Fed and BOE Shell Games to Bailout Insolvent Banks

The US banking system is insolvent. I gave 25 reasons on Wednesday, July 23, 2008 in You Know The Banking System Is Unsound When....

1. Paulson appears on Face The Nation and says "Our banking system is a safe and a sound one." If the banking system was safe and sound, everyone would know it (or at least think it). There would be no need to say it.

...

22. In a panic set of moves, the Fed slashed interest rates from 5.25% to 2%. This was the fastest, steepest drop on record. Ironically, the Fed chairman spoke of inflation concerns the entire drop down. Bernanke clearly cannot tell the truth. He does not have to. Actions speak louder than words.

23. FDIC Chairman Sheila Bair said the FDIC is looking for ways to shore up its depleted deposit fund, including charging higher premiums on riskier brokered deposits.

24. There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

Many things have transpired since then. I could easily list another 25 reasons. But the fact of the matter is the insolvency can now easily be seen by anyone who bothers to open their eyes.

Washington plots next step after aid to Citigroup and Bank of America

Inquiring minds are reading Washington plots next step after aid to Citigroup and Bank of America.

Washington was last night considering fresh plans to clean up the US banking system’s deteriorating situation.

In an attempt to restore confidence within the battered financial sector, the incoming Obama administration and the Federal Reserve are discussing a range of options, reported to include a government bank that would buy up toxic assets. Funded by taxpayers, the “bad bank” would buy the assets blocking the system and instead place the risk of holding them on the government.

An announcement could be made within days of Barack Obama taking office as President on Tuesday.

The news emerged after one of the most dramatic days on Wall Street, yesterday, during which the US Government threw a lifeline to Citigroup and Bank of America that could leave American taxpayers on the hook for up to $373 billion (£254 billion).

Citigroup announced that it would split itself in two, while Merrill Lynch, which was taken over by Bank of America (BoA), reported a $15.3 billion loss for the fourth quarter. BoA made its first quarterly loss for 17 years.

The drama began when the US Government acted to put a floor under BoA’s plunging share price by agreeing to inject $20 billion into the group and to underwrite losses on a further $118 billion of its most toxic assets. The $20 billion injection will come from the US Government’s $700 billion Troubled Assets Relief Programme and will make the Government the bank’s largest shareholder, with 6 per cent. Any money that the Government pays to cover losses on the $118 billion portfolio of toxic assets that it has guaranteed will be funded separately by the American taxpayer.

Aggregator Bank Idea

Bloomberg is writing Paulson, Bair Raise ‘Aggregator Bank’ for Toxic Debt.

The heads of the U.S. Treasury and Federal Deposit Insurance Corp. gave further momentum to the idea of a new government-backed bank to remove toxic assets from lenders’ balance sheets.

“A lot of work has been done on an aggregator bank” and other ways of using the $700 billion financial-rescue fund “to let it go further when it comes to dealing with illiquid assets,” Treasury Secretary Henry Paulson told reporters today in Washington. FDIC Chairman Sheila Bair praised the idea in an interview on CNBC, saying it might have “some merit.”

“They need to do something dramatic,” said Harvard University Professor Kenneth Rogoff, a former chief economist at the International Monetary Fund. He is a member of the Group of Thirty counselors on financial matters, a panel that includes Treasury Secretary-designate Timothy Geithner and Lawrence Summers, incoming director of the National Economic Council.

The FDIC, which has authority to take “any action” with insured deposit-taking firms deemed necessary to counter “adverse effects on economic conditions or financial stability,” could also play a role.

‘Capital Cushion’

“We think by leveraging TARP funds in this way, you could have a significant capacity to acquire troubled assets,” Bair, who is set to stay on under Obama, said today. Officials could “require those institutions selling assets into this facility to contribute some capital cushion themselves.”

Call To Do "Something Dramatic"

Notice the call to do "something dramatic" by Kenneth Rogoff, a former chief economist at the International Monetary Fund. We are in this mess because Greenspan did something dramatic in 2002, namely slashing interest rates to 1% fueling the biggest property bubble the world has ever seen.

However, it was not just the Fed, that is to blame. China and Japan were in on it too, lending money to the US at ridiculously low interest rates to keep their export machines running. Congress was in on the act, willing to build bridges to nowhere and throwing money at anything that yapped for a handout.

The net effect of those actions led to the creation of bubbles in housing, commodities, commercial real estate, and consumer consumption, all of which have now burst.

Those responsible want still more "dramatic actions" to keep the bubble alive. We have already seen too many dramatic actions misfire already, including of course of course Bush squandering $trillions on a war in Iraq on grounds of weapons of mass destruction that did not even exist.

Good Bank, Bad Bank Shell Game

The aggregator bank idea is nothing more than a shell game with a twist. I wrote about such shell games once before in Super SIV Bailout Plan Doomed To Fail.

Don't Ask - Don't Sell

• The plan boils down to this: Don't Ask - Don't Sell.
• Don't Ask what the asset is worth.
• Don't Sell or you will find out and not like the result.
  

Paulson's Super SIV idea did indeed die on the vine, in failure.

