Saturday, April 04, 2009

Placebo Economics

How many of you read the financial investor’s blog Seeking Alpha? Well, their March 30th post entitled “Exclusive: Big Banks' Recent Profitability Due to AIG Scam?,” is a must read that ought to embarrass the hell out Senate banking chairman Chris Dodd and his House counterpart, Barney Frank.

Here is how Seeking Alpha summarized what they learned from an anonymous inside trader they call "Lou" in laymen terms:
“AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this - for lack of a better word - fraudulent scam.

In simple terms, think of it as an auto dealer which knows that U.S. taxpayers will provide an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).

What this all means is that the statements by major banks, i.e. JP Morgan Chase (JPM), Citi (C), and BofA (BAC), regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.”
Is any of this true? If so, the implications are frightening and suggest economist and New York Times columnist Paul Krugman is correct in warning that banks are insolvent and the administration’s plan to stabilize financial institutions nothing but smoke and mirrors. For damn sure I find this report far more believable than the recent stock market bump reflecting the profit statements of these fraudulent institutions.

Congress has a duty to provide vigorous oversight on the public’s behalf. Specifically, Senator Chris Dodd and Representative Barney Frank need to utilize their subpoena power as well as demand that Treasury Secretary Tim Geithner come clean with what he knew and when he knew it. If their investigation proves that Geithner knowingly endorsed the scheme then at minimum he needs to be replaced immediately. If President Obama refuses to fire him than Eric Holder’s Justice Department should read Geithner his rights.

Click here to contact Senator Dodd’s office and here for Representative Barney Frank’s and demand that they do their jobs. Lax oversight of the executive branch was supposed to end in 2006.

Placebo economics will not rescue either America or the world from this depression. Accounting gimmicks will not sugarcoat the dislocation, pain and yes poverty people worldwide are experiencing because of the reckless conduct of financial institutions allowed to run amok. It is incumbent upon our leaders that today’s pain results in a better socio-economic paradigm tomorrow. Enabling banks to inflate their quarterly statements for a good day on the stock exchange is precisely how we got into this mess in the first place.

Yet again I insist that hyper-sized financial institutions be nationalized or as William Black suggests, put into a receivership as the law mandated following the 1980s Savings & Loans crisis. That should be followed by comprehensive anti-trust legislation that permanently ends the chokehold these large institutions have on our economy. And we as citizens need to think globally by banking locally.

I support the administration’s bold initiatives with respect to their budget and am more than willing to help them as an activist take on Blue Dog Democrats such as Senator Evan Bayh, who double cross their constituents for campaign contributions under the false guise of “fiscal responsibility.” Also, I believe, Obama has the makings of a magnificent international statesman.

But the administration’s approach to the banking crisis is inadequate at best and perhaps criminal at worst. Unless Obama takes charge and gets realistic about the banking crisis, none of the good intentions outlined in his budget proposal will come to fruition.

Secretary Geithner's approach is a metastasizing cancer on the administration. And certainly not change I can believe in.


Corey Mondello said...

If you can find a way to live like the wealthy; loop holes in paying taxes, etc...

You will live a better, happier, longer life.

jude cowell said...

Great article, Robert.

Did you catch the William Black interview on Bill Moyers' Journal this weekend? jc