All About Optics (Predicting Stress Test Outcomes)

The bank stress tests are beginning to create a perception problem, but not – as you might think – for banks.  Rather the issue is top level Administration officials’ own optics (spin jargon for how we think about our rulers).

At one level, the government’s approach to banks – delay doing anything until the economy stabilizes – is working out nicely.  This is the counterpart of the macroeconomic Summers Strategy and in principle it is brilliant. “Don’t just do something, stand there,” is great advice in any crisis – eventually everything bottoms out and you can take the credit, justified or not (unless an election catches up with you first; check with Herbert Hoover.)

But American bankers apparently just cannot cooperate by lying low, keeping their mouths shut, and refraining from anything that looks like picking other people’s pockets.

As the banks’ financial prospects improve, their political clout picks up and they increasingly resist the Fed and Treasury on many fronts, including the stress tests.  Then we find out this weekend that Charles Munger, Vice Chairman of Berkshire Hathaway, walks softly and carries a big pitchfork; speaking of bankers, he said:

“This is an enormously influential group of people, and 90 percent of that influence is being spent to gain powers and practices that the world would be better off without,” Munger, 85, said yesterday in an interview with Bloomberg Television. “It will be very hard to accomplish the kind of surgery that would be desirable for the wider civilization.”

Monday morning, we learn that Stephen Friedman, the chairman of the New York Fed (a) did not divest his Goldman stock when Goldman became a bank holding company and thus subject to the Fed’s jurisdiction (not good), (b) bought more Goldman stock in late 2008 (looks bad, including to Senate Banking), and (c) did not disclose this purchase to the Fed (very bad, optically speaking).  Berkshire Hathaway owns a great deal of Goldman stock – is this part of what Mr. Munger was trying to tell us?

“We need to remove from the investment banking and the commercial banking industries a lot of the practices and prerogatives that they have so lovingly possessed,” Munger said. “If they are too big to fail, they are too big to be allowed to be as gamey and venal as they’ve been — and as stupid as they’ve been.”

In any case, this is a serious problem for Treasury’s optics.  After long negotiations, the bank stress tests were set to show most banks are close to have their Goldilocks level of capital (i.e., just right)  Given that we generally agree (and the President has long stressed) this is the biggest financial crisis since the Great Depression, we seemed to be on the the verge of a capital adequacy miracle.

But instead of this being seen as some combination of good luck and smart policy, “everyone is basically fine” would look like the banks are running the show.  My Treasury friends swear up and down this is not true, but that is now beside the point.  Whatever the reality, it looks increasingly to everyone like the banks really are in charge.  It’s a nasty rule of politics that you are damaged by where perceived blame lands, rather than by what you actually do.

How should Treasury handle this?  They’ve tried the standard stalling tactics, but pushing the stress tests into the weekend news cycle would be a bit too blatant; “late on Thursday” remains the current announcement time. 

If only Charles Munger hadn’t been quite so eloquent.

Munger said the financial companies spent $500 million on political contributions and lobbying efforts over the last decade. They have a “vested interest” in protecting the system as it exists because of the high levels of pay they were earning, he said. The five biggest U.S. securities firms, only two of which still exist as independent companies, paid their employees about $39 billion in bonuses in 2007.

“They would like to get back as closely as possible to business as usual, and they have enormous political power,” he said.

Back in February, I suggested that we were about to witness a showdown between Secretary Geithner and US banking interests.  Some very smart people are working nights, trying to figure out how to prevent the full outcome of this confrontation from becoming focused in the public’s mind.  My guess is that Charles Munger is not at this point on the team,

Berkshire Hathaway Inc. Vice Chairman Charles Munger, whose company is the largest private shareholder in Goldman Sachs Group Inc. and Wells Fargo & Co., said banks will use their “enormous political power” to prevent changes to the industry that would benefit society.

Munger said policy makers should seek to impose limits on banks that are deemed “too big to fail” after financial institutions worldwide suffered more than $1 trillion in losses. The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the recession.

What Treasury really needs is a distraction.  Doesn’t anyone have a big positive, or at least controversial (and not related to banking), announcement they’d like to make on Thursday? 

You could, of course, make the stress tests appear more meaningful by focusing on a headline, “10 out of 19 banks need capital” (but how much?)  Given the recent market rebound and stronger general confidence, this may be where we are going.  Presumably Treasury will give banks plenty of time to raise this capital and provide extensions as needed. 

