By John Bougearel
The stock market rally this week was largely predicated on lies from Citi’s Vikrim Pandit and BAC’s Ken Lewis, if McKinsey’s bank profitability model for 2009 is anywhere in the ballpark. The soundbites we heard from Pandit and Lewis focused on revenues and profits for the 1st two months of Q1 09. What was missing was any word of the offsetting writedowns. According to Karen Shaw Petrou of Federal Financial Analytics Inc, “Whether they will be profitable remains to be seen because with the possible exception of Mr. Dimon, the others have been hugely wrong a lot,” she said. But to their credit, they have been “consistently wrong.” And I would also like to point out to Ms. Shaw that many of the recent statements Mr. Dimon have been far from credible, and downright distasteful. That aside, according to the McKinsey report, 2009 will be flat out unprofitable for banks, with profitability not expected to return to until 2010.
Notably, this same week the stock market rallied roughly 14%, hearings on Capitol Hill had Representatives Paul Kanjorski and Barney Frank arm twisting the FASB and SEC chairs to change/eliminate the Fair Value rules. This would certainly allow banksters to report revs and profits without any offsetting writedowns. Those so-called profits would be swallowed by the writedowns like Jonah to the whale. If fair value rules are changed to accommodate the banksters, so they can mark them to maturity or some other fictitious model, then I am afraid no one will trust the asset valuations provided, the financial system will stay clogged for a longer period of time than they need be and confidence in the flawed financial system will remain in the crapper. Ronald Reagan summed the whole matter up best more than twenty years ago when he said: “The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help’” If FV is impaired by lawmakers in such a way to allow the banksters to perpetrate further accounting fraud, then the stock market rally off the March lows will be suspect and remain vulnerable to further downside. We will get to the stock market implications after a short but necessary digression, which I truly wished were not needed here.
Counterparty Risk Index Signals a Big Bank Failure Maybe Nigh
According to the Credit Derivatives Research, the counterparty risk index surged almost 30% in the week leading up to March 10, 2009, “as investors rushed to protect themselves against possible defaults at giant institutions. It now costs an average of $289,000 per year to buy insurance on $10 million’s worth of bank debt. That’s just shy of the $300,000 average premium in force the day the index hit its all time high — Sept. 17, 2008,” two days after the failure of Lehman Brothers.
Lawmakers Introduce the Depositor Protection Act of 2009
and Try to Eliminate Fair Value Accounting
download Donald Applecore
Meanwhile the government began gearing up for Armageddon-like big bank failures on Thursday March 5 when Senator Dodd introduced a new bill called the Depositor Protection Act of 2009 and more recently on Thursday March 12 when lawmakers began attempting to eliminate Fair Value accounting or at the least knock its teeth out. The nutbag Representative Paul Kanjorski on the Hill is spear-heading this lame-brained effort. The goal is to let banks decide what marks to give their assets. Presumably, these marks would be marked-to-model, that is whatever fictitious fantasy model they wish to create.
The financial system would not clear and confidence would remain in the crapper. The FASB chair Robert Herz is being pressured by lawmakers to change the FV rules. Barney Frank is along for the ride to do some of the arm-twisting and cajoling. SEC Chairman Mary Schapiro appears to be against eliminating mark-to-market, but she is not forceful on this point.
Eliminating Fair Value would not only restore a fictitious financial system that is neither safe nor sound, but it would greatly reduce the gargantuan risks that will result from the Depositor Protection Act of 2009. The Depositor Protection Act of 2009 is coming about because the FDIC can no longer self-fund itself. At the end of September 2008, the FDIC had almost $40 billion in its Deposit Insurance Fund (DIF). By the end of December 2008, the Deposit Insurance Fund had fallen to $19 billion.
Under Senator Dodd’s Depositor Protection Act, the FDIC will have the authority to borrow as much as $500 billion to fund its depositor guarantees. Senator Dodd’s bill has such an attractive sound to it, that it should be an easy sell. That is unfortunate for us because it is nothing more than an illegal protection racket run by organized criminals.
The Depositor Protection Act is an Illegal Protection Racket
Just to be clear, the source for this bill’s introduction comes from Bernanke, Geithner and Bair. All three wrote Dodd in the past month in support of an “emergency expansion” of the FDIC’s capacity to borrow. “This mechanism would allow the FDIC to respond expeditiously to emergency situations that may involve substantial risk to the financial system,” Bernanke wrote in a Feb. 2 letter to Dodd. The only problem with this “mechanism” is that it is illegal.
Market participants will note that the FDIC WAS supposed to be funded by the banking industry. Now the three musketeers from the Fed, US Treasury and FDIC want the FDIC to be able to borrow from the Treasury, which ultimately means the taxpayers. Gone entirely is the fiction that banks self-insure against their own self-destructive demise.
Under this new act, the FDIC will now require that the taxpayer insure their deposits and becomes a vehicle to extort taxpayer money for the banksters. This bill essentially requires us, the depositing taxpayers to self-insure our own deposits. And Dodd has the nerve to call this “protection” for the depositor? No, it is a protection racket designed to extort money from the taxpaying depositor. This is tantamount to buying protection from the mafia. The Act needs to be properly renamed the Depositor Protection Racket Act of 2009. This has a much better ring to it, and has the benefit of being at least an honest sell to the taxpaying depositor.
