StupidiVid: So Easy A Canadian 12-Year-Old Can Do It

Meet Victoria Grant, who apparently is a lot smarter than a lot of people you and I know.




Smart kid.

If 12-year old Victoria Grant can explain how banks that print our nation's currency and their puppet global banks are the most immoral criminal institutions on our planet responsible for oppression, mass suffering, and misery, shame on anyone else that is too lazy and/or too misanthropic to take the time or effort to watch this six minute video to understand this essential truth that is probably the most important misunderstood truth in the entire world. No humanitarian efforts will ever make a sustainable impact in this world if we first don't tackle the fact that our modern banking system is criminal and must be destroyed, the truth of which 12-year old Victoria already understands.

Yep.  Worth a watch, at least.

Last Call

And Europe seems to have survived another deadline with Belgium agreeing to nationalize and bail out banking giant Dexia and France and Germany pledging to recapitalize the rest of the European major banks.

Dexia agreed to the nationalization of its Belgian retail bank and secured 90 billion euros ($121 billion) in state guarantees, in a rescue that raises pressure on other euro zone countries to strengthen their banks.

German Chancellor Angela Merkel and French President Nicolas Sarkozy said on Sunday they would tackle Greece's woes and agree how to recapitalize the regions' banks by the end of the month, but they declined to reveal details of their plan.

"We expect the EU to come up with a minimum core Tier One (capital) level under certain stress scenarios and a higher one without any stress. Then banks will be asked to reach this level in a short period of time," said a senior banker in Germany.

The question is how much will be needed?  British PM David Cameron wants to take the Hank Paulson approach.

British Prime Minister David Cameron told his euro zone peers to adopt a "big bazooka" solution.

"If capital is to have any chance of stabilizing the banks, it will need to be large: we would start with the IMF's 200 billion euros," said Alastair Ryan, analyst at UBS. This could involve euro zone governments owning 40 percent of the sector if such a sum was to come from the state, he estimated.

That's not chump change, and neither is the EU owning 40% of the European banking sector.  Could this be the EU's move to finally nationalize and unwind the Too Big To Fail banks?  Maybe...but I doubt it.

Dr. Doom Gets His Apocalypse On, Or We're Out Of Rabbits, Rocky

Nouriel Roubini is depressing today even for Nouriel Roubini.

The massive volatility and sharp equity-price correction now hitting global financial markets signal that most advanced economies are on the brink of a double-dip recession. A financial and economic crisis caused by too much private-sector debt and leverage led to a massive re-leveraging of the public sector in order to prevent Great Depression 2.0. But the subsequent recovery has been anemic and sub-par in most advanced economies given painful deleveraging.

Now a combination of high oil and commodity prices, turmoil in the Middle East, Japan’s earthquake and tsunami, eurozone debt crises, and America’s fiscal problems (and now its rating downgrade) have led to a massive increase in risk aversion. Economically, the United States, the eurozone, the United Kingdom, and Japan are all idling. Even fast-growing emerging markets (China, emerging Asia, and Latin America), and export-oriented economies that rely on these markets (Germany and resource-rich Australia), are experiencing sharp slowdowns.

Until last year, policymakers could always produce a new rabbit from their hat to reflate asset prices and trigger economic recovery. Fiscal stimulus, near-zero interest rates, two rounds of “quantitative easing,” ring-fencing of bad debt, and trillions of dollars in bailouts and liquidity provision for banks and financial institutions: officials tried them all. Now they have run out of rabbits.

Roubini basically goes on to predict the death of capitalism -- as we know it, anyway.   But he has a solution:

The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment. It also requires more progressive taxation; more short-term fiscal stimulus with medium- and long-term fiscal discipline; lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks; reduction of the debt burden for insolvent households and other distressed economic agents; and stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts.

That would be a beautiful thing if it came to pass.  Unfortunately, the entire Republican party and more than a few Democrats will do everything they can to make sure something like this never, ever happens.

If this sounds familiar, it's good ol' Roubini Plan N I was strongly suggesting we do two and a half years back:  N for Nationalize the damn banks.  Won't happen, and we're all the poorer for it.  Literally.

TARP O' The Mornin' To Ya

Turns out all those banks that took TARP money?  A fair number are going to fail anyway.

On Nov. 6, United Commercial Bank of San Francisco failed, becoming the first recipient of the Troubled Assets Relief Program, or TARP, to collapse. The cost to taxpayers: $299 million.

Analysts expect more bailed-out firms to fail in the months ahead. Others may survive but will struggle to repay the government. Steven Rattner, the former head of the government's efforts to bail out the auto industry, said recently that the full public investment in GM is unlikely to be repaid. Meanwhile, AIG is dismantling itself, selling healthy subsidiaries at what critics say are bargain prices in an all-out effort to get cash to repay the government.

About $400 billion of federal investments remain in the corporate sector, much of it channeled through TARP. Critics of the program say losses were inevitable, in many cases.

Bankers, lawmakers, state banking regulators and oversight committees have faulted federal officials for providing funds to firms that were so sick that they couldn't recover and for failing to be open about how recipients were chosen. Some critics have also attacked the government for the types of investments they made.