Treasury wants to wait and essentially do nothing, at the same time as appearing decisive.  This is a tough combination to pull off.  And what will the banks get up to while you are waiting?

By Simon Johnson

64 thoughts on “All About Optics (Predicting Stress Test Outcomes)

  1. “Whatever the reality, it looks increasingly to everyone like the banks really are in charge.”

    You’ve mentioned this many times, but I don’t think its via explicit force. Rather, they are “in charge” in the sense that Washington is too scared to let anything happen to them, so they “adjusted” the stress test to come up with the “goldilocks” capital requirements for many of the banks. Blankfein/Dimon/Lewis/Pandit/Mack etc. don’t exactly have a gun to Geithner’s head. However, Geithner wants to protect his job and his boss’s (Obama’s) approval ratings, and this means that no banks will fail.

    This may be because they’re too big to fail, but maybe its not TBTF in an economic sense. Sheila Bair has said time and time again that the FDIC has the authority in place to wind down a large banking institution. It could be that these institutions are TBTF in a *political* sense. Its a political home run if the administration can turn the economy around with any more corporate death and destruction (a la Lehman). Worst case scenario…its not their fault and it was caused by Reagan/Thatcher deregulation. Capped downside and unlimited upside? Seems like Obama is operating with a political call option much as our bankers operated with their financial call option…

  2. You ask, “What Treasury really needs is a distraction. Doesn’t anyone have a big positive, or at least controversial (and not related to banking), announcement they’d like to make on Thursday?”

    Is it any coincidence the administration is *also* releasing its detailed 2010 budget proposal on Thursday?

  3. typo: Its a political home run if the administration can turn the economy around withOUT any more corporate death and destruction (a la Lehman).

  4. From inside the federal budget world, I can tell you that the release was originally set of mid-April, before the stress tests were announced. Turns out its hard to put a budget in place when you don’t have all your Cabinet Secretaries, so we waited. Fear not, the stress test results will overshadow the budget roll-out.

    On a separate note, a simple question for Mr. Johnson – what can/should we the lowly ordinary citizens do with this information?

  5. Are we sure that the administration wants the crises wrapped up quickly rather than the long workout that seems likely with current ‘sweep it under the rug’ banking policy? If the crises resolves itself does support for large government stimulus spending and restructuring evaporate? Great. I’m beginning to sound like a conspiracy buff…

  6. Maybe we will get another suspected case of swine flu that the media will pump up and drown out the treasury results on Thursday. The media is a propaganda machine used as a tool its all to obvious now.

  7. your comment is based more on observation than theory. Right from the mouth of Rahm and others, never let a god crisis go to waste because you can do all kinds of things you never could before.

    (left in the rather fitting freudian slip)

  8. It could be that these institutions are TBTF in a *political* sense.

    That’s precisely what it is, as I’ve argued at my own blog. “TBTF” is an ideological construct meant to put a highfalutin gloss on what is really nothing more than rank gangsters demanding protection money in perpetuity.

    Even if there ever had been an economic truth to the concept, why haven’t the vulnerable points been shored up or moved by now? If something was TBTF last September, how could it still be, if there had been any effort since then toward bolstering “Main Street” versus the failure of Wall St behemoths? The answer is simple: the Bush/Obama, Paulson/Geithner cadre is ideologically beholden to the propagation of society as mine and dump for these bloated, feudal interests.

    Munger thinks rectificatory surgery will be difficult? I think it’s impossible. This obstruction to any hope of America and the world solving any of these problems is too big and too entrenched to be surgically excised. It can only be blasted out.

  9. The stress tests always were just a tool to restore confidence. They were never intended to actually uncover anything or assess “real” health. Nearly a month ago it was reported that “nobody would fail.”
    Why are we surprised that we are now in the “optics” phase? The crisis will not be averted by any real change (that’s slow, messy and hard), but rather by encouraging the growing belief that it’s over. This will work because, unusually, the interests of Wall Street, Washington, and the American people are perfectly aligned – they all want things to back to exactly the way they were.
    There is nobody, except a few economists (Mssrs Johnson, Krugman, Roubini, et al) who wouldn’t be perfectly happy just re-inflating the bubble. (And those economists will increasingly look like curmudgeons who are clinging to the crisis for the TV time and book deals it afforded them.) Wall Street is happy to go back to creative accounting and unfettered bonuses. The American people want their easy credit lifestyle back. Washington wants to turn it’s focus to re-election (it has already become painfully apparent to the Obama administration that no real policy change is possible as long as America insists on having a Congress). A nice, firm, plump bubble will allow Obama to ask “are you better off now than you were fours years ago?” in 2012 and get re-elected.
    Sure, structural faults may catch up to us again, but politicians only think as far as the next election. And nobody in Washington is a saint or savior, merely a politician.

