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Uncle Sam:Geppetto as Citi and BofA:Pinocchio

Posted by Larry Doyle on July 16, 2009 1:32 PM |

If you did not think we are entering into a Brave New World of an Uncle Sam economy, then today is a day which should help change your mind.

Independent Wall Street firms, such as Goldman Sachs and JP Morgan, would like a return to business as usual. Their outsized profits are nothing more than “to the victors go the spoils.” They will fight and lobby to make sure they get to take home these profits in the form of compensation.

Meanwhile back in the toy shop, Geppetto (in the form of Uncle Sam) is pulling the strings and watching Pinocchio (in the form of Citigroup and Bank of America) dance along.  While Geppetto has been exceptionally busy, the taxpaying public has been kept very much in the dark. We see evidence of Geppetto’s ‘dark workroom‘  on three fronts today.

1. The Wall Street Journal offers Lawmakers Spread Blame on Merrill Deal:

House lawmakers lambasted former Treasury Secretary Henry Paulson and Bank of America Corp. Chief Executive Kenneth Lewis on Thursday, suggesting officials looked the other way as major mistakes at the bank required a $20 billion bailout of the firm at the expense of taxpayers.

“While all of this was going on, the American people, investors and the Congress were kept in the dark,”(LD’s highlight) said Rep. Edolphus Towns (D., N.Y.), suggesting negotiations over the bank completing its deal for Merrill Lynch & Co. was a “good, old-fashioned Brooklyn shakedown.”

Rep. Dennis Kucinich (D., Ohio), citing internal Federal Reserve documents obtained by the committee, said Mr. Paulson and Fed Chairman Ben Bernanke ignored evidence that bank management had withheld material information from shareholders, as well as indications that Mr. Lewis’s management of Bank of America “was seriously deficient.”

While Paulson is being grilled, there is little doubt that he believes he did what was in the best interest of the country and the economy – – if not necessarily the interests of Bank of America shareholders. Paulson offered that he was not qualified to provide a legal opinion on his engagement with Lewis.

2. If there were ever any doubt about Geppetto’s lack of confidence in Ken Lewis (aka Pinocchio), it is brought to bear today by news of a ‘secret regulatory sanction’ imposed upon him and the BofA board. The WSJ highlights U.S. Regulators to BofA: Obey or Else:

Bank of America  Corp. is operating under a secret regulatory sanction that requires it to overhaul its board and address perceived problems with risk and liquidity management, according to people familiar with the situation.

Rarely disclosed publicly, the so-called memorandum of understanding gives banks a chance to work out their problems without the glare of outside attention. Financial institutions that fail to address deficiencies can be slapped with harsher penalties that include a publicly announced cease-and-desist order.

The order was imposed in early May, shortly after shareholders of the Charlotte, N.C., bank stripped Chief Executive Kenneth Lewis of his duties as chairman. Bank of America faces a series of deadlines, some at the end of July and others in August, these people said.

3. In the final act of today’s puppet show, we also learn from the Financial Times Citi Close to Secret Deal with Regulator:

Citigroup is close to a secret agreement with one of its main regulators that will increase scrutiny of the US bank and force it to fix financial, managerial and governance issues.

The proposed agreement requires, among other things, that Citi strengthens its board and governance, improves asset quality, better manages expenses and provides more information to regulators on its capital and liquidity, these people added.

The regulator’s action highlights concern over Citi’s financial health, governance and the strength of its management team, led by Vikram Pandit, chief executive. The FDIC is known to be frustrated with the slow pace of Citi’s “toxic” assets sales, its losses and the lack of commercial banking experience at the top.

What are we to learn from all of these developments? Very simply, do not accept anything at face value at this stage in our new economy. There is a reason why Geppetto is working in the dark. That is, the embedded losses in these institutions would sink these firms if not the entire economy.

Historical measures of value and economic behavior need to be looked at in the context of how Geppetto is pulling the strings!!

Enjoy the show!!


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