Gosh, you mean we should have taken over and nationalized the sick banks instead of pretending they were solvent and having to take them over now, having wasted hundreds of billions in propping up banks for short-term political gain in the process?

Gee, I wonder who was advocating that position in early 2009.

Good Money After Bad

Britain is dumping another $50 billion or so into the Royal Bank of Scotland and Lloyd's Banking Group in order to keep them going.

The Treasury will inject 25.5 billion pounds of capital into RBS, for a total of 45.5 billion pounds, making it the costliest bailout of any bank worldwide. The government will fund about a quarter of Lloyds’s 21 billion-pound fundraising. Both banks said they won’t pay cash bonuses to workers earning more than 39,000 pounds this year.

The rescue will bring the government closer to full ownership over RBS, while Lloyds will escape government control. Lloyds CEO Eric Daniels will raise funds from money managers to avoid the Treasury’s asset insurance plan that would give the government a majority stake. He’s betting bad loans will decline after the Bank of England said the country’s recession was nearly over. In contrast, Stephen Hester, RBS’s CEO, will accept greater government oversight and insure 282 billion pounds of his banks’ riskiest assets with the Treasury.

“There is now a very fine line between RBS being nationalized,” said Danny Gabay, director of Fathom Consulting in London and a former Bank of England economist. “This contrasts with Lloyds willing to fight harder for its independence.”

RBS fell 8.3 percent to 35.45 pence as of 12:12 p.m. in London trading, for a market value of 20.1 billion pounds. Lloyds declined 2.1 percent to 83.25 pence.

RBS is all but nationalized, and Lloyd's is simply struggling in flypaper at this point. Over at Big Picture, Barry flags Joseph Stiglitz reminding us that we should have gone with Plan N in the first place.

“If we had done the right thing, we would be able to have more influence over the banks,” Stiglitz told reporters at an economic conference in Shanghai Oct 31. “They would be lending and the economy would be stronger.”

Stiglitz has stuck with his view even after the U.S. economy returned to growth in the third quarter and as banks’ share prices climbed this year…

The U.S. government plans to alter the way that a similar rescue would be handled in the future. Draft legislation proposes that banks, hedge funds and other financial firms holding more than $10 billion in assets would pay to rescue companies whose collapse would shake the financial system.”

Why are we planning on how to bail out banks in the future when we should be making sure that banks never get too big to need to be bailed out instead?

And people wonder why I think Helicopter Ben, Timmy and the rest of Obama's economic knuckleheads (save Paul Volcker) need to go.

A Stimulatin' Development

The Kroog wants another stimulus package.

The United States risks a Japan-style lost decade of growth if it does not take aggressive action to stimulate its economy and clean up its banking system, Nobel Prize-winning economist Paul Krugman said on Monday.

"We're doing half-measures that help the economy limp along without fully recovering, and we're having measures that help the banks survive without really thriving," Krugman said.

"We're doing what the Japanese did in the nineties," he told a small group of reporters during a visit to Beijing.

He said it was not clear that China would suffer sub-par growth as a consequence of the fallout of the present crisis.

"I'm mostly worried that the U.S. and the euro zone will have Japanese-type lost decades," he said.

Krugman said he expected little or no employment growth this year or next in the United States, where the jobless rate in April hit a 25-year high of 8.9 percent.

"A second stimulus is becoming clearly urgent. They need a very, very strong stimulus," said Krugman, a Princeton University professor and a New York Times columnist.

Cleaning up the bank system is more important, I think. Even more important is dropping hardcore Plan N on the insolvent ones. But of course, politically neither will be possible until 2010.

And by then it will be far too late. When the euphoria of this Dead Cat Bounce wears off and the silly talk of a V-shaped recovery and 6% positive GDP growth in 2009 is put to rest, the reality that remains will not be pretty.

Obama will not be able to blame Bush for much longer. He will be able to blame the Party of No somewhat. But in the end, it'll be the ConservaDems that kill the economy.

Your Morning Roubini

In the WSJ this morning, Nouriel Roubini and Matthew Richardson once again make the case for Plan N, given their belief that the stress tests are useless (emphasis mine)

...it is highly likely that some of these large banks will be insolvent, given the various estimates of aggregate losses. The government has got to come up with a plan to deal with these institutions that does not involve a bottomless pit of taxpayer money. This means it will have the unenviable tasks of managing the systemic risk resulting from the failure of these institutions and then managing it in receivership. But it will also mean transferring risk from taxpayers to creditors. This is fair: Metaphorically speaking, these are the guys who served alcohol to the banks just before they took off down the highway.

And we shouldn't hear one more time from a government official, "if only we had the authority to act . . ."

We were sympathetic to this argument on March 16, 2008 when Bear Stearns ran aground; much less sympathetic on Sept. 15 and 16, 2008 when Lehman and A.I.G. collapsed; and now downright irritated seven months later. Is there anything more important in solving the financial crisis than creating a law (an "insolvency regime law") that empowers the government to handle complex financial institutions in receivership? Congress should pass such legislation -- as requested by the administration -- on a fast-track basis.