  10. I’ve always admired Buffett and Munger, but shouldn’t they put their money where their mouths are? They are the largest stock holders of Wells and Goldman, why don’t they use that clout to end lobbying efforts by both banks, or more lobbying transparency or however it would be structured. You know, be good corporate citizens.

  11. Ever since the state of the Union the entire Administration became fixated on refuting the Republican talking point that Obama=market decline.

    The full-court press they launched to talk up the market has succeeded beyond anyone’s expectation. Perversely, now they can’t stop (sort of like trade loading political capital); the very legitimacy of their policies is tied up in the S&P. And as bank SHARE PRICES have risen (in other words, as the P has increased, regardless of E), the banks have seized the momentum to declare that everything is fine.

    How could the Administration push back without hitting itself? It’s more invested in the rally than the banks themselves, which know Treasury won’t let them fail and therefore feel perfectly entitled to tunnel their way wherever they wish.

  12. My prediction is quite simple: this downturn will be sold as a “once in a lifetime” event and the feeling of a need for significant reform will fade as the market returns to some kind of equilibrium. “Why should we spend all this time and effort and political capital for something that only would have helped had it existed before the crisis and which we don’t need anymore since it’s unlikely to happen again anytime soon?”

    If I’m correct, the banks and the administration would be doing everything they could to buy time until the “free fall” bottoms out. They would also need some way to repeatedly disrupt the news cycle and distract the public’s attention and conversations from constantly returning to “this awful economy”.

    It’s a good thing the administration isn’t playing this sinister game through some well-timed attempt to slowly release bits and pieces of information relating to highly controversial issues.

  13. Nice post. One question for you, however: where do you see any kind of “showdown” between Geithner and the banking interests?

    Everything I have seen so far leads me to the conclusion that Geithner is the bankers’ point man within the administration. Indeed, it’s hard for me to imagine how a lobbyist for Goldman or JPMChase installed as Treasury Sec would have behaved in any way differently from how Geithner has.

  14. I agree that government should play a role in keeping banks from becoming Too Big To Fail. But, there’s also a bit that individuals can do. I have my money (banking and investments) in smaller regional banks. They have good service and rates, and they have a Goldilocks size – not too big and not to small.

    A consumer led “run” on big banks could help in the effort.

  15. I’d look somewhere else for words of wisdom. Buffett and Munger have seem to have slipped off the pedestal and are sounding more like the hypocrites they are always warning about.

    All their criticisms of banks are accurate. Yet, Wells Fargo and Goldman were the two most cynical players in the subprime fiasco, the former as a writer and the latter as a packager of some of the most horrendous loans. Then both bragged about how they had insulated themselves from the fallout they were instrumental in creating. If they’re so disgusted, why was Buffett singing the praises of Well Fargo last weekend?

    And derivatives are weapons of mass destruction, but only when not written by the able Buffett.

    I think in a few years, people looking back at their success will realize much of it was attributable to their playing the debt bubble so well on the way up. But they weren’t as smart as Goldman and Wells when it came to insulating themselves.

    There really are no pillars in business. It’s all about making money. Some people are more ethical than others, and that’s certainly good, but they are ultimately motivated by self-interest.

  16. I also found Mr. Munger’s views stunning, particularly when measured against those of his boss, who seemed quite dismissing of all this scrutiny of his banks.

    The interesting thing about the debate in recent weeks is that it has moved from the reality of all the bad RMBS, CMBS and increasing levels of credit card charge-offs to the cosmetics of stress tests and “to-big-to-fail”. A rising equity market certainly gets some credit for changing the nature of the debate, but the tone of both the bankers and the Administration has contributed. To me, this all seems too much like changing the budget instead of changing the actuals. I suspect that the debate will return to the reality of looming losses when the banks run out of special items that offset write-downs and the proverbial “next shoe” drops.

