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Wall Street Plays Washington

Posted by Larry Doyle on July 7, 2009 5:15 PM |

Is the charade played out on Wall Street and in Washington anything more than the equivalent of a dinnertime show at a casino complex?

Politicians and bankers work the stage while the media maitre’d pretends to care how you really feel. Ultimately, the curtain goes down, the lights go on and you’re stuck with a bill that leaves you aghast.

Welcome to the Brave New World of the Uncle Sam economy 2009.

Today Bloomberg releases news that Delinquencies on U.S. Home-Equity Loans Reach Record:

Late payments on home-equity loans rose to a record in the first quarter as 18 straight months of job losses and a slumping economy left more borrowers unable to pay their debts, the American Bankers Association reported.

The ABA is not exactly timely with this news in regard to home equity lines of credit; Sense on Cents shared similar color on May 20th in “Bank Stress Tests: Vigorous or Sham? Let’s Review HELOC Losses”:

For those not aware, Turbo-Tim Geithner’s Bank Stress Test utilized an assumed cumulative loss on this product of 6-8% in the base case. The most adverse scenario assumed cumulative losses on HELOCs of 8-11%.

What did our 12th Street Capital friends learn in their analysis? KD writes:

What I find very interesting here is comparing the Cumulative Loss numbers on these deals versus the Government’s assumption of losses in the stress test. As a reminder, our friends in D.C. assumed in a More Adverse Scenario that Helocs on bank balance sheets would generate losses of 8% to 11%. Now I know their numbers represent the projections going forward for the next two years, but when you take a look at numerous ‘06 and ‘07 deals already ringing up losses north of 20% I find it hard to reconcile. I think the Treasury has a very rosy picture of the loss curve going forward.

This brings us to the topic of losses within the banking system and the integrity of the Bank Stress Tests. The Wall Street banks were more than happy to “put on a show” with Secretary Geithner leading the orchestra and the FASB in a supporting role given their relaxation of the mark-to-market. Now we get to revisit the fact that banks are still sitting on hundreds of billions in embedded losses.

Bloomberg highlights a report released by Deutsche Bank, U.S. Lenders May Have to Raise $300 Billion:

“We expect continued weak bank results in the second quarter as credit pressures continue”

Continued weak bank results? I thought the banks had surprisingly good results in the 1st quarter. Do you mean those results were fictitious and earnings were more ‘managed’ than actually truly generated?

Yes I do!!

Going forward, Bloomberg reports that Deutsche Bank believes:

Banks will likely report losses for the second half of this year and much of 2010, according to the report. O’Connor said “normalized” earnings will take longer to achieve than most analysts predict, and he said the eventual level of normalized profit will likely be lower than current estimates.

“This is being driven by consumer losses remaining elevated longer than expected, commercial and related losses possibly reaching to 10 to 11 percent in 2009 to 2011,” O’Connor wrote.

Normalized? What does that mean? Have results to this point been abnormal? No, normalized means operating without a shadow banking system (i.e. a loan securitization model).

While Wall Street and Washington did their song and dance, Sense on Cents has tried to highlight the lack of integrity in the testing process from the outset. In April I wrote “Bank Stress Tests: Major Sham?”

What does the FDIC, led by Ms. Bair, have to say about the upcoming Bank Stress Tests? The New York Post provides a CHILLING perspective:

The tests are conducted by the Treasury Department and the Federal Reserve on the nation’s 19 biggest banks, including behemoths Citigroup, Bank of America and JPMorgan Chase.

“It’s a sham,” one source told The Post, describing the test as an “open-book, take-home exam” that doesn’t actually work.

While the Washington and Wall Street actors perform on stage, the bill for this charade runs ever higher.

I do not want to continue to see this performance. In fact, give me a backyard barbecue, a beer, and a ballgame anytime.


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