Are Banks Healthier Today Than One Year Ago?

Americans have been told that banks are returning to health, that the financial crisis has passed the darkest of days, and everyone can go about their business as usual.

But are banks really healthy? Unfortunately we are not able to know the truth because when the Financial Accounting Standards Board (FASB) changed the rules that govern how financial institutions record asset values on their books to a model that essentially allows them to mark assets to a model that has been dubbed  ‘mark to make believe‘ we can not properly gauge their financial condition.

When accounting rules are changed in the middle of the crisis, as was the case with FASB allowing the financial institutions to record assets on the books at values that are likely much higher then the open market would provide it creates an un-level playing field as it is no longer possible to compare apples to apples.

In other words, if bank (you pick a name) is holding a certain pool of mortgages on their books they are essentially allowed to value those assets on what they believe will be a future value, not what they are ‘really’ worth if they were sold today.

Before the housing bubble blew up the banks and other financial institutions were very happy to be reporting the value of these assets at ‘mark to market’ values because prices were rising so quickly. But the banks sang a different tune when said assets began to decline in value. All of a sudden the banks did not like the accounting rules anymore. They liked ‘mark to market’ valuation methods on the way up, but when the housing market began to crumble they suddenly wanted new rules, and they got them.

Why was it so important that the banks and other financial institutions get the rules changed? Simple, if these institutions had to keep reporting their assets at current market valuations then they would be forced to report substantial losses. And in many cases reveal that the institution is insolvent.

In early 2009 the bank lobbyists twisted the arm of Congress, and with the help of then Treasury Secretary Hank Paulson persuaded the Financial Accounting Standards Board to relax the ‘mark to market’ accounting rules. Under the modified rule adopted in April of 2009 the banks could elevate the values of their holdings to a model based on a perceived future value, thus hiding the fact that they could be technically insolvent if they were following the same market valuation methods when prices were going up.

Don’t you wish you could balance your checkbook the same way banks are allowed to now?

When banks applied for emergency funding under the TARP program there was a requirement that the banks had to make periodic dividend payments back to the Treasury while the bank held the TARP monies. Today we learn that an increasing number of these banks who have yet to pay back the TARP money are falling behind in their requirements to pay the government.

More than 90 U.S. banks and thrifts missed making a May 17 payment to the U.S. government under its main bank bailout program, signaling a rising number of lenders are struggling to meet their obligations.

The statistics, compiled by SNL Financial from U.S. Treasury data, showed 91 banks and thrifts skipped the May dividend payment under the Troubled Asset Relief Program, or TARP. It was the first missed payment for 23 of the banks; for the others, it was at least their second miss.

The number of banks missing their TARP payments rose for the third straight quarter. In February, 74 banks deferred their payments; 55 deferred last November.

SNL Financial’s analysis found 20 banks have missed four or more payments since the program began in 2008, while eight banks have missed five payments.

Under the TARP program, the U.S. Treasury invested in preferred shares issued banks looking for funds. The banks were to make regular dividend payments to the Treasury {…} (Source: Ruters/CNBC)

With the number of institutions unable to make the required payments what does that say about the so called ‘all is well’ government proclamation?




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Read more on Financial Services, 2008 Financial Crisis at Wikinvest

The GS Connection: Paulson’s Calls to His GS Pals

More evidence surfaced of Hank Paulson’s suspicious dealings in the wake of the bailout of AIG.

According to evidence uncovered by the New York Times, Hank Paulson who was then Treasury Secretary, spoke “two dozen times” with Lloyd Blankfein, the GS CEO on the week the bailout was granted to AIG, in September 2008.

During the week of the A.I.G. bailout alone, Mr. Paulson and Mr. Blankfein spoke two dozen times, the calendars show, far more frequently than Mr. Paulson did with other Wall Street executives.

On Sept. 17, the day Mr. Paulson secured his waivers, he and Mr. Blankfein spoke five times. Two of the calls occurred before Mr. Paulson’s waivers were granted.

