Tuesday, March 13, 2012

More about US banks, 'stress tests' and criminal conduct

Yesterday I mentioned that the Federal Reserve was about to release the results of the latest round of 'stress tests' on 19 major US financial institutions. Those results were announced today (instead of on Thursday, as originally scheduled).

The Federal Reserve said 15 of the 19 largest U.S. banks would remain healthy in a severe crisis, demonstrating the scope of the recovery of the the nation’s financial system since it nearly collapsed in 2008.

Four banks failed at least one of the criteria in the so-called stress tests: Citigroup, Suntrust Banks, Ally Financial and the insurance giant Metlife, the central bank said. Those companies would have to raise more money to buffer themselves in case a crippling downturn hits the economy.

Banks that passed the test included Bank of America, J.P. Morgan Chase, Goldman Sachs and Wells Fargo. Now those firms can raise their dividends or buyback shares, which has the effect of raising the stock prices.

The scenario used to test the banks included unemployment hitting 13 percent, stock values dropping by half and housing values fall by 21 percent. The Fed said that in such a situation, the country’s 19 biggest banks would lose $534 billion over nine quarters.

There's more at the link.

This is doubtless good news for the 15 financial institutions that passed the 'stress test' - at least, in official terms. However, it's not such good news for the person in the street, like you or I. Remember that the 'passing' financial institutions still had capital reserves equal to only a small proportion of their 'risk-weighted assets', as the Fed put it in its news release yesterday. That means those banks have 'leveraged' their capital reserves ten times over - or, to put it another way, they can actually cover only one dime out of every dollar of 'risk-weighted assets' on their books. It says a lot when we consider that, prior to recent 'improvements' in their position, they could cover only a nickel out of every dollar, doesn't it? Furthermore, the only reason their positions have improved is because the Fed has extended almost unlimited credit to the US (and, for that matter, the international) banking system, and taken over many of the banks' risky investments and bad debts. We're all on the hook for that. It's become part of the federalized national debt. Pardon me if that prospect doesn't exactly fill me with joy!

While all this was going on, an offshoot of the 'Occupy Wall Street' protests, calling itself 'F The Banks' (allegedly standing for 'Foreclose The Banks' - yeah, right!), is planning to occupy branches of Bank of America (BoA) on March 15th. They've released an article about BoA by Matt Taibbi, in which he pulls no punches. At present it's on their Web site, and also available for download as an Adobe Acrobat document in .PDF format. Here's a brief excerpt. I urge you to read it carefully, because it's all true.

There are two things every American needs to know about Bank of America.

The first is that it’s corrupt. This bank has systematically defrauded almost everyone with whom it has a significant business relationship, cheating investors, insurers, homeowners, shareholders, depositors, and the state. It is a giant, raging hurricane of theft and fraud, spinning its way through America and leaving a massive trail of wiped-out retirees and foreclosed-upon families in its wake.

The second is that all of us, as taxpayers, are keeping that hurricane raging. Bank of America is not just a private company that systematically steals from American citizens: it’s a de facto ward of the state that depends heavily upon public support to stay in business. In fact, without the continued generosity of us taxpayers, and the extraordinary indulgence of our regulators and elected officials, this company long ago would have been swallowed up by scandal, mismanagement, prosecution and litigation, and gone out of business. It would have been liquidated and its component parts sold off, perhaps into a series of smaller regional businesses that would have more respect for the law, and be more responsive to their customers.

But Bank of America hasn’t gone out of business, for the simple reason that our government has decided to make it the poster child for the “Too Big To Fail” concept. Because it is considered a “systemically important institution” whose collapse would have a major, Lehman-Brothers-style impact on the economy, two consecutive presidential administrations have taken extraordinary measures to keep Bank of America in business, despite a staggering recent legacy of corruption schemes, many of which were simply overlooked by regulators.

. . .

The inevitable result of that new form of corruption is this bank, whose continued, state-supported existence should naturally outrage all Americans, be they conservative or progressive.

Conservatives should be outraged by Bank of America because it is perhaps the biggest welfare dependent in American history, with the $45 billion in bailout money and the $118 billion in state guarantees it’s received since 2008 representing just the crest of a veritable mountain of federal bailout support, most of it doled out by the Obama administration.