  17. It could be a good cop/bad cop media play. Munger was never in the limelight until last week. Every media outlet is now sending their version of Becky Quick to interview Buffet … so enters Munger, the bad cop.

    I am not sure what is means, but I agree with your sentiment that these cornfed Nebraska boys should take and act on your suggestion.

  18. Once again, this is an economic and financial symptom of a political disease. A cure requires nasty political medicine but it is much easier (politically) to treat the symptom with snake oil. The placebo effect is sometimes successful, but its not the best option if other more effective treatment is available…

  19. Re-inflating the bubble won’t work because of the math: sooner or later, debt needs to be repaid and it gets harder to do the longer it compounds. Or it can be defaulted. Either option comes with a heavy cost. The tech bubble was re-inflated as the ABS bubble (etc.). The 401k bubble, inflating since the 1980’s, is going to pop if it hasn’t already. On the horizon: social security, medicare, etc. There are already too many bubbles. The debts need to be settled one way or another, and the sooner the better.
    Also, credit pulls demand forward so when this is over the debt-fueled portion of consumer demand will be gone.

  20. The Hoover reference is inaccurate. He tried to engineer a whole bunch of solutions, all of them based on faulty premises. Whether things would have been worse or better, had he done nothing, who knows. It’s not that he did nothing, it’s that what he did, failed.

  21. I’ve probably written about these points before, but I think they bear repeating. The afternoon in November when it was first announced that Geithner would be Obama’s Treasury Secretary, the stock market went up by over 700 points in less than an hour.
    A few weeks ago, when Geithner announced his latest and more detailed plans for the use of TARP and other goverment assets to aid the banking sector, the market went up by roughly 500 points in a day. It looks like Wall Street could not be more comfortable with the lay of the land as long as Geithner is “in charge.”

  22. > Stephen Friedman, the chairman of the New York Fed (a) did not divest his Goldman stock when Goldman became a bank holding company and thus subject to the Fed’s jurisdiction (not good), (b) bought more Goldman stock in late 2008 (looks bad, including to Senate Banking), and (c) did not disclose this purchase to the Fed (very bad, optically speaking).

    i assume this is a fireable offense. if you worked for an investment bank and you did this you would probably be sacked. at the very least disclosure is necessary. not to mention the fact that his employer may have had non-public information about goldman sachs would open him up to allegations of insider trading which can get you jail time.

  23. > As the banks’ financial prospects improve, their political clout picks up

    i don’t understand what your point of view is on this. if the banks are down, they have power because they are near collapsing and you can’t lay a hand on them because the system will collapse. if they are doing well, their political clout should decrease, no?

    simon, you can’t have it both ways.

  24. “Back in February, I suggested that we were about to witness a showdown between Secretary Geithner and US banking interests”

    If so, will Timmy get a call from Rattner saying something like “do you know who you’re f&cking with? I’ll have the IRS audit you, your friends and your family”

  25. Who’s trying to have it both ways? Their clout, just like that of any other rich interest, is a function of how much support they can buy. This never changes regardless of an interest’s actual, reality-based economic viability. (Just look at the ethanol “industry”, which never has been and probably never will be viable, but which is a corporatists’ darling.) Even as insolvent zombies the big banks are still a wealthy vested interest. That’s why for interests like this it’s so often heads-I-win, tails-you-lose.

    If as zombies they can also convince ignoramuses among lawmakers and “regulators” to sincerely believe that their failure would bring economic armageddon, that’s an added bonus.

  26. George Soros was right…Obama “lost a great opportunity” to reshape the banking landscape. However, I’m not convinced he won’t get a second chance. Ok, so Q1 results were pretty good…but these were due to one-time events (AIG payouts, record re-financings)…so what happens if Q2 and Q3 aren’t as good (or even close)? My guess is charge-offs will continue to climb as unemployment continues to climb. And just because the stock market is up (right now) does not mean the economy is healthy. I’m praying Obama is as smart as I think he is and will throw his considerable clout into the ring at that point. Right now, I get the feeling he defers too much to Geithner/Summers seeing them as the experts. However, if he starts to see that their plans aren’t working, hopefully he’ll step in forcefully himself. If Q2 and Q3 bring losses at the banks, we’ll be back to where we started…and a new round of “stress” tests won’t do the trick this time.

  27. Policymakers should be acting to minimize an asymmetric loss function, where the skew is downside. Treasury seems to have adopted an asymmetric loss calculation that’s skewed to the upside.