Michele Davis, a spokeswoman for Mr. Paulson, said that the former Treasury secretary was busy writing his memoirs and that his publisher had barred him from granting interviews until his manuscript was done. She pointed out that the ethics agreement Mr. Paulson agreed to when he joined the Treasury did not prevent him from talking to Goldman executives like Mr. Blankfein in order to keep abreast of market developments.

Ms. Davis also said that Federal Reserve officials, not Mr. Paulson, played the lead role in shaping and financing the A.I.G. bailout.

But Mr. Paulson was closely involved in decisions to rescue A.I.G., according to two senior government officials who requested anonymity because the negotiations were supposed to be confidential.

And government ethics specialists say that the timing of Mr. Paulson’s waivers, and the circumstances surrounding it, are troubling.

The fact that many decisions taken by the US Treasury under Hank Paulson’s mandate appear to have directly or indirectly benefitted GS has been the subject of much controversy until now. For instance, the decision to let Lehman Brothers or Bear Stearns fail, but to bail out both GS and AIG, not only eliminated two of the most dangerous rivals of GS, but ensured a flow of 12 Bn USD of taxpayer money into GS, allowing it thus to profit of its CDS and its “intelligent” risky hedging strategy.

On the morning of Sept. 16, 2008, the day the A.I.G. rescue was announced, Mr. Paulson’s calendars show that he took a call from Mr. Blankfein at 9:40 a.m. Mr. Paulson received the ethics waiver regarding contacts with Goldman between 2:30 and 3 the next afternoon. According to his calendar, he called Mr. Blankfein five times that day. The first call was placed at 9:10 a.m.; the second at 12:15 p.m.; and there were two more calls later that day. That evening, after taking a call from President Bush, Mr. Paulson called Mr. Blankfein again.

When the Treasury secretary reached his office the next day, on Sept. 18, his first call, at 6:55 a.m., went to Mr. Blankfein. That was followed by a call from Mr. Blankfein. All told, from Sept. 16 to Sept. 21, 2008, Mr. Paulson and Mr. Blankfein spoke 24 times.

At the height of the financial crisis, Mr. Paulson spoke far more often with Mr. Blankfein than any other executive, according to entries in his calendars.

The calls between Mr. Paulson and Mr. Blankfein, especially those surrounding the A.I.G. bailout, are disturbing to Samuel L. Hayes, a professor emeritus at Harvard Business School and a consultant in the past for government agencies, including the Treasury Department.

“We don’t know what they talked about,” Mr. Hayes said. “Obviously there was an enormous amount at stake for Goldman in whether or not the A.I.G. contracts would be made whole. So I think the burden is now on Mr. Paulson to demonstrate that there was no exchange of information one way or the other that influenced the ultimate decision of the government to essentially provide a blank check for A.I.G.’s contracts.”

For those who would think that it is necessary for the  Secretary of the Treasury to consult so often with one of the leading banks of the US, here is a recap of the phone calls to other important bank CEO’s.

By contrast, Mr. Paulson spoke six times that August with Richard S. Fuld Jr. of Lehman, four times with Jamie Dimon of JPMorgan Chase and only twice with John Thain of Merrill Lynch.

So prospers the GS connection in the US government.  There is not much to say anymore about it. Just remains to wait and hope that their crazy risk-taking will ultimately be the cause of the downfall of GS, just as it might have been the case in September 2008, had it not been for the helping hand of Hank Paulson.




Hank Paulson Breaks The Law?

Former Treasury Secretary Hank Paulson has probably done more to ‘help’ his banking industry friends while at the same time done the most damage to the tax payers than any other Treasury Secretary in history in my opinion.

Oh, and current Treasury Secretary Timmy Geithner is probably going to go beyond Hank Paulson’s tricks and create even more questionable actions as the financial crisis continues to unfold.

TARP Money – Bush Will Make Request for Remaining $350 Billion

From Bloomberg:

President-elect Barack Obama asked the Bush administration to notify Congress he plans to seek the remaining $350 billion in financial-rescue funds, White House spokeswoman Dana Perino said.

Obama, who takes office on Jan. 20, called President George W. Bush this morning about 20 minutes after Bush said in his final White House news conference that he hadn’t been asked by the president-elect to act on his behalf and that he was willing to do so.

