctly
point out that the so called derivatives on MBS are actually insurance, and as such, illegal under the
circumstances. There are unlawful under insurance regulations because the issuer (in the case in point AIG)
knowingly and intentionally did not have adequate capital reserves to secure the risk. This is why several former
investment bankers and economists who understand the subject regard the issuance of so called derivatives on
structured investment securties as little more than fraud.

The idea that the US taxpayer should be the guarantor of last resort against hyper speculative and apparently
unlawful contracts failing in the marketplace is, at the risk of repeating myself, too absurd to warrant
discussion. Nonetheless, the state of secrecy which prevails in government and media, referred to as "non
disclosure" and "unregulated markets" and "bank right to confidentiality" is such that the fraudulent nature of the
transactions and the violations of fiduciary principles are not widely understood.

Futures contracts and options are distinguishable from these derivatives and subject to regulation. This however
does not mean that they deserve the status of a government insurable bank asset, because they are also too risky to
warrant government guarantees when they fail. That the Fed would transfer US treasury instruments in exchange for
options or futures contracts is laughable as a banking transaction. Yet transfers of this nature have already taken
place in the hundreds of billions of dollars for derivatives such as those discussed above. This is nonsense.

[acmavm]

13. Just the thought that our economy is being 'fixed' by those two fuckwits

should be sending every taxpayer with a brain wave pattern in this country running for the bathroom at regular intervals. What the hell is Bernanke doing anywhere near this situation? Why is he allowed to put his fucking two cents in anywhere? Hasn't he done enough to bring us to where we are today?

And Geithner, he's just carrying out the original republican corporatist plan, give it all to the rich man.

[jonestonesusa]

14. Great post - thanks!

I also hope that President Obama is willing to take another close look at the finance industry bailouts, if nothing else to put a ceiling on the total cost. What a waste of a LOT of public money. Greater diversity of opinion on his economic team would really help. I wonder if the new Treasury appointees will provide any of that. Alternatively, perhaps public dissent by additional high-profile economists as well as everyday voters will help. Today's NYT editorial on AIG is a nice prominent place to emphasize the lack of transparency.

We sure can't afford the current direction. The wake up call has to come.

[Supersedeas]

21. yep, not likely to receive info like this from the Corp Advertisers on the TV Networks

[4dsc]

15. We've never been in this situation before

No matter what era they try to compare this recession with, this country has never been in this type of situation before with its financial system.. That is why we are having all kinds of problems trying to solve it.. Nothing short of a complete meltdown will resolve this issue I believe..

So where we go from here and how it works is anyone guess.. And believe me it all appear to be nothing but GUESSING at this point..

[upi402]

16. I wish the Obama cheerleaders in GD could get to this k/r n/t

[yurbud]

17. set up the gallows on Wall St, and as ''stress-testing'' is completed at each bank...

give the appropriate execs a rope neck tie and the bonus they deserve.

Problems would start to clear themselves up.

[Better Believe It]

18. Can we vote on that?

:) :)

[Po_d Mainiac]

19. Only hang them half way

Till they reveal where they stashed the goods, and willfully sign over the deeds to their estates........then put the pukes outa our misery.

This, of coarse is after pitting them on trial Nuremberg style (en-masse), before a jury of OUR peers.

[yurbud]

20. it would be poetic justice to use Gitmo rules on those who profited from Bush years