    Sadly, our banking policy seems very likely to be overtaken by events. Again.

  28. There was a heavy dose of sarcasm to my initial post, but nonetheless…
    I fully agree that deep issues need to be settled,and the sooner the better. I fear, however, that sufficient interests are aligned to keep a bubble going “just a little bit longer” and events continue to point that way: repealing mark-to-market, theatrically concocted stress-tests that test nothing, trumped-up Q1 earnings, “rebounding” real estate..etc. The message we are supposed to get is “move along, nothing to see here” as if the wreck is in the past and there’s just some boring clean up left.
    Given that so many other significant indicators (unemployment anyone?) still point to substantial trouble makes the crafting of the message even more Orwellian.

  29. 05-May-09 14:04 ET White House says likely that “several hundred thousand” jobs were lost in April – Reuters

    Here’s your distraction for Friday morning: The April employment report produces a job loss total of just 400k, giving the Treasury a perfect “good news” cover for stress test results. Why else would the White House comment ahead of the April jobs number, as they did today?

  30. To answer this very good question, start with Berle and Means. For outside owners or creditors, including the big ones, the cost of reforming or removing incompetent and/or criminal managers (as on Wall Street), almost always is prohibitively large, notwithstanding the wishful thinking that has taken over the business schools and too many economics departments.

    No nation has fully solved this problem but the trend in comparative corporate compensation is good evidence that the US has fallen way behind the pack.

  31. This seems to me a generational problem. We have a generation of participants in the market right now (I include myself) of whom few have ever known a system that wasn’t based on bubble economics. We had the bubble of the stock market (tech being the most spectacular example, crashing in the beginning of the decade) followed by the bubble in real estate. Bubbles create their own rules and patterns of behavior, according to rational self-interest. The trouble as I see it is that no one knows how to manage their money (or the economy in the case of our leaders) when there aren’t the favorable conditions that bubbles make possible. We are hell-bent on re-creating a stock bubble as I write this. How do we re-train ourselves to learn to run an economy in a healthy style when we haven’t seen one in such a long time? Until the pain is bad enough (apparently this winter wasn’t enough of a shock, YET), the activation energy isn’t present for such a radical shift. Having someone in Simon’s position (experience with bubbles and more importantly, their aftermath) is an invaluable tool. I hope our leaders are paying attention to this blog. I suspect they are.

  32. Munger is always the grumpy sidekick at the annual meetings.

    Buffett displayed his true self last fall when he supported Tarp 1. He described it as a plan to pay market value, while Treasury was planning to pay above market for bad bank assets. Was Buffett confused (unlikely) or shilling? I wish someone were able to ask him in a public forum. Buffett is the Equity Yin to Bill Gross’ Fixed Income Yang (or something like that) when it comes to financial bail outs.

  33. I don’t think the bottom 50% of Americans as measured by wealth have enough money in the largest banks to have much impact. And if they did cause a run, they would pay for it, literally, with additional public bailouts.

  34. The stress tests, as you note, although indicating real weakness will not result in any real action. Meanwhile, the toxicity of the assets held by the large “BANKS” deteriortes daily. Today, Bernanke once again acted a cheerleader in chief by trying to put his best smiley face on where the economy is headed, and it may have worked. Not so amazing, the remaining big players are “churning” the Wall Street markets to keep the public convinced that things are getting better. Remember, this is a bear market rally which is not deceiving the realists who are on the fringe, and don’t believe what is happening really indicates recovery, in any meaningful sense is on its way. Fuggetaboudit!

    The Summers/Geithner “waiting game” will persist until things flatten out and the economy continues slogging its way to a better day (many years in the future). Except, the toxic assets ain’t goin’ anywhere, and it is still hard to imagine PPIP really having a meaningful impact because of, not inspite of, the “waiting game,” where the banks can continue to stonewall and buy support.