The mere threat of this law could be a powerful catalyst in aligning incentives. As the potential costs of receivership are quite high, it would obviously be optimal if the bank's liabilities could be restructured outside of bankruptcy. Until recently, this would have been considered near impossible. However, in 2008 there was a surge in distressed exchanges of debt for equity or preferred equity.

Still, the recent negotiations with Chrysler's creditors suggest large obstacles. The size and complexity of large banks' capital structures make debt-for-equity exchanges an even taller task, particularly because creditors will want to hold out for a full bailout along the lines they have been receiving.

The government should be able to dangle an insolvency law as an incentive to cooperate. This will result in a $1 trillion game of chicken. But given the size of the stakes, and the alternative of the taxpayers continuing to foot the bill, it's the best way forward.

Just so. So far, this very legislation that we need -- legislation for receivership powers that FDIC chair Sheila Bair had asked for six weeks ago and something she said the FDIC needed to have back last June -- has all but been forgotten. The stress tests and the Obama declaration that Too Big To Fail means just that has pretty much scuttled any Plan N implementation.

Which is a shame. As long as the government lacks the power to beat Too Big To Fail, the banks will continue to extort the American taxpayer to the tune of trillions. Given the fact that the banking industry continues to own Congress however, the odds of this happening will continue to be slim to none.

Test Anxiety

Everything you need to know about the bank stress tests this week is buried in the NY Times happy-face story this morning.

One outstanding question is how tough Timothy F. Geithner, the Treasury Secretary, and other officials will be on the banks they judge to be weak. The government has delayed the release of the results from Monday, and bank executives are arguing for a more lenient approach.

The Obama administration has angered Wall Street with some of its early steps, but it has also proven unable to be as tough as it initially suggested on several occasions. Last week, at the urging of Wall Street, the Senate defeated a bill that would have made it easier for homeowners to avoid foreclosure.

The administration’s critics worry that the stress tests will follow this pattern. They say that Mr. Obama and his advisers either have too rosy a view, or are stalling — and pretending to be somewhat optimistic, even as the banks’ problems fester — until they think Congress is willing to approve more bailout money.

One of the critics’ concerns is that the stress tests — originally meant to show investors whether banks could survive an unexpectedly bad next two years — no longer seem to have an extremely dark forecast. As job losses have mounted, some economists’ forecasts for unemployment and growth have come to resemble the stress test’s assumptions.

Regulation is negotiation, and the American public is losing the battle. As Yves at Naked Capitalism says on the subject:

I am coming to realize there might be method in the seeming madness of changing dates and shifting sneak previews via favored members of the press as to what the stress tests might entail.

Tire out the critics, numb the casual followers, and leave the boosters in firm control of share of mind.

Let's face it, the fact that the authorities are allowing banks to negotiate the findings is a very very bad sign. It says either they don't trust the results themselves, or they lack the guts to act like they are in charge. But regulators are always in charge (well until fifteen plus years of criticism in the media and Congressional budget cuts left them undernourished and fearful). And now they also have the power of the purse on their side too.

But of course I've been saying that for months now. The stress tests were never anything more than a public relations exercise that got too big to control, but the confusion and the size of the beast actually makes it easier to spin. All this terribly complex stuff really means everything is fine! All the banks are solvent, they just need more money!

Since the number one priority of Treasury is not to objectively determine if banks are solvent and not to defuse the derivative nukes that are ticking on each banks' balance sheet, but to convince investors that everything is fine and buy enough time for the banks to somehow fix the problems themselves, Treasury has now become an adversary to the truth. Timmy, Helicopter Ben, and especially President Obama have a vested interest in pretending the banks have weathered all their problems, have magically come up with record-setting first quarter numbers due to a suddenly vibrant economy rather than under-the-table counterparty payments through AIG, and are well on the road to recovery rather than just in the eye of the hurricane with the storm wall fast approaching.

It's a ludicrous plan. But rather than take action, the administration is stalling, counting on the markets to fix a multi-trillion dollar problem. The banks know they can continue to extort taxpayer money forever now. And they will continue to do so until somebody stops them.

But who? Plan N is dead. There will be no bank receivership, no real regulation, no change in the system. Only the funelling of money to Obama's corporate masters. If you were under any illusion that government regulated finance even after a near collapse of the global economy, you're sadly mistaken.

Everything will remain the same for the next stage of the collapse, including the most intransient fact: The fact that you'll pay.

Chrysler And The Great Bankster Wars

Jim Kwak at Baseline Scenario tries his hand at being a war corespondent from Wall Street, where the news that Chrysler's deal has collapsed and bankruptcy is imminent is just one small part of a much larger battle.

I’ve been writing a lot about the game of chicken recently, most often in connection with the GM and Chrysler bailouts. On the Chrysler front, the game is in its last hours. Even after a consortium of large banks agreed to the proposed debt-for-equity swap, some smaller hedge funds are holding out for more money, and even the extra $250 million that Treasury agreed to kick in seems unlikely to keep Chrysler out of bankruptcy.