The idea now is to separate out all the bad assets and place them under one shell in a don't ask, don't sell plan, keeping the good assets in a good shell, and pretending the bad shell does not exist. The "twist" is that taxpayers will be on the hook for most of the assets hidden under the bad shell, footing the bill over time.

Somehow this scheme is supposed to inspire confidence.

World Banking System Is Insolvent

It is not just the US banking system that is insolvent. Many nations banking systems are insolvent, including the US, UK, various Eurozone countries, China, and others.

Please consider a £200bn UK Plan To Save Banks From Bad Debt

The taxpayer will be forced to underwrite up to £200 billion of bad banking debt under a government plan to take control of assets belonging to Britain's major high street lenders, The Daily Telegraph can disclose.

In an attempt to restore confidence within the financial sector, the Treasury will tell the banks of its plan on Saturday. It aims to announce details of the rescue package publicly early next week.

The bad bank plan has climbed the political agenda in the past couple of weeks as the Government has become aware of the extent of the lenders' bad debts.

Sources said that a bad bank would have to take on about £200 billion of toxic assets. That would take the Government's total commitment to solving the banking crisis to almost £1 trillion in taxpayers' money that has either been spent or pledged.

That equates to about £33,000 per taxpayer. The total sum is equivalent to more than two-thirds of Britain's annual GDP of £1.4 trillion.

As well as creating a bad bank, the Government is planning to use Northern Rock as a "good bank" which can dramatically increase lending to individuals and businesses.

Northern Rock As The Good Bank

Note the massive irony of proposing Northern Rock as the "Good Bank". Northern Rock was nationalized early in 2008, at taxpayer expense, after an examination of its books revealed a £53Billion Hole In Its Mortgage Portfolio, over 70% of that portfolio, was not even owned by the beleaguered bank, but by a separate offshore company.

Brown urges banks to come clean over bad assets

With that backdrop, on both sides of the Atlantic, Brown urges banks to come clean over bad assets.

Prime Minister Gordon Brown told British banks Saturday they must own up to the extent of their bad assets amid more reports his government could launch a fresh bailout of the struggling sector.

In a Financial Times interview, Brown did not rule out the possibility that banks could get a further injection of taxpayers' money after big names including Royal Bank of Scotland (RBS) were bailed out last year in a 37 billion pound recapitalisation.

His comments came after shares in RBS and Barclays plunged Friday after US giant Citigroup announced an 8.29 billion dollar fourth quarter loss and Bank of America got a 20 billion dollar state bailout.

"One of the necessary elements for the next stage is for people to have a clear understanding that bad assets have been written off," Brown told the Financial Times.

"We have got to be clear that where we have got clearly bad assets, I expect them to be dealt with."

Officials are reportedly working on plans to buy banks' bad assets -- exacerbated by some consumers and businesses' inability to pay their debts as the credit crunch bites -- and place them in a "bad bank", or to underwrite the toxic assets.

The BBC said the government would next week announce an insurance scheme which would allow banks to pay a fee and have their bad loans underwritten by the taxpayer up to a point. The industry reportedly has some 200 billion pounds of bad assets.

Brown's Fee Scheme Ripoff

Check out that "Fee Scheme" ripoff plan of Gordon Brown. I can guarantee you upfront that if it is approved it will work something like this: For a 1-5% "fee" taxpayers will be on the hook for 95-99% of the losses.

Stop Wasting Taxpayer Money

A recent US poll shows Americans overwhelmingly say federal bailout has not been effective and majority want the government to stop providing money to banks. Please consider Americans on bailout: Stop spending

The government's financial bailout for troubled banks has not worked so far, a majority of respondents to a national poll say, and six in 10 don't want Washington to spend more money on the rescue.

Sixty-one percent of those questioned in a CNN/Opinion Research Corporation survey released Friday oppose providing more government money in the financial bailout. There are some supporters, however -- 38% said the government should provide more assistance to ailing banks and other financial institutions.

Most of the 1,245 adult Americans who were questioned for the poll were surveyed before Thursday's Senate vote to release the remaining $350 billion in the financial bailout program.

"One reason for the opposition to more money being spent may be that more than eight in 10 said that the first $350 billion of taxpayer money for the bailout didn't work," said CNN Polling Director Keating Holland. "Only 14% say that the money accomplished what it was supposed to do."

US taxpayers oppose these ripoffs, shell games, and schemes that will bail out the greedy and the incompetent at their expense. If a poll of UK taxpayers was taken, I suggest it would show similar results.

Nonetheless, Keynesian clowns on both sides of the Atlantic think they can solve these problems by squandering taxpayer dollars. It won't work for the simple reason it is impossible to spend one's way out of a crisis, when the crisis was fueled by reckless spending and lending in the first place.

The root cause of this mess is a combination of fractional reserve lending, free lunch policies in Congress (Parliament, China, etc), and unsound currencies back by nothing, coupled with micro-mismanagement of interest rates by Central banks around the globe.

Instead of addressing the root cause of this mess, governments everywhere are playing various shell games while taxpayers foot the bill.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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