Banks Solvent? Probably Not


SIGTARP: Citibank Was About To Fail, But How About Now?


Fascinating things in this report….

Among them:

  • There was $500 billion in overseas (and presumably uninsured) deposits in Citi in late 2008.  That was the “fear factor” that (primarily) led to their bailout.
  • The loan portfolio that was covered had a “projected” (by Citi) final loss of about $29 billion.  Here’s the problem – we don’t know what happened to that.  Some of it was probably covered by reserves, but not all, and as far I know it wasn’t written down.  So where is that projected loss now?
  • The “bailout” and “guarantee” was sold to the market as a intentional deception.  How many more lies were we sold during this period of time?
    • An FRBNY official noted that the timing for an agreement was crucial, as Citigroup had to announce that the Government was guaranteeing the tail risk, or unknown losses, of the assets before the markets opened in Asia between 7 p.m. and 8 p.m. EST. According to the official, the term sheet worked by “convincing the skittish market that the Federal Government was taking the risk, even though the risk really remained with Citigroup,” because the Citigroup loss position was greater than anticipated losses.

Finally, and perhaps most-importantly:

Second, the Government’s actions with respect to Citigroup undoubtedly contributed to the increased moral hazard that has been a direct byproduct of TARP. While the year-plus of Government dependence left Citigroup a stronger institution than it had been, it remained, and arguably still remains, an institution that is too big, too interconnected, and too essential to the global financial system to be allowed to fail. Indeed, a senior FRBNY official told SIGTARP in January 2010 (before the passage of the Dodd-Frank Act), that Citigroup was then still “too big to fail,” and that if history repeated itself there is “no question we would do it again…[with] a similar or different program.”

This, despite Dodd-Frank requiring that any institution that is such be broken up if it “threatens financial stability.”  You, of course, cannot do this when the entire system is coming apart – you have to do it when it’s not.

So why hasn’t Citibank been broken up, since everything is now allegedly “stable”?

Funny how the law isn’t followed when it’s a big bank that’s the problem.

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JPMorgan: Beats, But…..

Fourth-quarter net income climbed to $4.83 billion, or $1.12 a share, from $3.28 billion, or 74 cents, in the same period a year earlier and from $4.42 billion, or $1.01 a share in the third quarter, the New York-based company said today in a statement. The results compared with an average per-share estimate for adjusted earnings of $1 projected by 25 analysts surveyed by Bloomberg.

32 cents of it, however, was a reduction in loss reserves (that is, not actually money, but rather accounting tricks.)

That compares “favorably” with the 40% of “earnings” that came the first nine months from reducing reserves.

But are these reductions warranted?

I’m not sold.

The problem with the “Fraud As a Standard Board” (FASB) is that they folded like a cheap suit when accosted by Congress in 2009 instead of doing their job and telling Kanjorski-the-clown and the rest to stick it, forcing them to impose their intended fraud by legislation where everyone could see it front-and-center.  Nothing has materially changed since then, which means we don’t have actual results – any more than we did before.  And there are new allegations, as I reported on Wednesday, that banks are playing “funny money” games with alleged “earnings” on imputed interest (and probably fees) on non-performing mortgages.

The thing is, accounting standards say that you can’t do that – oh sure, you can “recognize” the alleged “earnings” but you also have to reserve against it, categorize the likelihood and size of the loss, and report that too. 

But if you remember in 2007, nobody did.  In fact that was what set off my alarms in early 2007 when I caught WaMu paying dividends out of non-existent money – and from my analysis those funds had a collection likelihood that was doubtful at best, yet the bank had taken no reserve against that alleged “profit.”

It of course turned into “not a prayer in hell” in terms of collection likelihood and ultimately was to a material degree the cause of the detonation in those financial institutions.

Yesterday, Tim Geithner prospectively stated his intent to violate Dodd-Frank – black-letter law – when he stated that if there was another crisis he’d bail out banks again.  This, despite Dodd-Frank requiring him to prospectively break up any institution that poses systemic risk in this fashion, before the crisis occurs.

The problem with attempting to do so again is not only that Congress will be very unlikely to go along with it.  It’s also the fact that irrespective of what Congress thinks and wants to do there is insufficient firepower available to do so without skyrocketing the commodity markets as a consequence of currency debasement which will instantly destroy any allegedly-salutary benefit that would otherwise be present.

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