“Beholden to Failed Banksters”
By Larry Doyle on April 10, 2009 at 4:25 PM in American Consumers, Bank Bailouts, Bank Failure, Banking Institutions, Congress (House & Senate), Current Affairs, Economic Stimulus, Economy, Obama Administration, Sense on Cents (Larry Doyle blog), Wall Street
Any investor or manager with a degree of experience knows that the “first loss is the best loss.” What do I mean by that? Once the market detects a loss or a weakened position, the price for that asset will remain capped unless and until the asset is sold or liquidated. This price action occurs in every sector of every market.
Welcome to the world of global finance 2009. As banks, insurance companies, hedge funds, and other financial entities deal with losses, we see a lack of aggressive posture being taken on dealing with these losses. Why? Once moral hazard is violated with a single entity, every other entity will look to violate it as well.
Immediate losses are forestalled in hopes that they will be covered or disguised. However, every loss ultimately must be recognized. By whom and how is the question.
At this juncture, more of the losses in our financial system are being directed toward the taxpayers. How? Via the wide array of government programs. What is the cost? A likely underperforming economy due to a lack of credit, and higher taxes to offset lower revenues.
The financial and political arenas have been intertwined in this mess right from the outset. The highly respected Bloomberg reporter Jonathan Weil opines on how President Obama is taking greater political risk in forestalling losses within the banking system. Weil writes:
Why doesn’t the Obama administration force insolvent banks and insurance companies to come clean about their losses first? It’s the “why” that’s so vexing. The who, what, when, and how are mere details, by comparison.
More than anyone else’s, it should be in Obama’s political self-interest to accelerate the worst of the financial crisis and get as much of the inevitable pain behind us as quickly as possible. Every day he waits is one less day he will have between the time we hit rock bottom and the next election. And yet, Obama and his minions are doing all they can to delay the reckoning, which only will make it worse.
In my opinion, Obama does not force the hands of these financial firms for three reasons:
1. his lack of understanding of the issues
2. his lieutenants’ connections to the firms
3. Congressional connections to those firms and payoffs made by Wall Street
While the taxpayers bear the enormous financial risk of these losses at this juncture, Obama and his troops bear the political risk in the 2010 and 2012 elections.
Why are Obama and team taking that risk? Weil offers:
Perhaps they’re scared the markets would panic if large, insolvent financial institutions started telling investors just how undercapitalized they are. There’s the distinct chance some of Obama’s advisers are beholden to failed banksters, because they used to work for them and may want to do so again someday.
Additionally, if Obama and team aggressively challenged the banks to address the losses currently, perhaps they may feel the risks to the financial system would spill over into the political arena. Thus, instead of truly inspiring confidence in the markets by dealing directly with the situation, we get the smoke and mirrors. To wit, Weil asserts:
Why else would the Treasury tell the 19 biggest U.S. banks to undergo “stress tests” of their financial health, and then put the banks in charge of performing the tests on themselves? Those reasons also might help explain why regulators pressured the board that sets U.S. accounting standards to weaken the rules on mark-to-market accounting, so the banks could hide their losses and show more capital.
Weil continues to provide a measure of integrity and transparency I wish we would see from our financial executives and political leaders.
LD
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Yes LD, I was amused and horrified by the lack of reality in the so-called banking “stress tests.” Someone named “irishscot” submitted the following analogy to the comments on Market Watch:
And another commenter (”HOLYMOLEY”) noted that
The “stress tests” seem like a big farce, particularly since the change in the “mark to market” rules. And they all passed! What a big surprise!
This is such an important piece. And I am in total agreement with you about this section:
Yet, the citizenry has NO realization of any of this. The media have been complicit since their owners also have “connections” and, most importantly, they fear any substantive critiques of Obama’s BAD approach to the economy lest they a) anger Obama and get tossed under that infamous bus, and b) anger their readers who they’ve brainwashed into lovin’ them that Obama all the time.
The public is woefully ignorant about the weight of the toxic assets that are dragging the economy down, and the banks’ efforts to hide those problematic assets. The public is also frighteningly ignorant they’re being set up to PAY — through higher taxes and hyperinflation — for all of Obama’s missteps.
If only every American were required to read Martin Wolf, Roubini, Krugman, and more. Their giddy confidence in Obama would evaporate in a heartbeat, and they’d all be calling their senators and representatives to get the stimulus plan on the right track and to HOLD OFF on that monstrous budget. Sigh.
Well done, Larry. Yes, depressing, but reality checks are in order.