As defined by Wikipedia,
The term racket comes from the Italian word ricatto (blackmail). Typically, this usage is based on the example of the “protection racket” and indicates that the speaker believes that the business is making money by selling a solution to a problem that it created (or that it intentionally allows to continue to exist), specifically so that continuous purchases of the solution are always needed.
Example: in a protection racket, a representative from the racket informs a storeowner that a fee of X dollars will be required every month for protection money, though the “protection” that is provided comes in the form of the racket itself not causing damage to the store or its employees.
On October 15 1970, The RICO Act, Racketeer Influenced and Corrupt Organization Act, became law and made racketeering illegal. In short, the Depositor Protection Act of 2009 is an attempt to overturn the RICO Act of 1970 and make legal the practice of “selling a solution to a problem that it created and intentionally allows to continue to exist, specifically so that continuous purchases of the solution are always needed.” The Fed, the FDIC, and the US Treasury are now explicitly in the protection racketeering business. And they are asking lawmakers to make this business legal under this new act. In short, these three entities ought to be indicted by the Supreme Court of the United States.
As An Alternative: How About Giving Bank Bondholders a Haircut?
On Wednesday March 11, Bloomberg’s David Mildenberg wrote a piece about lawmakers (Brad Sherman) advocating giving bad bank bondholders a haircut based on the GMAC model whereby bondholders were given a 40% haircut. Such a course of action would help improve capital ratios at insolvent banks like Citigroup, BAC et. al. Bondholder haircuts would also make these too big to fail (TBTF) banks smaller. Both are desirable outcomes, improving capital ratios by shrinking the firms would help clear the clog in the financial system and restore badly needed confidence.
Unfortunately, the idea of giving the bank bondholders a haircut is not gaining much traction as the “protection racket” seems to hold far more favor on Capitol Hill. Why this is so is largely a function of lawmakers being both financially illiterate and imprisoned by their own “regulatory capture.” The question we need to ask is how can we get our lawmakers and regulators to get their warped priorities and values straightened out?
I do not know that anything can be done about our regulators and lawmaker’s wrong-headed priorities and distorted value system. Others see lawmakers and regulators as immune to solutions to this financial and economic crisis that would bring some meaningful resolution. In pursuit of their policy objectives to prop up insolvent banks with taxpayer dollars, our regulators and lawmakers are seen as intractable and non-negotiable. In Zero Hedge’s Tyler Durden opinion:
There is nothing that can be done at this point to prevent the administration from leeching every last dollar out of its taxpayers to benefit the terminally addicted and zombied bank system. Using pretexts, subterfuge and lies, the administration’s charade triage will only end once there are no more gullible taxpayers to provide their cash, no more demagogue senators and congressmen who will bend reality to make it seem that their actions benefiting a select few are for the benefit of all, and no more naive investors who buy into the promises that U.S. debt is the “safest investment.”
And All This Means What for the Stock Market?
In short, what all of the above means for the stock market near term is investors can not expect this rally to have much legs, if all of the above undesirable outcomes come to pass. The only hope for the stock market would seem for lawmakers do a 180 and give the bondholders of the bad banks a haircut. Short of any really positive outcomes for the financial crisis, the question at hand is how far can the stock market rally near term before faltering?
Time-wise, it can probably rally into either the end of the two-day FOMC meeting on Wednesday March 18 or into Friday March 20th when Bernanke speaks to community bankers on the financial crisis. Longtime readers already know that stock market rallies in good times or bad tend to exhaust short term on FOMC statements. The next FOMC statement will be Wednesday March 16, three days from now. Recent examples of short term highs forming on FOMC dates were on Dec 16 and Jan 28. On Dec 17, the stock market began a brief 7% correction. On Jan 28, the stock market fell almost 9% in two days. The rest of the decline from Feb 6 onward was largely the result of the failures of the Obama administrations stimulus package, and B.S. “bad bank” plans from Geithner.
Now the market manipulation of “pretext, subterfuge, and lies” by our regulators and lawmakers could well lead to a higher high in the weeks to follow the FOMC statement, but at the least, market participants should brace themselves for a test of support after the FOMC statement and into Bernanke’s 12 pm ET speech on Friday March 20th if the market rallies into the close of Wednesday March 18 following the FOMC statement. In between, Mar 18 and March 20, Obama will be featured on the Jay Leno show. This is just one big PR campaign to deceive the public.
The chart above shows the 50% retrace to the year high at 792, just 5 points below the Jan 20 Inauguration low. Just above 797 is the 4 month moving average sloping into 825-830 this week. While 825-830 is a bit too high for the SP500 to aim for this week, I want market participants to note that it has touched the four month moving average on Sept 19 and Jan 6, but has never been above it since May 2008. At the moment, this moving average defines the bearish momentum of the latter half of 2008 and Q1 2008. It defines a stock market that is “in crisis.” Eliminating FV, creating a Geithner public/private baaaa’d bank, legislating the Depositor Protection Racket Act of 2009, Ping Pong Playa film will do precisely nothing to benefit the economy or taxpaying depositors. The enactment of any of these initiatives will serve to hide toxic assets and maintain the crisis of confidence in the financial system