    I am not sure, but we may yet see a bottom far below where we are now. Prayers are our best hope, because Congress has been bought for now, and Geithner could only try to convince Justice to go the antitrust route (which would mean more paper than Weyerhauser produces in the average year, and would take longer than we can imagine — but might provide a great stimulus for the legal community). And, we know that Justice wouldn’t relish that challenge, which would mean beefing up staff by several hundred new bodies. The resolution bill suggested by Geithner appears to have been shelved by Congress (no great surprise), so he is essentially toothless. The only real positive thing is that Congress can’t afford to anger the public with any more bailout money, so the banks may just fade and die after not being able to raise sufficient capital to cushion their futures. You know that parasites die everyday by sucking the host dry. It may happen here. Oligarchs are just high end parasites that eventually let their addiction to power lead to self distruction. It happened in the Great Depression, and may very well happen here. If you hear a big sucking sound, it may be a least attempt for the oligarchs to breath in an oxygen starved environment.

    If that happens, I will be ready with my own smiley face.

  35. How can we possibly have a standoff between Secretary Geithner and the banking interests which he represents?

  36. I’m with you right up to “I’m praying Obama is as smart…”

    On the economic front, I have no hope or faith in Obama. I can’t imagine what you see that gives you any.

  37. I’m really getting concerned about the stress “tests”. The WSJ reports that these same banks are saying the worst is yet to come

  38. Buffett said that only 4 of the 19 institutions were “too big to fail.”

    Interesting comment. BAC and Wells each have over 10% of insured deposits.

    Everyone is pretending that investment banks are part of the traditional banking system. Most of the 19 are no where near Wall Street.

    90% of the weirdness of this has been figuring out a way to turn investment banks into commercial banks. It was dirty work but the investment banks would have taken out the global financial system.

    The investment banks (Goldman, MS) have higher tangible common equity then a lot of the others but don’t have huge, low cost deposit bases. TCE heavily favored them. The traditional banks with huge deposit bases got them by acquisition at over book value — creating goodwill — which is excluded from TCE.

    The way to look at things is separate out the institutions with New York addresses and the rest of the banking universe. The bonuses in North Carolina are not in the same league as those in New York.

    A couple of months ago, the non New York banks were beginning to try to untangle themselves from guilt by association with the NY investment banks, but were told to shut up and take it.

    After we heard about the little chat Ken Lewis had with the Treasury/Fed, I’m not surprised they complied.

  39. “would look like the banks are running the show. My Treasury friends swear up and down this is not true, but that is now beside the point.”

    Those friends; Haven’t they heard about the Durbin’s bill for homeowners and how the bankers gloated after it was defeated? How about the delays after delays banks requested for the new rules of credit cards? Aren’t they aware of the royal difference in treatment between the automakers and the banksters? The fact that NO executive at ANY bank was never asked to leave, even if the go-vermin literally OWN the banks?

    I mean, have your Treasury friends get out of their office; they need a vacation big time! They need to talk to ordinary people for a change.

    As for Stephen Friedman, this is simply unbelievable that a high ranking Fed official can even own any security of any entity he’s in charge of regulating. It make the Fed look like they’re on the take and in the tank.

    Short of the population going long on torches and pitchforks, I don’t see any resolution of the banking crisis that wouldn’t involve several more trillions of taxpayer money.

    Note that this could be a perfect recipe for social upheaval sooner or later.

    Why do I say that? Because I believe the Minsky Theorem also apply to population behavior: long periods of *apparent* stability (I was about to say passivity) will, under significant duress, result in dangerous instability. That can’t be good.

  40. Very good find GC.

    Treasury can also re-use the wonderful distraction that was so successful in helping get Tim Geithner approved to office when his tax-cheating ways was making news and needed to be overcome. That story, as underplayed as it was by generalizing and leaving out key facts, was replaced with another story which was correspondingly _overplayed_ and did the trick:
    Send out a short memo about how China might possibly under some conditions if the situation demanded it could perhaps be labelled very temporarily with no offense intended as a “currency manipulator”.
    (For a few microseconds and keeping in mind that we want friendly relations and no offense intended or given or taken…)

  41. It seems to me that the only way we are ever going to have an honest banking system will only begin when we have honest money. The value of the dollar has dropped over 90% since the inception of “The Fed”(A real misnomer since there is nothing federal about it)and the 100% devaluation seems very near. We can’t continue to print money out of thin air and expect to have a fair economy. Jefferson warned of a central bank. Jackson fought it and broke it up. Lincoln turned his back on the banks and issued greenbacks. The constitution gives the power to issue money based only gold and silver. It says nothing that grants congress the power to give that away. We must have honest money to have an honest, transparent economy.


