Tuesday, May 12, 2009

Bank Fraud: U.S. Government Style

I am amazed at the sheer audacity the U.S. government is exercising in propping up the U.S. banking industry. If any private citizen or group tried the same thing it would be considered bank and securities fraud and the FBI with sirens screaming and guns at the ready would be involved.

But since it is the Fed, and the U.S. Treasury, and the Congress, and the Obama Administration that are manipulating bank stock prices, it's okay. The ends justify the means, right?

It's obvious the banks desperately need new capital to shore up their crippled balance sheets. So instead of letting the marketplace take its natural course and let the stronger institutions take over the dying ones, the very same practice that has brought us two hundred years of economic growth through multiple economic panics and depressions, the government decides to create a zombie industry of walking dead financial institutions held up with little more than public money and accounting gimmicks.

First, the Fed opens its window and buys hundreds of billions of dollars of mostly worthless mortgage paper. Let's not forget TARP, TARP II, TALF, and the alphabet soup of acronyms that have wasted TRILLIONS OF DOLLARS getting us here. The Feds balance sheet is now worse than any individual bank ever looked.

Second, the Treasury (through FASB) abandons the "marked-to-market" rule. Let the banks decide how much their assets are worth instead of the open market. Sort of like letting a sixteen year old boy who just discovered girls to set his own curfew.

Then, of course, comes the kibuki dance of the bank "stress tests" which give the Bernanke Stamp of Approval to bank shares, one of the dumbest ideas to come out of an institution which seems to breed them like rabbits in the springtime. Here is an excellent analysis on the stress tests and why they are not only meaningless but harmful.

What is the purpose behind all this? Simple. To get a rally in bank shares so they can sell more stock to the public. It's easier to get equity in the midst of a rally. When your shares are up investors want to buy more. The current bank stock rally has doubled, even tripled, the prices of some major bank shares. Guess what they are doing? Issuing stock? Good guess.

I urged people to short the financials in April 2008. I not only was right I made a nice chunk of change doing so. I see no fundamentals on the horizon that are going to lift bank or financial stocks higher EXCEPT for the manipulations of the U.S. government---and they can only prop up zombie banks for so long. Ask the Japanese and their experience with Dawn of the Dead bankers proping up 28 Days Later companies at taxpayer expense.

So what fundamentals am I looking at that keep bank shares down?

Banks hold HALF of the $3.5 TRILLION of commercial real estate paper outstanding and the nonperformance rate on this debt has increased 250% in the last quarter. Forget that 30-40% of this paper is underwater and worthless. BARRONS did a great piece on this problem in their May 4, 2009 issue's cover story.

"The bank stress test results, released Thursday, suggested that the nation’s 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called an adverse economic situation." Read the rest of this article from the NYT and get an earful.

Interest rates can only go up. They can't go any lower.

I could go on but what's the point? Read this great article from Fortune instead. I'm raining on the Treasury's parade by merely pointing out the obvious. I'll be quiet now.

Let there be joy in the boardrooms, new equity in the hallways, and parties in the streets. Banks are selling new shares, their balance sheets are stronger, and all is well in Mudville. Yeah, sure.

Robert J. Abalos, Esq.