. . .

Last summer, for instance, the Bank – in order to satisfy creditors who were nervous about the enormous quantity of risky assets on its balance sheet – decided to move some $73 trillion (that’s trillion, with a T) in exotic derivative bets from one end of the company into the federally-insured, depository side of the bank.

This move, encouraged by the Obama administration, put the American taxpayer on the hook for an entire generation of irresponsible gambles made by another failed investment firm that should have gone out of business, but was instead acquired by Bank of America with $25 billion in taxpayer help – Merrill Lynch.

When did we make it the job of the taxpayer to buy failed companies, and rescue companies from their own bad decisions? How is that conservative?

Meanwhile, if you’re a progressive, Bank of America is the ultimate symbol of modern predatory capitalism. This company has knowingly sold hundreds of billions of worthless securities to unions and pension funds (New York state filed two different lawsuits against Bank of America and its subsidiaries on behalf of its pension fund, one of which was settled for $624 million) brazenly overcharged its depositors (it was forced to pay customers $410 million in restitution for bogus overdraft charges), and repeatedly lied to its shareholders (most notoriously, it lied about billions in losses on Merrill Lynch’s books before asking shareholders to approve its merger with the firm).

Moreover, Bank of America has ruthlessly preyed upon millions of homeowners, throwing them out on the street on the strength of doctored, “robosigned” paperwork created through brazenly illegal practices they helped pioneer — the firm sped struggling families to foreclosure court using perjured affidavits produced in factory-like fashion by the hundreds or thousands every day, with full knowledge of management. Through the firm’s improper use of an unaccountable private electronic mortgage registry system called MERS, it also systematically evaded millions of dollars in local fees, forcing some communities to cut services and raise property taxes.

Even when caught and punished for its crimes by the authorities, Bank of America has repeatedly ignored court orders. It was one of five companies identified in two separate investigations earlier this year that were caught continuing the practice of robosigning, even after promising to stop in a legally binding consent decree. Last summer, the state of Nevada sought to terminate a settlement over mortgage abuses it had entered into with Bank of America after it found the company was brazenly violating the agreement, among other things raising payments and interest rates on mortgage customers, despite the fact that the settlement only allowed them to modify loans downward.

Over and over again, we see that leveling fines and punishments at this bank is not enough: it simply ignores them. It is the very definition of an unaccountable corporate villain.

There's more at the link. I highly recommend reading Mr. Taibbi's pamphlet in full.

Karl Denninger says of Mr. Taibbi's article:

I can easily argue all that's true.

So why did this happen? And is it limited to one firm?

Let's dispose of the latter first -- it most certainly is not!

. . .

The outrageous behavior of these institutions is not really much of a surprise when one looks at history. Glass-Steagall's eviscertation by Greedscam and then it's ultimate repeal (and ex-post-facto legalization of the Traveler's merger at the same time) made clear that if you were a large financial institution you could do literally anything and not go to prison. This has been reinforced since in that virtually every one of the large financial institutions has committed far more than instances of chargable fraud; under "three strikes" laws were you or I to do the same thing we'd be cooling our heels serving a life sentence in prison.

. . .

The real question is why we, the people, tolerate this crap. The game thus far since 2007 has been to run fear -- claims of "tanks in the streets" and similar, all of which were you to do it would constitute a serious felony known as "terroristic threats." So how is it that a Treasury Secretary gets away with it?

Well, again, because we the people allow it.

In short the screwings will continue until the people rise and demand it be stopped. Unfortunately the imbalances that the "powers that be" are trying to continue in an futile attempt to fake a "recovery" are simply digging a deeper and deeper hole when it comes to federal deficits and thus the inevitable size of the contraction that must come in government as a whole.

Again, more at the link. Bold and italic print are Mr. Denninger's emphasis.

It's therefore clear that the Fed's 'stress tests' aren't going to deal with reckless and/or criminal conduct by the very financial institutions that have just 'passed' those tests. I don't know what will solve that problem as long as our present politicians are in office, because most of them (of both parties) have been bought and paid for by the banksters.

We need to 'clean house' in Washington. Big-time. This year.



trailbee said...
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trailbee said...
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