Banking: The New Con Game

The FDIC closed two more failing banks on Friday (American Sterling Bank in Missouri and Great Basin Bank in Nevada), taking total U.S. bank failures – less than one month into the second quarter of 2009 – to 25, on par with total bank failures in all of 2008. That number is set to grow. Coral Gables-based BankUnited, the largest bank headquartered in Florida, could be taken over by federal regulators if it doesn't boost its capital by merging or finding a buyer within 20 days, under an order last week from the Office of Thrift Supervision. The order issued on Tuesday gives BankUnited 15 days to submit a binding merger or acquisition agreement to regulators. Banks reported earnings last week and, along with the previous week’s reporting of greater than expected results from Wells Fargo, JPMorganChase and Citigroup stunned the investing world with astounding results (relative to where banks have been financially over the past eighteen months). Defaults on credit cards were, for JPMorganChase, up very substantially over the reporting period and that is nothing for them to take in stride. Job losses (reportedly down 53,000 over the past week – but still indicative of more than 600,000 per week losing their main sources of income) are projected to grow, which means banks can look forward to increases in credit card defaults going forward. But the real issue that allowed banks to tender better than expected earnings results rests with the fact accounting rules have been changed. Banks now can, as we disclosed in last week’s letter, assess their value of their toxic waste assets themselves. There is no oversight as banks make grandiose assumptions about the value of mortgages that are not being repaid and properties that are not being sold. At some point, banks’ valuations of toxic waste will have to be reassessed; perhaps only when foreclosures make the market, which they’ve not yet begun to do. And at that point, banks will look far uglier than the picture they now portray. On 4 May, the U.S. Treasury will reveal results of its bank stress tests and, at this point, there is much concern about how and how much of the results to make public. The tests were supposedly designed to determine if banks have sufficient capital to make it through losses over the next two years if the economic downturn worsens. The Treasury issued the tests to the nation’s top 19 banks and it withheld the results prior to first quarter earnings releases in order to prevent test results from impacting first quarter earnings. But the delay in releasing those results could prove to be a two-edged sword. If the results are positive, there isn’t a thinking person on the planet who won’t wonder about the validity of the tests. At the same time, offering evidence of continued deterioration in banks’ solvency could lay the groundwork for further punishment by investors. First, there is a problem in that such tests had to be administered at all. That should be the primary consideration by (potential) investors. Second, it is more than fair warning, in our view, that since the tests covered the potential for losses over the next two years there is an inherent suggestion that economic conditions will continue to deteriorate. It is more than a little telling that first quarter macroeconomic data shows growth, unemployment and falling prices alone are worse than those in the FDIC’s baseline scenario for 2009 and even worse than those for the more adverse stressed scenario for 2009. The "pessimistic scenario" used in stress tests for banks represents a crucial factor going forward. In it, unemployment rises to 8.9% by the end of 2009, and home prices fall an additional 22% for the same period. It's glaringly obvious that the pessimistic scenario is far too optimistic. Unemployment is over 8.5% officially and more than double that level via other reporting means. Home prices lost 19% of value y-o-y in January. Clearly, worse still scenarios are needed to arrive at a test that has any value at all. But the resistance from the banks against such scenarios means anything meaningful won't even be considered. Increasingly economists and analysts are coming to the same conclusion: Fraud between collaborative corporations and government officials has created the banking nightmare that has unfolded over the past year. Banks’ worsening positions are being covered up by U.S. policymakers but they can’t hide the results that have come to light to date relative to the economy as a whole:
1. World economies are plummeting at depression-level speed by all key measures; production, consumption, trade, profits, asset values, capital flows and more;
2. Unemployment is soaring. In the U.S. it is close to 20% when all excluded and understated categories are included;
3. Pensions and benefits have been lost;
4. Homelessness is rising sharply, the result of more than six million U.S. foreclosures as tent cities pop up across the nation;
5. U.S. foreclosures increased 24% in the first quarter of this year while increasing 46% year-over-year in March alone.
The devastated state of the U.S. economy should be sufficient to make it clear that banks cannot possibly be in better shape than there were a few months ago. It should be enough to indicate that, in the absence of widespread recovery, banks don’t stand a chance of getting better anytime soon – let alone over the next two years. Conditions for the non-Wall Streeter of appreciable means or those uninvolved in high level politics grow more distressing each day. Government involvement in the banking crisis in particular and the economy in general assures that a worse outcome is not far off as Washington contrives new schemes to keep the public’s eyes off its slights of hand. If the U.S. government were a business, its management would have been brought up on criminal charges by now. The Obama White House – and Bush before him – has consistently rewarded failure, provided the failing business is a bank. More incredibly, it had done so without much public outcry – until last week. The fifteenth of April is tax day in the U.S. and protestors gathered in more than 500 cities to convey their disgust with government intervention for which private citizens continue to pay the price. There is no previous time at which we can recall such an orchestrated coming together of the American public to make contact with its government. The big issue is whether government was listening. We will guess it was not. While the domestic economy continues its collapse Obama visits hostile governments in the Middle East and South America, apparently pursuing his “we hope they like us” foreign policy. Lackeys in Washington are busy coming up with new tax schemes and other programs to lure the private sector into their bank rescue plans. The last issue left for the private sector is whether it can retain any semblance of confidence in its government. Tea party protests across the nation represented stress test results the government didn’t anticipate: Protests were symptomatic of the low threshold for continued government interference, spending and lack of accountability, reflecting the public’s waning confidence in all levels of government. The American public is taking notice of the schemes designed to salvage crooked banks, enrich politicians and soak taxpayers for the cost. Irrespective of the results of bank stress tests, we expect they – as further Treasury efforts at economic rescue – will be viewed with skepticism and disbelief due to sharply contracting confidence and, as confidence goes, so goes the currency. In the latest lunacy from Washington, banks will be allowed to repay TARP funds, but only if they meet certain requirements that prove repayment is in the public interest. Frankly, we don’t understand how the repayment of private sector funds could ever be anything but in the public interest. But this latest scam from Washington is supposed to be in the public interest by preventing some ‘shaky’ banks from returning TARP funds as (according to statements made by Obama on Sunday) “…they are going need different levels of assistance of taxpayers”. Last week’s tea parties suggest taxpayers are about ‘full-up’ on government intervention and running on empty in terms of wanting to bailout the banks.