  42. Well, if one has lavished from the easy flowing fountain of money the last decades, than it’s clear that the banksters are not willing at all to give up this chicken with the golden eggs. It’s utterly naive to think that the banksters are capable of self-regulation or self-reflection. Only extremely tight regulation and control of the, partly, state owned banks can provide a correct flow of financials in all layers of the community.

    One would think that only Obama could do this. But I’m very disappointed by the reluctancy and reserved approach by the Obama government. Obama is for a better world, but why doesn’t he attack the banksters now he has the power??

    Big Finance should be broken down to smaller, better controlable and manageable units.

  43. Oustanding piece of analysis and writing. You and Willem Buiter for Fed Chair / Treasury Secretary.

    (Can blame a guy for wishing…)

  44. The investment banks (Goldman, MS) have higher tangible common equity then a lot of the others but don’t have huge, low cost deposit bases. TCE heavily favored them. The traditional banks with huge deposit bases got them by acquisition at over book value — creating goodwill — which is excluded from TCE.

    Smartest comment I’ve seen yet on this whole mess. Buffett said it as well: THE VALUE IS IN THE LOW COST DEPOSIT BASES, but the biggest consolidators are being hurt by the focus on TCE. Why else would Goldman, Morgan et al have scrambled to become banks??? These guys are sellling non-guaranteed debt at 350 over treasuries…very expensive funding.

  45. The news that BofA now needs over 30 billion in capital infusion is telling to me. And I’ve been looking at the precious metal prices with the widget and continue to be surprised that gold and silver remain strong considering what the DOW had done since March. Tells me that a lot of investors are still worried and this morning I see that the stress test news is sending all the precious metals up at market open. One of the indicators I think of some of the fear in the back of people’s minds.

    Throw into the mix China and their buying of gold and attempts to lessen their US debt buying and holdings and I’m not so sure the future of the US economy is as bright as our gov is painting it.

  46. From this post and from experience of the past two years it is clear that we have a classic conflict of interest here. This goes indeed past a single appointed/elected official taking advantage of insider status. While i do think that TARP, TALF and others where necessary i am far less convinced of TBTF. Washington was very eager to safe Wallstreet entirely, with the exception of Lehman, and used an all or nothing argument. Either we safe financial instutions or we all will experinece catastrophe. That was clearly the selling point. This blindfolded generalizaten as opposed to a more market leaning approach reveals the deep-rooted connection between Wallstreet and Washingon. After all where would Washington be- where would this country be without Wallstreet.

  47. I can appreciate where you are coming from, but can you tell me if there is any currency that qualifies as an honest currency today?

  48. Obama is surrounded. Check out the relationships between Rubin, Geithner, Summers but also Emmanuel and Axelrod. Obama owes a lot to Axelrod, arguably his office itself, and one must assume he will not move against this entire group.

    What a mess! One party is led by wierdos and dunces and the other is the servant of a grossly inflated and rotten-to-the-core financial sector. Protected from both market discipline and a big guy with a pitchfork, the financial insiders will continue to collect enormous rents, destablize asset prices, and drive the entire economy down to a double-digit unemployment-or-inflation equilibrium.

    It is a little frightening that the likes of Citigroup will not merely survive this crash but once again will support lavish consumption with other people’s money. But it is a lot more frightening that most American firms and households will do exactly that same thing. The worldwide extent of the crash, and especially the mass defaults in southern and eastern Europe, are now sustaining our collective illusion that the current upticks in the “indicators,” so dear to mediocre economists, are signs of a recovery. But for a solid and lasting recovery, we must pay down our external debt. Sad to say, neither the financial engineers in Citigroup, who know only how to shuffle around credit, nor the financial engineers in the Obama administration, who know only how the shuffle around debt, have demonstrated that they know much of anything about how to pay down the external debt. Indeed, their wearisome pieties about “comparative advantage in finance” and “free trade” are strong evidence that, in the matter of producing as much as one consumes, the financial engineers are clueless.

  49. I saw this coverage of the stress test: and it brought up some interesting points, but when I saw that banks including Wells Fargo, Citi, and especially BofA needed more equity is made me skeptical of the whole thing. I think that giving our any more money is just a crime and it’s time for the banks to be held accountable. If Jamie Dimon and JP Morgan can do it, what happened at Bank of America? I mean $34 billion is inexcusable.

  50. Can you please elaborate on exactly what you mean by “If Jamie Dimon and JP Morgan can do it?”

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