“President Bush agreed to the president-elect’s request,” Perino said. “We will continue our consultations with the president-elect’s transition team, and with Congress, on how best to proceed in accordance with the requirements of the statute.”

[Read more...]

Hank Paulson – FAIL

From the WSJ:

The U.S. Treasury has failed to reveal its strategy for stabilizing the financial system, not answered questions asked by a government watchdog, and has done nothing to help struggling homeowners, a report being released Friday charges.

In the most scathing criticism yet of Treasury’s implementation of the $700 billion financial-rescue package, a draft report being issued by the five-member congressional oversight panel said there appears to be “significant gaps” in Treasury’s ability to track hundreds of billions of dollars of taxpayer money.[...]

[Read more...]

Market Summary – The US Economy has Become a "Fiat Economy"

Ask yourself this question..

Why has the Federal Reserve essentially created a ‘zero interest rate policy’ for the United States today by cutting the Fed Funds rate to near zero?

If your answer is ‘to create economic growth’ then I must tell you that you are listening to Jim Cramer too much.

The correct answer is that the Federal Reserve is desperately trying to ‘create credit growth‘, not organic economic growth. When the United States lost its status as a manufacturing powerhouse in the 1970′s and the nation became ever more dependent on a consumer driven ‘services industry’ the only way to show any growth was to keep the availability of money growing.

The past decade of credit growth was pushed so high that when it fell over the edge it sent the economy of the United States into a free fall spiral downwards. When credit is removed from the system the true health of the economy was revealed.

Credit is merely a disguise for real growth.   

The collapse of the credit system in this country last year has pulled the mask off the real economy. And what has been revealed is that there was nothing behind it. The only growth obtained (as reflected in the US GDP) has been a direct result of credit growth.

12-16-2008 8-54-15 PM This chart shows the personal savings rate of Americans for the last half century. Notice that in the early 1980′s the ability of people to save money began to decline. Ever since that time that ability to save has continued to dwindle up to this day.

12-16-2008 9-19-42 PM Now compare the chart above to the chart of the Dow Jones Industrial Average from the past 40+ years. Notice anything? The economy (as measured by growth in the stock market) increased as savings deteriorated. How did the Government make up for this decline in the real economy? By turning the US into a ‘credit nation’. The economy of the US has become so dependent on credit growth to sustain itself that it will go to extreme measures to keep it going, even if it means the possibility of run away inflation down the road.

[Read more...]

October 8th, 2008 – The Big Lie

Keeping up with recent events has been an exhausting task. The days of holding stocks in short or long term trades, with your only worry being Google’s earnings report, or worrying about the impact of a surprise “earnings miss” on your favorite stock, are gone. Those types of concerns have been replaced with companies becoming insolvent overnight, bankruptcies, credit market implosions, housing market declines, and bank failures. We even added one more worry to the list: entire nations becoming insolvent. This morning we learned that Iceland essentially went into default, as their currency lost most of its value in 24 hours and was no longer being accepted as a valid form of payment in some places.

Yep, the good old days of just worrying about a bad earnings report are gone, for now.

The rapid growth witnessed in almost all sectors of our economy are gone. Most of the growth was an illusion based all on credit. Everything grew quickly,from home prices to iPods and big screen television sales, all because of the free flow of credit.

The big lie being put to the American people, is that the heart of the credit implosion is due to individuals getting in over their heads and no longer being able to pay their mortgages. The truth is that it was Wall Street investment firms that sought to capitalize on the free flow of credit and rising housing prices, by securitizing mortgages. They created numerous forms of investment securities (based on mortgages) that were so highly leveraged, that when the underlying asset (mortgages) began to weaken just a bit, the leverage ratios came crashing down hard. And, it did not stop there. The very same firms that created these exotic investment securities, sold them to everyone from pension fund managers to foreign governments, with very little (if any), warning of real risk potential.