The problem is that bankruptcy is the only weapon Chrysler and Treasury have in this fight, and it’s a strategic nuclear weapon. Bankruptcy is the only threat that can get the bondholders to agree to a swap; but because a bankruptcy carries some risk of destroying Chrysler (because control will lie in the hands of a bankruptcy judge - not Chrysler, Treasury, the UAW, or Fiat), and taking hundreds of thousands of jobs with it, everyone knows that Treasury would prefer not to use it. The bondholders are betting that they can use Treasury’s fear of a bankruptcy to extract better terms at the last minute. (And it’s even possible that the large banks agreed to the swap knowing they could count on the smaller, less politically exposed hedge funds to veto it.) But Treasury may still press the button, because it needs to make a statement in advance of the bigger GM confrontation scheduled for a month from now.

The Obama administration is in fact now saying this morning that Chrysler will be nuked from orbit. The plan is to join it with Fiat without liquidating it, but still the expectation is that thousands and thousands of Chrysler jobs will have to be shed.

The question is why are we blasting Chrysler's jobs to hell, but refusing to hold insolvent banks to the same kind of deal? In fact, the banks are refusing to accept anything less than the trillions in free money they are getting now and have no intention of doing anything else.

Why are the banks turning their banks on this government largesse? I think there are two reasons.

First, taking capital under the CAP or selling assets into the PPIP involves some hardship, despite the taxpayer subsidies involved. Raising capital dilutes existing shareholders, and selling assets (at prices where someone will buy them) will require writedowns from their current, unrealistic book values. Treasury really wants the banks to participate, because it will increase confidence in the banks, and that’s why Treasury is offering to share the pain, via underpriced capital and low-risk loans.

But even though Treasury is so generously offering to share the pain, what’s the incentive for the banks to suffer any pain at all? We know the government won’t use the strategic nuclear weapon and let them go bankrupt or pull their banking licenses (which amount to the same thing). And Tim Geithner’s request for a battlefield nuclear weapon - resolution authority for systemically important financial institutions, including bank holding companies - seems to be going nowhere in Congress. This is not surprising, since the banks have already demonstrated that they can count on most or all Republicans and at least a few Democrats in the Senate. With the administration’s hands tied and the banks’ political power intact, the banks are in the same position they always were: if things go well, they will make money; if things go badly, the government will always bail them out later, on terms they are willing to accept.

On the one hand, the banks are complaining about unprecedented government interference and pressure, and to some extent that is happening. But on the other hand, the banks are ultimately calling the shots, because they know Tim Geithner can’t use his only real weapon.

Second, the incentives of managers and shareholders are not aligned. A major factor in the banks’ reluctance to participate in their own rescue seems to be fear of government interference, which is code for executive compensation restrictions.

Executives worry that whatever assurances the White House gives them, an angry Congress might impose new rules on banks that participate, particularly on pay. . . . “We’re certainly not going to borrow from the federal government, because we’ve learned our lesson about that,” [Jamie Dimon] said earlier this month in a conference about earnings.

Now, while I think some of the compensation caps discussed in Congress (but not passed by the Senate, as far as I know) were silly, I haven’t heard a lot of shareholders complaining about them; it’s the managers who don’t want them. So the situation is very simple. Participating in PPIP, for example, might be a net positive for shareholders, because even though it forces short-term writedowns, it also reduces the risk of larger writedowns in the future. But if managers think that it will lead to compensation limits, then it is a net negative for managers. I think our readers can fill in the rest of this thought.

In other words, the banksters continue to run the bank bailouts to the tune of trillions of dollars. And Obama and Geithner are going along, because failure to do so means the collpase of the global economy. It's extortion, and the one thing that could end the cycle -- Plan N -- has been killed in Congress by the bank lobbyists.

So we'll continue to be shaken down for big bucks until the free money we print to pay off the extortion breaks the back of the creditor nations that fund our economy. That will eventually happen, but not before the banksters walk off with our economy to another "less restrictive" country.

The banksters have won the war...and the American people have all but lost.

[UPDATE] Glenn Greenwald has more on the bankster lobbyists controlling Congress.

[UPDATE 2] D-day has Obama on Chrysler:

While many stakeholders made sacrifices and worked constructively, I have to tell you, some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don't stand with them. I stand with Chrysler's employees, its families and communities. I stand with Chrysler's management, its dealers and suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars. I don't stand with those who held out when everybody else is making sacrifices.

Really. Well then. You should have a little talk with guys like Dick Durbin and Evan Bayh there, because they do most certainly stand with the banksters.

Look At That Ex-Car Go

As expected, GM is announcing the death of Pontiac and 23,000 jobs with it, plus hundreds of dealers.

General Motors announced plans to cut 23,000 U.S. jobs by 2011, drop its storied Pontiac brand and slash 40% of its dealer network in its latest bid to stay out of bankruptcy.

GM also announced an offer to its bondholders to swap $27 billion of the company's unsecured debt for stock. GM is offering bondholders 225 shares of its stock for every $1,000 it owes the bondholders in principal. The move will greatly dilute the value of GM shares held by current stockholders.

Still, shares of GM (GM, Fortune 500), a component of the Dow Jones industrial average, gained nearly 10% in pre-market trading following the announcement due to hopes that the company will now be able to avoid bankruptcy.