We have seen the “bad news” of immediate losses “forestalled” (or deferred) in the case of the government “massaging” (or fudging, or lying about) the monthly job-loss numbers. The Bureau of Labor Statistics is responsible for the figures, and as one analyst notes:
The stock market rallies when the published figures are “not as bad as expected,” and by the time the real figures are published, we’re on to other things. But sooner or later, the public will “wise up” to this tactic, and the BLS will be an acronym standing for something else: Bullsh–!
For more info:
http://marketoracle.co.uk/Article9960.html
Hi Larry!
Another good essay. I suspect all 3 “why” factors are in play here–Obama relying on the advice of others, many of whom [if not all] have ties and vested interests to and in the very insititutions that need a full housecleaning. Once I heard the “new” accounting rules had been given a high-5, I knew the fix was in.
The narrative guys win, again.
Most of what I read is grim, pointing not to a turnaround but a long, agonizing decline.
Pretty depressing!
Larry Doyle something tells me that no matter what Obama does with regard to the financially challenged banks you will be critical. It does not matter. You are just another Obama hater like the rest of the people on this site.
What is your answer to this very difficult issue?
Should the U.S. tax payers use the Swedish model and completely take over the troubled banks and therefore take on all the risk and losses?
Should we buy all their bad assets from them? And eat all the loses?
Should we let some of them fail and take our chances with the systematic risk a la Lehman?
Should we try and help the people with the mortgages and try to prop up the underlying asset value? You will scream that we are rewarding bad behaviour?
Should we eliminate mark-to-market accounting so the banks can just hide their loses?
Easy to be a critic when there is no good answer. Anyone can do that!
Your three points are a bit strange.
“1. his lack of understanding of the issues
2. his lieutenants’ connections to the firms
3. Congressional connections to those firms and payoffs made by Wall Street”
You really believe that the economic minds that work around Obama and that Obama consults have a lack of understanding of the issues? What a joke.
You think that Obama and the Democrats are so connected to the banks that they will do nothing? Another joke!
You are rapidly losing credibility with your meaningless blogs to your financially unsophisticated audience. You may be a big fish in a very small NQ pond, although I am not sure how much of fish you really are, but you are increasingly sounding like another wacky conspiracy nut blinded your hatred of Obama.
Julie, Larry Doyle is far from “a wacky conspiracy nut” blinded by Obama hatred. He has been a very moderate and measured voice on this blog. And, he has his own excellent website (Sense on Cents) and does not need to hang out in the “pond” of No Quarter. Most of us are grateful that he does. Also many of the readers here on No Quarter are not as financially naive as you might suppose. And by the way, mark to market accounting has recently been eliminated during the Obama administration, and the banks are now free to creatively value their own bad assets.
Oh yes, one other item to consider about LD’s articles on No Quarter: when one of us “financially naive” readers asks him a question, no matter how “dumb” the question may seem, he almost invariably gives a polite and thoughtful response. IMHO that’s nice!
Quit your friggin insults and discuss the topics, or go away. You just continue to attack the writers, and readers and that is NOT allowed.
Why didn’t the Treasury just buy all of those toxic assets (which was the original sales pitch) and let the financial derelicts fall on their own swords? Wouldn’t it have been cheaper than the endless TARP, TALF, Rescues, Recoveries, STIMULUS, and Bailouts for every “Too Big to Fail” or “Economically Vital” entity on the planet?
De-regulation works only if Congress and responsible government agencies are diligent in their oversight. Never again should companies be allowed to become “To Big to Fail”.
My feeling about the whole mess is that we have excatly what we bargain for.
We have a citenzenry deadly infected by a god-like syndrome (”We can do it. Yes we can”) which elected a God-like president (I am the One every body waited for) and a Congress full of Mandarins (Barney, Pilosi, Kennedy, Kerry on the left and their twins on the right).
Nowhere is there any trace of humility and of understanding that complex issues needs not only will but knowledge to be solved.
Every body in charge seems to be perfectly fine with winging it.
I had a conversation with a young educated Obot the other day about the Black Swan of Taleb, and his approach to the financial mess was : Well, there is no model for what we are going thru, and scientists cannot operate without models. So, considering that standing in front of a coming freight train is the worse thing to do, at least going out of the way is better, even if you don’t know if you should go right or left.
Uh????
What about common sense, lessons from the past?
Well he did not think of that…
Typical… Just get out of the way and jump in on direction without looking first if there is not a ravin there… At least you TRIIIIED…