It's looking more and more like Timmy sold us up the river, folks. You know those bank stress tests everyone keeps talking about as the key for saving the financial system from itself? Turns out there's ample evidence to believe that the tests are at best, a complete ruse that will deliver no useful information about the true state of the banks, and at worst they are completely rigged.
Nobody could have predicted, etc...
The bank stress tests currently underway are “a complete sham,” says William Black, a former senior bank regulator and S&L prosecutor, and currently an Associate Professor of Economics and Law at the University of Missouri - Kansas City. “It’s a Potemkin model. Built to fool people.” Like many others, Black believes the “worst case scenario” used in the stress test don’t go far enough.
He detailed these and related concerns in a recent interview with Naked Capitalism. But Black, who was counsel to the Federal Home Loan Bank Board during the S&L Crisis, says the program's failings go way beyond such technical issues. “There is no real purpose [of the stress test] other than to fool us. To make us chumps,” Black says. Noting policymakers have long stated the problem is a lack of confidence, Black says Treasury Secretary Tim Geithner is now essentially saying: “’If we lie and they believe us, all will be well.’ It’s Orwellian."
The former regulator is extremely critical of Geithner, calling him a “failed regulator” now “adding to failed policy” by not allowing “banks that really need desperately to be closed” to fail. (On Saturday, Geithner said on Face the Nation, if banks need "exceptional assistance" in the future "then we'll make sure that assistance comes with conditions," including potentially changing management and the board, but did not say they'd be shut down.)
Black says the stress test must also be viewed in the context of Geithner’s toxic debt plan, which he calls “an enormous taxpayer subsidy for people who caused the problem.” The fact bank stocks have been rising since Geithner unveiled his plan is “bad news for taxpayers,” he says. “It’s the subsidy of all history."
Any scenario for fixing the banks is
100% dependent on the stress tests objectively and accurately determining which banks are solvent and which banks are effectively insolvent. If the tests are rigged as Black says, then there's no way to save the banks or the financial system, in effect, the system will be doomed to collapse.
The stress tests being a way to magically pass all the banks as "A-OK" when they are insolvent is basically the absolute worst case scenario, where banks will be allowed to operate as zombies ad infinitum on the taxpayer dime, funded by Helicopter Ben's Magic Printing Press.
The resulting hyper-inflation as the taxpayer has to continually fund trillions in bad loans and toxic crap basically wipes out the US economy and the world with it. Game, set, match.
If William Black is right, the Obama administration will end up doing more damage to the economy than Bush did, and that kind of admission from myself is downright terrifying.
Do read that Naked Capitalism link. The details of what a true stress test should be, and what Geithner is proposing, should make you ill. I know it does me.
I also asked him about the fact that bank examiners examine banks (duh) and would not have much (any?) experience in the capital markets operations or sophisticated products that the big investment bank, now banks, participated in. Goldman and Morgan Stanley ought to be subject to these exams; Citi, JP Morgan, and Bank of America have large capital markets operations. These firms are where the biggest risks and exposures lie. Do the examiners what to look for in a even the low-risk operations, like repo desks, much the less derivatives and proprietary trading books? He agreed (as presented below) that it was a near certainty that this was beyond their skill level.
Now this begs the question: why has the Treasury Secretary set in motion an obviously bogus process? It suggests the result is pre-ordained.
As AG would say, "The fix is in, folks." And this time, the fix has fixed us but good. A hundred regulators versus the entire financial system when Geithner and Obama have every single reason to lie to us about the results, to pass the banks off as "improving", and hope the Toxic Asset Three-Card Monte game is enough to fool all of the people, all of the time.
Bottom line is there's nothing Timmy can do to save the economy that won't wipe out the standard of living of your average American, but this way Treasury gets to claim due diligence while all hell breaks loose. It's either face the truth and assure a collapse now, or hyper-inflation and collapse later. As a politician, what would you do? Tell the truth?
The lifeboats on the S.S. Titanic are being quietly filled while we're busy below decks listening to the captain's recorded announcements that everything is fine. It's not. Obama can't save us. All he can do is try to control the damage from the collision. Telling us the truth would cause mass panic. Lying to us until the banksters and the bigwigs can get the lifeboats launched is the way to go.
But even the designation of "sick but not ready to be hospitalized" carries with it risk to the Administration. If the banks get sicker than anticipated, how can they explain it? They can't say, "oh, things got worse than we contemplated". The whole point of a stress test is to anticipate worst case scenarios. And it is pretty certain a fair number of the big banks will be on such large-scale life support by year end that it will be hard to make a case not to put them in receivership.
And by the time things get that bad, receivership may not be a viable option anymore...not without Helicopter Ben's Magic Printing Press going at full speed. This is a brutal scenario, one where
Obama has determined he has no choice but to prepare America for a collision with an iceberg.
First quarter 2009 was bad. You will refer to them as "the good times" before long.
Be prepared.
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