Tuesday, April 7, 2009

Moral Hazards Everywhere, and the Stench of Criminality

Based on a CNBC report, Mish at globaleconomicanalysis.blogspot.com reports that:

MISH:  Lies, coverups, distortions, and no transparency are the norm for the Treasury Department and the Fed, so it should come as no surprise that Bank Stress Test Results Delayed For Earnings.

CNBC:  The U.S. Treasury Department is planning to delay the release of any completed bank stress test results until after the first-quarter earnings season to avoid complicating stock market reaction, a source familiar with Treasury's discussions said Tuesday.

The Treasury is still talking about how results of the regulatory stress tests on the 19 largest U.S. banks will be released, and may disclose them as summary results that are not institution-specific, the source said.

The source, speaking anonymously because the Treasury has not made a final decision on what to disclose, said officials do not want any test results released before the earnings season wraps up for most U.S. banks on April 24.

The tests are designed to determine the depth of banks' capital holes if conditions deteriorate further. After the tests are completed, the banks will have six months to either raise private capital to compensate, or accept government funds.

But officials are worried about how the market will react to the stress test results if there is not a clear recovery path for a bank that is deemed to have a large capital need. The last thing Treasury wants to do is set off a panic, the source said.
It's earnings season and banks are going to pretend they are making money (or losing less than they are), and the Treasury does not want to interrupt those lies with stress test results.

MISH (again):  Furthermore, the one thing we know for sure is the longer the Treasury delays reporting and the less detailed information the Treasury provides, the worse the actual results, regardless of what is actually reported.

This is amazing:  earnings season takes precedence!  Mish's view is supported by the Johnson/Kwak post today in The Baseline Scenario:

The stress tests have two main problems. First, they are no longer credible, because the worst-case scenarios announced for the stress tests are no worse than many economic forecasters expect in their baseline scenarios. Second, the administration has as much as said that the major banks will all pass the stress tests, making it appear that the results are foreordained. It is possible that the stress tests will be used to force banks to sell assets as part of the PPIP, which would be a good but unexpected consequence.

Just in case you think that this sort of behavior is limited to Treasury or last year's two episodes of short-squeezing by sudden SEC crackdowns on naked short sellers, please read carefully from a Bloomberg.com report of what our Justice Department has done to a (previously) sitting Republican Senator:

U.S. Judge Dismisses Case of Former Senator Stevens (Update3) 

April 7 (Bloomberg) -- A U.S. judge set aside the political corruption verdict that probably cost ex-Alaska Senator Ted Stevens re-election and ordered an investigation into whether prosecutors’ “shocking” conduct was criminal.

U.S. District Judge Emmet Sullivan said he had a duty to determine the “potential for obstruction of justice” by six federal prosecutors.

“In nearly 25 years on the bench, I’ve never seen anything approaching the mishandling, the misconduct, I’ve seen in this case,” Sullivan said in Washington at the outset of what he called “a dramatic day.”

Sullivan appointed a special prosecutor, Washington lawyer Henry Schuelke, to conduct the probe of the government lawyers. He ordered the Justice Department to share files with Schuelke to help him determine whether the prosecutors are guilty of criminal contempt.

The instances of misconduct are too serious and too numerous to be left to a Justice Department investigation that has “no outside accountability,” the judge said.

Public Integrity Section

Those to be investigated are William Welch II, chief of the Justice Department’s public integrity section, Brenda Morris, the principal deputy director, and four other members of the trial team. The section prosecutes public officials and government employees for corruption.

Washington defense lawyer Michael Madigan called the judge’s appointment of a special prosecutor “an extraordinary action” he has never seen in his 30-year career. . .

During the trial, Stevens’s lawyers repeatedly accused prosecutors of failing to turn over evidence they were required to share with defense lawyers because it might help their client. Defense lawyers said prosecutors belatedly turned over copies of a Federal Bureau of Investigation interview in which Allen had told investigators he “believed Stevens would have paid an invoice if he had received one. . .

(Attorney General) Holder has declined to say whether the prosecutors committed any wrongdoing, saying he wants to await the results of an internal investigation.

The judge said he was frustrated with the apparent lack of progress in that investigation, saying, “to date, the silence has been deafening.”

Have you ever?  One reads the above with profound disappointment, because it appears to demonstrate that the misuse of Treasury and the planned misuse of the FDIC (discussed earlier today) has extended widely, even to Justice. 

In the same vein, consider:

AIG’s Bank Payments Probed By TARP Inspector General (Update2)

“We would like to know if the AIG counterparty payments, as made, were in the best interests of the taxpayers,” lawmakers led by Cummings said in a March 25 letter to Barofsky.

Competing insurers including Ambac Financial Group Inc. and the predecessor of Syncora Holdings Ltd. reached agreements with banks such as Citigroup Inc. and Merrill Lynch & Co. to cancel similar contracts at discounts to their expected losses.

GAO Report

The Government Accountability Office said last month that the Treasury should demand that AIG seek concessions from banks as a condition of the latest U.S. aid.

“If such concessions are not considered to be in the government’s interest, the reasons should be clearly articulated and explained,” the congressional auditors said.

One understands why Chris Whalen of Institutional Risk Analytics recently wrote that the Federal Government is like a criminal Mafia-type enterprise.  

EBR stands by its assertion that what we are seeing, and that may be unraveling, may well be the financial equivalent of Watergate, for which any number of people went to jail, a President was forced out, and which was associated with the worst bear market since the Depression.

In the Great Depression, the large New York banks were of unchallenged soundness, and the runs were on small community banks.  The situation is reversed now.  Your money will be safest in small, well-run local banks without toxic waste on their balance sheets and that have lent prudently while retaining strong capital positions.  You can assume that FDIC is a bankrupt institution that will be bailed out by the relatively insolvent but too-big-to-fail Federal Government.  Thus it is better to have your money either directly in a Federal obligation, a large Federal or Treasury money fund such as Vanguard's, a Ginnie Mae mortgage-backed security, or a truly safe bank than a risky bank such as BofA. 

So far as the stock market goes, please consider the long-term chart of the DJIA.  As the Republicans were taking over both houses of Congress in January 1995 for the first time in more or less forever, the stock market began to go vertical, and embarked on a record 5 consecutive 20% gains, ending in the manic and also improperly-concocted doubling of the NASDAQ in 1999.  This takeoff from what was a rising channel of stock prices throughout the 1982-1994 period began at Dow 4000.  No one should be surprised if we see that Dow level again as this disaster runs its course.

Copyright (C) Long Lake LLC 2009

No comments:

Post a Comment