Still, 40% of GM dealers will be some serious job losses. We'll see how this shakes out. It's a big step towards solvency.

If only Obama was as tough on the banks.

[UPDATE] Almost overlooked this part.

GM said that it will ask the government to take more than 50 percent of its common stock in exchange for canceling half the government loans to the company as of June 1. The swap would cancel about $10 billion in government debt.

In addition, GM is offering stock to the United Auto Workers for at least 50 percent of the $20 billion the company must pay into a union run trust that will take over retiree health care expenses starting next year.

If both are successful, the government and UAW health care trust would own 89 percent of GM stock, with the government holding more than a 50 percent stake, CEO Fritz Henderson said in a news conference at GM's Detroit headquarters.

Oh sure, we'll Plan N the freakin car companies, but not the banks.

Revenge Of Plan N

Economist Simon Johnson does an excellent job of explaining once again why we need Plan N.



Obama will have to do it eventually. You can count on that.

Obama May Be Stressed Out

Despite the serious misgivings about the bank stress tests, the NY Times reports that the Obama administration is planning to reveal data about all 19 banks in an effort to avoid stigmatizing any individual ones.

The administration has decided to reveal some sensitive details of the stress tests now being completed after concluding that keeping many of the findings secret could send investors fleeing from financial institutions rumored to be weakest.

While all of the banks are expected to pass the tests, some are expected to be graded more highly than others. Officials have deliberately left murky just how much they intend to reveal — or to encourage the banks to reveal — about how well they would weather difficult economic conditions over the next two years.

As a result, indicating which banks are most vulnerable still runs some risk of doing what officials hope to avoid.

Yesterday's move by Goldman Sachs to sell stock in order to raise money to pay off its TARP bill prompted this morning's report.

Goldman’s action has put pressure on other financial institutions to do the same or risk being judged in far worse shape by investors. The administration feared that details on healthier banks would inevitably leak out, leaving weaker banks exposed to speculation and damaging market rumors, possibly making any further bailouts more costly.

The Goldman move also puts pressure on the administration to decide what conditions will apply to institutions that return their bailout funds. It is unclear if Goldman, for example, will continue to be allowed to benefit from an indirect subsidy effectively worth billions of dollars from a federal government guarantee on its debt, a program the Federal Deposit Insurance Corporation adopted last fall when the credit markets froze and it was virtually impossible for companies to raise cash. In ordinary times, regulators do not reveal the results of bank exams or disclose the names of troubled banks for fear of instigating bank runs or market stampedes out of a stock. But as top officials at the Treasury and the Federal Reserve Bank focused on the intensity with which the markets would look for signals about the nation’s biggest banks at the conclusion of the stress tests, the administration reconsidered its earlier decision to say little.

So now, Obama is in a jam and in a bad one to boot, and one I predicted he would be in some time ago.

If the banks all pass the test with flying colors, nobody's going to believe him. If he reveals just how insolvent the banks are, it's panic time. If he reveals some banks are more equal than others, then it'll force some banks into recievership as they lose customers and deposits. I've argued that the last point there is the perfect cover for Plan N, but Obama seems more and more determined to take the first option instead, revealing as little substantial information about the banks actual health and depending on wishful thinking to get us out of this mess.

Now having said that, it's entirely possible that the stress test having been publicly revealed to be a sham at this point, Obama has no choice now but to divide the banks into solvent and insolvent and kick in Plan N on the losers.

Then again, he could just pretend they're all fine like the guy on NPR this morning. If that happens, batten down the hatches.

Wells Fargo Is Broke

Wells Fargo made close to $3 billion last quarter, supposedly, so all is well with the banking sector according to the happy-face guys. The reality however isn't so good for Wells Fargo or America.

Wells Fargo may have posted a record profit recently, but it’s important to note that left to its own devices the bank would have gone out of business already and not be posting any profits at all. Indeed, it appears to be undercapitalized by tens of billions of dollars:

Wells Fargo & Co., the second- biggest U.S. home lender, may need $50 billion to pay back the federal government and cover loan losses as the economic slump deepens, according to KBW Inc.’s Frederick Cannon.

KBW expects $120 billion of “stress” losses at Wells Fargo, assuming the recession continues through the first quarter of 2010 and unemployment reaches 12 percent, Cannon wrote today in a report. The San Francisco-based bank may need to raise $25 billion on top of the $25 billion it owes the U.S. Treasury for the industry bailout plan, he wrote.

This is why nothing you near from the financial sector about how all’s well should be taken too seriously. It’s true that given very bank-friendly monetary policy it’s easy for banks to run an operating profit. But most of these large banks are zombies—insolvent. They’re only able to run an operating profit because they’re not going out of business and being liquidated. And the reason they’re not being liquidated is government guarantees. It’s as if I had a profitable business selling cookies, except I didn’t actually have any cookies to sell and was just putting government-provided cookies in boxes, then bragging about how profitable my company is and how the government should stop hassling me about paying myself a bonus.

So, it made $3 billion when it owes $25 billion, and could end up owing tens of billions more...and Wells Fargo is held up as an example of a profitable, stable bank.

