More Spin and Geithner Gobbledygook
Tuesday, March 29, 2011 at 9:14PM On the right hand side of the Treasury Department website homepage, under the subheading Wall Street Reform, is the following lofty statement:
"It is time to restore responsibility and accountability to our financial system."
That's the spin. Now, it's been spinning there awhile, so it's not exactly news.
But today, in complete contrast to the meaning of that statement, Geithner suggested backing a 'risk-retention' proposal that excludes banks that meet high underwriting standards (probably those that got high marks on the latest Fed stress tests for which the Fed isn't releasing any details) from having to retain portions of the deals they securitize, you know, of having to maintain a stake in the outcome of those deals and the performance and integrity of their underlying loans.
To recap, as a result of the 2008 debacle, banks that passed their stress tests, effectively borrow money at next to zero percent. The aftermath of the financial crisis is the loosest monetary policy in our nation's history. Even with all that help, banks don't want to be bothered holding anything that could screw around with their capital ratios. Of course.
The watery and verbose Dodd-Frank bill did very little to change the banking landscape (okay less than nothing, big banks got bigger, Glass-Steagall wasn't resurrected, rating agencies remain in control of rubber stamping deals and debt, funky derivatives are excluded from exchanges, etc.) But it did manage to churn out some language that suggested banks keep some 'skin in the game' and retain up to 5% of each securitized deal they manufacture.
Today, Geithner reconfirmed that any potentially useful pieces of that bill (and you have to look really hard for them to begin with) would be rendered impotent or be axed. Shocking. So comforting he's leading the super-spin systemic-risk-reducing-but-not-really, taxpayer funded Financial Stability Oversight Council Board.
It's no surprise that the banks that received trillions of dollars of federal backing don't want to hold more of their concocted crap in the future. That would mean holding more capital behind the crap too. That would mean not being able to use that capital to create new crap.
But it's not just them. It's the regulators that manufacture their future employees too. Having apparently forgotten everything that happened in the last few years, the FDIC voted 5-0 to consider this proposal. The SEC's going to have a think about it later this week. How about - no that's a dumb ass proposal that flies against everything we've been babbling about when we talk about containing systemic risk? Course not.
It'll happen. The most powerful banks will be deemed the highest quality issuers and nothing will have changed - again. And what's the likelihood that JPM Chase, for example, is the first exemption? High.
What's the likelihood that the collateral underlying their loan portfolios retains the same value it had when those loans were contracted? Zero. If that were the case, then only in JPM Chase land, for example, would the value of homes not have deteriorated. Which isn't reality. But that doesn't matter. Because they, and every other bank, can continue to pretend that until a default happens or a foreclosure is completed, there's no need to re-evaluate any of their loan portfolios because they are under-collateralized on every single loan, or admit their true risk. Certainly no accounting rule is going to make them.
Yep, banks know enough to lobby against retaining a higher stake of risk in those loans and their related deals. Which tells us something about how weak and shady the banking system remains and how strong the Treasury, Federal Reserve, Regulatory and Congressional spin to the contrary is.
Reader Comments (8)
Another way to look at it is that those securities are collateralized... by the US citizenry. There's still a lot of wealth out there to be destroyed.
Isn't there some place where we can make bets on QE3?
yeah, that's exactly right. the qe stuff started with the backing, purchasing and guaranteeing of collateralized securities, it got media attention at the qe2 treasury level, but no matter what - the Fed is backing the infusion of no-rate capital into the banking system and collusive in pretending there's no risk involved in it (that's all aside from its ability to ignore price inflation for basic needs). there's a lot of wealth that has been destroyed unfortunately, that doesn't count in the bank reporting scheme of things, so the picture of their health is substantially more illusionary than it was before the fall of 2008. but, let's pretend it's not....
the Fed will figure out a way to continue to ignore inflation and risk, my bet is they don't announce qe3 just when qe2 technically is over in June, they do something more shadowy and then announce a continued qe2 program (aka qe3) in smaller shifts.
I wonder how much the sales of T-bonds will impact the Fed's decision on QE3. It certainly seems like the number of buyers out there is drying up. I read that the FED is now the largest owner of US debt, somehow surpassing Japan and China in just two years.
Kinda seems like eating your own vomit to survive.
I suppose they could raise the rates but... seems like that would start to kill the whole "liquidity" idea. Unless of course... the banks really are capitalized and the leveraging is now safe and happy.
Smells like a rate trap to me.
Just the same I'm with ya on QE3. I'll take whatever Vegas odds you give me. Maybe they can call it reciprocal liquidity infusion? (i.e. Eat your own vomit)
Keep up the good work Nomi
well, to quote you - I think they'd rather 'eat their own vomit' than allow rates to rise too quickly. Banks aren't as well capitalized as they should be, if only because they aren't required to truly evaluate their existing risk.
Just read Wall Street Under Oath. Great book. This has all happened before, almost down to the individual personalities in finance.
Yeah - absolutely. Pecora's testimony and sheer ability to dig at the major bankers was impressive. But, the same connection, Washington/Wall Street/Fed power relationships were at play. Difference is the legislation enacted to alleviate part of the problem back then had balls. Not so now.
Listen to Jim Rickards interview on Eric Kings website (http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/3/27_Jim_Rickards.html). There will be a QE3 according to Rickards but it will be under the radar if Rickards is right.
There's got to be QE3, or some other shell-game, likely sooner than later. The headline last night on drudge was that the Treasury spent 8X more than they took in in March! Partially due to tax refunds, but also due to large overall spending and poor tax revenue. Obviously to finance the subsequent months, more T-bonds will be brought to the market and the FED will have to step in and buy the leftovers.
The main forces of depression and financial destruction haven't changed or gone away in these past 3 years. The mass of derivatives is undoubtedly larger than ever and the main players have grown stronger through the elimination of their smaller competitors. Also, there has been no growth in the real productive economy which would generate more tax revenue and spending on the military-industrial complex continually increases with no end in sight. It is an awful downward death spiral which is sustainable only as long as the dollar is the reserve currency.
The only good thing is that my son has made 30% on the silver I bought for him at his birth 7 months ago...