10/27

The four largest banks in the US have just released their third-quarter profits and between them, they released $5 billion from bad-debt reserves to bolster their profits. This amount and the near 20% that it represents of their profits in the quarter is eye catching and is causing many people to comment about it.

However, all these comments are focused on this quarter only but similar comments were made last quarter on last quarter earnings and prior to that too. The short-termism culture in this country is really extreme. No one has the time or interest to go back even one quarter, let alone more.

The problem is that this has been going on now for about four years. For SIXTEEN consecutive quarters, these banks are reducing their bad-debt reserves and using it to bolster their profits.

How can that be? I mean, the bad-debt loss reserve is there to represent what the bank and its auditors believe are actual future losses that will be incurred. I understand that from time to time, one quarter here and one quarter there, small amounts can be judged to be over reserved. But sixteen CONSECUTIVE quarters? And in amounts that total by now about $100 Billion? That surely indicates that these reserves were way too big to start with, right? How can these reserves grow to be so inflated?

I’ve written about it so many times that I am blue in the face, and am still shocked that no one else is raising this simple question. How come the banks have so many surpluses in their bad-debt loss reserves? This question is so fundamental that I cannot over exaggerate its significance. Behind this question lie thousands of people who lost their lives—literally, millions or even tens of millions who lost their livelihood and the significant weakening of the capitalistic system, and with it the democratic free world. This is NOT hype. This is what lies behind this simple question.

The financial crisis of 2008 was real, no doubt about it. But it escalated beyond control to become this horrendous crisis that caused all of the above, due to the combination of four things:

  • Stupid, and/or ignorant, and/or unscrupulous politicians who sought to use and abuse the situation for their own political agenda, without any concern for the consequences.
  • Stupid AND lazy AND ignorant media who behaved like sheep, lacking any independent thinking or critical analysis thus enabling  these politicians to do their worse.
  • The lack of at least one, ONE brave man amongst all the leaders of the financial industry who all cowed from the media hype and political assault and lacked the courage to stand up and shout—this is not right!
  • Most importantly, the leverage that allowed all these stupid cowards and unscrupulous people to inflict this horrible damage on us is the “Mark to Market” rule part of the Sarbanes–Oxley Act.

As a result, of all of the above, these banks made such large provisions and write offs during 2008 to enhance their bad-debt loss reserves that caused them to look insolvent. That caused the panic of 2008 and was followed by the government intervention via TARP. Looking at it now with the perspective of four years later, it is clear that these provisions were inflated, that the losses were nowhere near as high as indicated then. Indeed of the four banks, three (the only exception is Citibank) did not need TARP at all, and the same goes for the large investment banks such as Goldman and Morgan Stanley. In retrospect, EVEN if the administration still made the mistake of allowing Lehman to go bankrupt, there was NO NEED to panic. City Bank could have been bolstered and everything else should have continued. Crisis, absolutely. Panic, NO.

We’ve had financial crises before. In the early 1980, Continental Illinois went bankrupt. It was, I believe, the 7th largest US bank then. So while City was larger, the market and the economy are so much larger that EVEN if City would be allowed to fail, the market could have withstood that.

In the early ’90s, we had the S&L crisis, which, at the time, was considered to be horrendous and indeed in real terms was much larger than the 2008 crisis. The federal government took a complete write-off, a loss of $500 Billion in the early 1990s as opposed to TARP, which was $700 Billion in 2008, and ended up with a profit (at least as far as the intervention in the banking sector is concerned).

The most horrific thing in this story? They ALL knew that the write-offs were way too large. They all knew that they were exaggerated. Yet no one had the courage to stop the panic. To stand up and say things are not as bad, let’s keep perspective.

How do I know that they all knew?

Because TARP originally was set up to be a facility to allow the Federal government to buy “bad loans” from the banks and thus recapitalize them. That is what the law provides for. It was NEVER meant to be a direct investment in the capital of the banks. Yet the banks refused to sell at the marked-down value. Why? Because they KNEW that this value is ridiculous and they knew that they will get a big part, if not all the write-down, back over the years. And if this is not good enough for you, in one of the early congressional hearings on the crisis on 2009, when all the banks’ CEOs were brought before Congress and were humiliated and treated disrespectfully—the then-CEO of Citibank, Victor Pandit, said it in so many words: He was asked why did they not want to sell these bad loans via TARP and otherwise, he responded that he does not want to sell at the written-down value because he thinks they are worth more.

What more does one need to understand the horrible, enormous fraud and deceit that was inflicted upon the US people and the world by its leaders?

Words fail me. I hope that one day there will be a historian courageous enough to shout out loud: The Emperor Has No Clothes!