The whole system is rotten. The reality is that pretending the banks are solvent will only lead to crushing losses in the trillions before all is said and done. Wall Street is currently living a fantasy, and so is the global financial system. The banks are insolvent, our financial system is insolvent, and our country is insolvent.

When this last bubble pops, it'll take our country with it. Even Plan N may not be enough, but it's our only real hope right now. Sadly, Obama has no intention of implementing it, today he was arguing that he's saving the taxpayer money by not doing it.

On the other hand, there have been some who don’t dispute that we need to shore up the banking system, but suggest that we have been too timid in how we go about it. They say that the federal government should have already preemptively stepped in and taken over major financial institutions the way that the FDIC currently intervenes in smaller banks, and that our failure to do so is yet another example of Washington coddling Wall Street. So let me be clear – the reason we have not taken this step has nothing to do with any ideological or political judgment we’ve made about government involvement in banks, and it’s certainly not because of any concern we have for the management and shareholders whose actions have helped cause this mess.

Rather, it is because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it is more likely to undermine than to create confidence. Governments should practice the same principle as doctors: first do no harm. So rest assured – we will do whatever is necessary to get credit flowing again, but we will do so in ways that minimize risks to taxpayers and to the broader economy. To that end, in addition to the program to provide capital to the banks, we have launched a plan that will pair government resources with private investment in order to clear away the old loans and securities – the so-called toxic assets – that are also preventing our banks from lending money.

If President Obama truly believes this, then Plan N is not going to happen. As such, our economy is now fully vested in the Geithner Plan. Pray it works. I don't think it will.

When and if it fails, America is in dire danger.

[UPDATE] At Big Picture, Barry Ritholtz explains how Goldman Sachs did mostly the same thing with fake earnings numbers by smiply ignoring all their December losses.

Another Vote For Plan N

While Wall Street and the financial world mulls over Tim Geithner's statement that he may indeed get tough and fire executives of bailed out companies, TARP Oversight Panel chair Elizabeth Warren has officially suggested that America should go the full Plan N route.

A congressional panel overseeing the U.S. financial rescue suggested that getting rid of top executives and liquidating problem banks may be a better way to solve the economic crisis.

The Congressional Oversight Panel, in a report released yesterday, also said the Treasury may be relying on too rosy an economic scenario to guide its $700 billion bailout, and declared that the success of the program after six months is “mixed.” Three of the group’s members disagreed with at least some of the findings.

“All successful efforts to address bank crises have involved the combination of moving aside failed management and getting control of the process of valuing bank balance sheets,” the panel, headed by Harvard Law School Professor Elizabeth Warren, said in its report.

Treasury Secretary Timothy Geithner has revamped the Troubled Asset Relief Program to focus on injecting capital into banks and removing up to $1 trillion in illiquid securities from their balance sheets via public-private investment partnerships. The government is also working to unfreeze credit markets through a Federal Reserve program that provides loans to investors in some asset-backed securities.

Warren, in an interview on Bloomberg Television, said yesterday that while “things may be getting a little better” under Geithner, the Treasury still needs to be more transparent about how it is spending the taxpayers’ money.

“We still have a long way to go, a very long way,” she said.

A long way indeed, but Elizabeth Warren is a woman after my own heart, for sure. The pressure is growing for Plan N to be implemented, but everything depends on the results of the bank stress tests being fair and brutally objective to identify the banks that need to be targets of Plan N.

With ample evidence however that the stress tests are just a dog and pony show, it's looking more and more like Plan N will be avoided at all costs until it's either the last option, or worse, far too late to implement it.

It's Always The Quiet Ones

Another must read article on the financial industry, this time from Atlantic's Simon Johnson: "The Quiet Coup".(emphasis mine)

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

And that's really the heart and soul of the problem and why I'm so frustrated that Geithner, Bernanke, and Obama continue to fail to see it for what it is: The financial industry created this collapse, and yet we continue to reward the people who created the collapse with leadership roles in solving the crisis.

Obama is now going out of his way to assure the banksters that the government and the American people aren't going to be picking on them anymore. Geithner and Bernanke continue to run almost the exact same Paulson/Greenspan playbook. The GOP continues to say that over-regulation caused the problem in the first place. Everything our government is doing seems to be first making sure the financial medevac helicopter teams are attending the banksters and seeing they aren't injured by the crash while the American economy lies bleeding from the carotid on the pavement.

The call for regulatory power is almost an afterthought...and I'd bet large amounts of money that like the AIG bonus tax, Congress will wait until the Village is looking the other way and then kill the legislation. As I said on Tuesday, "The banksters know they're still holding all the cards: if they don't want to lend, the economy crumbles." Despite Obama laying down the law on the banksters on Friday, they now know they can operate with virtual impunity.