Do you want to know an even bigger lie? Our government telling the American people that they will get their money back. That’s right, it is a lie. The US government will use our tax dollars to buy the toxic assets from anyone who was duped into buying them.  Then, they promise to sell them later, at a profit. Remember, these toxic assets are all tied to the housing market in one fashion or another.  So, in order for their plan to work, there must be a demand for these assets at later date.  Demand will ONLY exist if the rapid rise in housing prices returns. This will not happen, because it was the credit bubble that created the housing bubble, and credit is evaporating rapidly and will never return to the likes of what it once was. These toxic assets will end up being nuclear waste on the US balance sheet and will eventually have to be buried, along with the $700 Billion that we paid for them.

The events of the past year have created a generational shift in the way our markets will behave for a very long time. It could be as many as 10 years before we ever see new highs again in the Dow or the S&P 500 indices. One only has to look at the Nasdaq to see what happens when a bubble explodes. Following the bursting of the “dot com” bubble in the late 90′s, the Nasdaq traded in a subdued fashion, never coming close it’s previous highs. This is what we have to be prepared for once this current crisis has passed.

A buy and hold strategy for making money in the markets will likely be a futile exercise for many years to come. The real money to be made will come from getting in and out of the right stocks and at the right time. That, we will help you do.

We are at the precipice of a bear market rally or a hard crash. Even the global rate cut announcement this morning was not enough to get the market going. Those who bet heavily in the morning, thinking the market would go skyward, ended up in the loss column by the end of the day. These remain very dangerous and treacherous times in the markets. The Financial Times reported tonight that the stress in the credit markets is even higher now than in recent months, and that was after the global rate cuts were enacted. When the time comes for the next bear market rally, know that we will play accordingly. We still expect the bear market to last well into 2009. Long term outlook for the economy and the markets remains bearish.

More on this topic (What's this?) Read more on U.S. Housing Market at Wikinvest

Fannie Mae & Freddie Mac – Sunday Update

We have learned that there will be an announcement of some kind at 11:00am (US EST). Supposedly it will be Hank Paulson and the Federal Housing Finance Agency Director James Lockhart who will make the announcement.

Speculation of what the plan will be has been running wild to say the least. And the resulting impact to the bond markets, currency markets, and the equities markets remain in just as much ‘cloud of uncertainty” as well.

The NY Times broke a story that Fannie and Freddie have been over stating their capital reserves. In other words they have been lying all along as to how well capitalized they really were. And you know we have been telling you for many months that there was no way that their capital reserves could be healthy.

Here is part of the NY Times article:

The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced on Sunday, came together after advisers poring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter. (emphasis added)[...]

[...]Indeed, one person briefed on the company’s finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.[...]

The Full NY Times article can be found HERE

It may very well be that Fannie and Freddie were so close to a complete failure that the Government had to step in NOW. Or, it could also be all a big ‘master plan’ that is orchestrated to give the markets something to cheer about and create a rally as we head into the last 2 months before elections. It all depends on WHAT the plan announced is, and just how it is perceived by the markets.

From my point of view ANY intervention by the US Government into these two companies is nothing short of a complete bailout and places great risk upon the tax payers of this Country.

Lisa and I have written for many months about how the credit markets have been deteriorating with each passing week almost. Mortgage delinquencies have been rising, yields on bond sales by Fannie and Freddie have been rising (equating to higher risk), and the entire mortgage (and housing market itself) has been falling apart rapidly.

Will the bailout of Fannie and Freddie create a “whoopee, lets rally” in the equities market as risk will be thought to be forever ‘backstopped’? Or will the recognition of just how dire the situation has become be a “oh crap” and create a massive sell off in equities as the acknowledgement of just how bad the conditions have become forces people to unload shares of anything tied to financial institutions?

This will indeed be a monumental day and one for the stock market history books.

The US Government needs to stop handing out OUR money to any company that screws up. I run my own company, can I go to Hank Paulson and ask for free money too? Hey.. let every company in America just go about reporting false income statements, keep the common shareholders happy, keep ripping off the public, and then when it all falls apart go to Paulson and ask him to fix everything.

Free enterprise and free markets… my ass.

Chime in with your thoughts…