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To Wall Street, Washington, and World: “Fool Me Once…

Posted by Larry Doyle on March 11, 2010 2:08 PM |

…shame on you, fool me twice, shame on me!!!

There are a handful of financial journalists who pull no punches in telling the absolute truth and in providing real transparency. Bloomberg’s Jonathan Weil holds a special spot in the Sense on Cents Hall of Fame for his determination in calling people and institutions on the carpet. From Wall Street to Washington to around the global financial landscape, Weil leaves no stone unturned in promoting integrity. His commentary today is superb. Please share it with friends. Weil writes, Greece Lifts a Page From Citigroup’s Playbook:

Is it too much to ask for the world’s titans of government and finance to speak credibly when they open their mouths?

Some of them sure seem to think so, judging by the latest news from the financial-crisis front.

To hear Vikram Pandit tell it, Citigroup Inc. was a healthy institution when it got bailed out by the U.S. government. The problem back in November 2008, Citigroup’s chief executive officer told a congressional oversight panel last week, was that short sellers were driving down its stock price in spite of the bank’s fundamental strength.

At the same hearing, Herb Allison, the assistant Treasury secretary for financial stability, said “there is no too-big- to-fail” guarantee by the U.S. government for Citigroup or any other financial company. He dodged other questions about Citigroup by noting, with no apparent sense of irony, that the Treasury is now its largest shareholder.

Not to be outdone, Greek Prime Minister George Papandreou traveled to Washington this week to complain how unfair it was that “unprincipled speculators” were tearing down his country’s markets. Sure, Greece had lied for years about the size of its budget deficit. But what needs to be fixed urgently, he said, is the scourge of credit-default swaps that let investors bet on whether Greece will default on its debt, while European nations mull a possible bailout.

This all has a certain mid-2008 ring to it. Back then, in the months between the U.S. rescues of Bear Stearns Cos. and the government-backed mortgage financiers Fannie Mae and Freddie Mac, the talk from Wall Street kingpins and regulators was much the same.

In April 2008, Lehman Brothers Holdings Inc. CEO Dick Fuld declared the “worst is behind us,” while blaming short sellers for his bank’s faltering share price. (In a short sale, an investor sells borrowed shares in hopes of buying them back at a lower price later and pocketing the difference.)

By July, the Securities and Exchange Commission had unveiled the first in a series of emergency short-selling rules that made it harder for investors to bet against the stocks of Lehman and 18 other “substantial financial firms.” Instead of helping the companies, the move wound up highlighting which financial-services companies the government was worried about the most, including Fannie and Freddie.

That same month, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke testified in Congress that Fannie and Freddie were adequately capitalized. Two months later, Paulson directed the government to seize both companies because they were insolvent.

Neither short sellers nor rumors spread by speculators were to blame for any of these companies’ collapses. Bogus balance sheets and incompetent regulators were, along with the panic that ensued once investors decided they couldn’t deny the reality any longer.

One lesson government officials and CEOs alike should have learned is that they only undermine market confidence when they try to deflect attention from their own organizations’ failings by making preposterous claims or blaming trumped-up bogeymen. That some of them keep reaching for the same tired playbook speaks to their capacity for deluding themselves into thinking that others will believe them when they say ridiculous things.

Meantime, the financial system has seen little substantive regulatory change since its near-meltdown in late 2008. In Europe, the one significant effort underfoot in response to Greece’s fiscal crisis is to possibly ban traders from selling credit-default swaps on some countries’ sovereign debt. It’s an idea that also may be gaining momentum in the U.S.

There has been no evidence such trading has had any effect on Greece’s borrowing costs. Greece’s swaps aren’t even all that expensive, at about 284 basis points yesterday, meaning it would cost about $284,000 a year to insure $10 million of Greek debt for five years.

While high by sovereign-debt standards, that’s paltry compared with the price to protect against a default by, say, Ambac Financial Group Inc. Its swaps were trading yesterday at 4,679 basis points. That tells you the market believes a default by the New York-based bond insurer is many times more likely than one by Greece.

Likewise, in the U.S., the only financial-regulatory change of note has been a new round of SEC restrictions on short selling. In Congress, reform legislation has gone nowhere.

The U.S. government has done nothing to address too-big-to- fail, except to dispatch underlings like Allison to deny its existence. The way the government measures banks’ regulatory capital remains broken. (Citigroup, which reported a $27.7 billion net loss for 2008, was deemed “well capitalized” when it got bailed out.) Credit-rating merchants such as Moody’s and Standard & Poor’s are as entrenched and conflicted as ever.

Then there’s the fiscal health of the U.S. itself. Absent policy changes, “the federal government faces an unsustainable growth in debt,” the Government Accountability Office said in a January report. Within 10 years, the national debt held by the public, as a share of gross domestic product, could exceed the peak it reached in the aftermath of World War II, the GAO said.

Someday, should the rest of the world ever begin to question the U.S. government’s creditworthiness, don’t be surprised if the geniuses running our financial system find a way to blame short sellers and speculators for that, too.

I could not have said it better myself. Not that Jonathan Weil could have further positively distinguished himself, but with this commentary he just did.


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