Honestly, what's Obama going to actually do that won't run into the Sensible Centrist Senate buzzsaw? The Senate's bought and paid for by the banks and has been for almost 30 years now.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. The first AIG bailout, which was on relatively good terms for the taxpayer, was supplemented by three further bailouts whose terms were more AIG-friendly. The second Citigroup bailout and the Bank of America bailout included complex asset guarantees that provided the banks with insurance at below-market rates. The third Citigroup bailout, in late February, converted government-owned preferred stock to common stock at a price significantly higher than the market price—a subsidy that probably even most Wall Street Journal readers would miss on first reading. And the convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

And this will continue until we insist that it changes. It's clear at this point until the system explodes completely and Obama has no other choice, that the same financial industry will be preying on us until we have nothing left.

The way out? Plan N.

To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.

Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5trillion (or 10percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

That's change I can believe in. Until we get it, we're just a violently armed third world banana republic with an unstable currency. Plan N is needed not only to solve the financial issues, but to bust the trusts.

It's us or the oligarchy, Mr. President. Choose one.

Why Kroog Attacking Obama From The Left Is Important

Doug from Balloon Juice nails it:

What’s most important about Krugman right now isn’t whether he’s right or wrong but that he’s starting to get traction attacking Obama from the left. Obama’s stimulus package was, in my view, not as large as it should have been in large part because the debate was all about whether or not it was too big. The Geithner bank plan is drawing little scrutiny from the cable chatterers because Wall Street seems to like it and the Republicans are yet to produce their own alternative 19 page flow chart on the subject. In effect, for now, the economic debate in the mainstream media ranges from Geithner-Summers banksterism to Bachmann-Santelli-Shelby currency craziness/tax holiday idiocy/”let them fail” know nothingism. That is not a healthy situation.

I would go even further, right now the public discourse is limited to a Hobson's choice between Geithner's woefully incomplete bad bailout plan and fever-bright GOP insanity on the intellectual level of "glossolalia as financial policy". Needless to say, we need a third f'ckin choice, and that's where the Kroog comes in.

Is Krugman right? Is the Obama administration too beholden to Wall Street and to the status quo, trying to save a system that is beyond salvation? Does Obama have—despite the brayings of the right—too much faith in the markets at a time when prudence suggests that they cannot rescue themselves? We do not know yet, and will not for a while to come. But as Evan—hardly a rabble-rousing lefty—writes, a lot of people have a ‘creeping feeling’ that the Cassandra from Princeton may just be right. After all, the original Cassandra was.”

If Krugman's ideas start getting play, not only can the case be made for Plan N more succinctly, but as a useful comparison it only emphasizes how utterly useless (if not borderline absurdist) the Republican party really is right now. The ideas that Obama should be drawing from are coming from guys like Krugman on the Left, not the gaping maw of failure that is the Right in 2009.

Krugman gives the Left the credit and heft it has so sorely needed at a time when serious ideas are badly required, and serves to further expose the barking lunacy of the intellectually bankrupt Right.

[UPDATE] Dday is right on the money: "Krugman is fulfilling that role, opening what many have called the Overton window, moving the conversation away from the failed conservative ideas of the past."

[UPDATE 2] Oliver Willis adds:

It’s also worth noting what it takes for an outspoken liberal to get on the cover of a newsweekly. You have to be on a different side of an issue than a Democratic president.

So say we all.

In Which Zandar Answers Your Burning Questions

Aaron Task at YTT asks:

Are Bonus Restrictions Driving Top Talent Overseas?

Depends. Are we talking about the same "top talent" that crashed our entire economy into the ground? If that's true, then good riddance to bad rubbish. But he goes on:

But there actually is some truth to the we have to pay our top people outlandish salaries argument, says Mark DeCambre, Wall Street reporter for The New York Post.

Relatively strong European firms like Credit Suisse and Deutsche Bank are in a hiring mode, he says, as are smaller shops like Jefferies Group, hedge funds and boutiques like Greenhill and Moelis & Co.

In other words, there's always a market for top talent, whom DeCambre likens to a star pitcher or slugger on a baseball team. The team may have a strong bench, but isn't going very far without its top players.

So be it, you might say - but all those bailout billions will most definitely go to waste if the recipients can't compete in the global marketplace.

I'm thinking I'm not going to want to choose to do business with the company that lost tens of billions of dollars anyway, because I have every reason to believe the company's "top talent" -- the same people they are paying "outlandish salaries" to retain -- are not the people I want to give my money to. In fact, we now have empirical evidence that the "top talent" of the companies in question are greedy douchebags who drove their companies into near insolvency.

Bonus restrictions driving these idiots overseas may be the smartest thing America has done in years. They can't compete in the marketplace anyway...in which case let's nationalize the insolvent sacks of crap and break them up.

Problem solved. Hey Aaron, let's stop pretending that the Captains of Industry were innocent here.

Timmy Lays Down The Law

Mr. Geithner wants a whole bunch of new regs and oversight, which is the first thing he's done that I 100% agree with.

“To address this will require comprehensive reform,” Geithner said in prepared testimony for a House Financial Services Committee hearing. “Not modest repairs at the margin, but new rules of the game,”

Geithner called today for a systemic risk regulator to oversee big financial institutions and federal authority to seize them if they run into trouble.

The administration’s regulatory framework would make it mandatory for large hedge funds, private-equity firms and venture-capital funds to register with the Securities and Exchange Commission, and it would require derivatives to be traded through central clearinghouses.

The SEC would be able to refer those firms to the systemic regulator, which could order them to raise capital or curtail borrowing.

I know just the guy he should hire for the role of Systemic Risk Regulator too, and he even likes Tim's plan, he just knows Plan N will have to come afterwards.

Hopefully this is the start of the real work on the economy. All of these are badly needed oversight reforms that will have to be used to fix the problem.

A General Revolt

Steve Clemons rips into Obama on the Geithner plan and everything else as he details the broad opposition to it (emphasis mine)

Regrettably, the Obama administration seems to be fumbling the ball on an economic policy course that restores confidence in the American economy on both the optics level and also on a substantive front that reorganizes the "social contract" and design of the real economy in the U.S.

Obama, in his 'loyalty' to his current economic team and the mistakes they are making is the antithesis of Abraham Lincoln. Obama may have tried to mimic Lincoln's "team of rivals" approach to politics -- but he needs to read the chapters on the number of generals Lincoln fired during the Civil War to finally get things moved forward.

Obama may need to fire a number of his economic generals who have been trying to restore Wall Street to what it once was -- not boldly and critically reorganize the financial sector in a way that the dysfunctional behavior that characterized its bubble success is dismantled and reshaped.

Civil society should not wait quietly while Obama's team continues to fumble -- and while its key economic policy chiefs play "point the finger" at their colleagues behind the scenes. It's time for serious discussion about what needs to be done. . .and we need better benchmarks than we have for applauding, critiquing, and simply measuring the policy steps the administration is taking.

Now, normally this would be another "Village Stupidity" or "Already Failed Obama Administration" tagged example of unfair criticism towards a President who has been in office for a mere two months, trying to fix a decade of economic disaster that has erupted like a volcano on the last President's watch.

A month ago I would have scoffed at Steve Clemons for drinking the Sensible Centrist Village Kool-Aid.

The problem now is that the criticism is pretty much warranted at this point. Obama's made his choice to go with Geithner and his plan. Getting rid of him now is more or less a non-starter, Obama has committed to his people and the course he's on. Presidents have to make those kinds of decisions.

But there is hope. That hope now at this point is that the plan somehow makes Plan N politically feasible, either through a combination of the plan creating enough political legerdemain to bamboozle Congress into accepting it or it flunks so badly it leaves Obama and Congress no choice. Building on the news the FDIC and the White House were setting up just such a manuever for banks, there is a glimmer of hope in the fact that Geithner is asking for the ability to take over and unwind "too big to fail" non-bank companies like AIG. These two articles give me a lot of hope that Plan N is still in the cards as the fallback option. Obama and Geithner both understand this.

My frustration comes from the belief that Plan N should be the first option (or at least the current one) and not the last. The President has been convinced to try this public-private partnership plan before Plan N. It's his call, not mine.

It's entirely possible that Obama may enact both plans simultaneously. As Bon the Geek reminded me this morning, "Yeah, it's disappointing. But then also there may be something we don't know."

Mainly I guess I'm frustrated to see the political process this broken to the point where Plan N just can't be implemented...and make no mistake, Plan N comes with its own pitfalls and hazards.

[UPDATE] Yves Smith isn't buying the Geithner wind-down/Plan N manuever at all.

Given the lack of any mention of a special resolution regime, or intent to develop one, the point of this bill is NOT, appearances to the contrary, to be able to put more firms into receivership. It is to get broader authority to bail them out.

Atrios is with Yves on this one. Me? It's definitely the Occam's razor solution given Geithner's history. I can't discount this is just another back door for more bailouts should we get to the Plan N stage. I want to have hope. Hope will not fix this problem.

Hooray For Despair

Dow's up 250 plus on Shiny Geithner Plan, and Brad DeLong and Kroog are slugging it out over the thing. Brad thinks the political aspect is more important (can't fire Geithner now, Obama's agenda is at risk, etc), Kroog thinks the financial one is more important (no right price problem, recycled Bush/Paulson plan).

It's getting kinda ugly. I'm still with Kroog on this for various reasons, but Brad is right as far as the political aspect of the issue is still a consideration and must be part of the solution. Both arguments are compelling.

Kevin Drum has another perspective:

If Geithner's plan fails, we eat it. If we nationalize the banks and become owners of all the toxic waste, we eat it. This financial crisis is going to cost the government a ton of money no matter what we do at this point.

Which really is a good point, and something BooMan said over the weekend. The argument is that we should let Timmy do his thing because since the taxpayer is screwed anyway and that the diminishing returns of implementing nationalization is not worth it compared to the hassle of implementing it, plus the risk to Obama's agenda should Obama publicly fire the guy, means we should give Timmy a chance for the plan to work.

But again, that's putting political stuff over the financial stuff, and in the long run we'll be stuck with the same problem. The thing with Plan N is that the government can make sure what needs to get done actually gets done, as in "breaking up the bad banks and unwinding toxic crap". If we just went ahead and did Plan N two months ago instead of fiddlefarting around trying to solve the unsolvable No Right Price problem, we'd be that much closer to a real solution and a working economy by now.