Regular readers are familiar with Yves Smith's Geithner Doctrine:
Nothing must be done that will hurt the profits or reputation of any bank that is pretty big or well-connected.Mr. Taibbi sums up the result of implementing this doctrine:
It built a banking system that discriminates against community banks, makes Too Big to Fail banks even Too Bigger to Failier, increases risk, discourages sound business lending and punishes savings by making it even easier and more profitable to chase high-yield investments than to compete for small depositors.
The bailout has also made lying on behalf of our biggest and most corrupt banks the official policy of the United States government.
And if any one of those banks fails, it will cause another financial crisis, meaning we're essentially wedded to that policy for the rest of eternity – or at least until the markets call our bluff, which could happen any minute now.In reaching this conclusion, Mr. Taibbi looks at how the US government handled the issue of reporting the true condition of the largest US banks since the beginning of the financial crisis.
In doing this, Mr. Taibbi shows why the financial regulators' information monopoly must be ended and banks must be required to provide ultra transparency.
The main reason banks didn't lend out bailout funds is actually pretty simple: Many of them needed the money just to survive.Please recall that starting on August 9, 2007, the question asked globally was which banks are solvent and which banks are not. This question could not be answered because the banks' current disclosure practices leave them, in the words of the Bank of England's Andrew Haldane, resembling 'black boxes'.
Which leads to another of the bailout's broken promises – that taxpayer money would only be handed out to "viable" banks.Walter Bagehot, the father of modern central banking, said that the central bank's role as lender of last resort was to lend at high interest rates against good collateral to solvent banks.
What was obvious to all from the beginning of the financial crisis is that the global central banks were lending at low interest rates against even the most worthless collateral whether the banks were solvent or not for fear of financial contagion.
Regular readers know that the only way to end financial contagion is to require the banks to provide ultra transparency. With this information, market participants can assess the risk of each bank and adjust their exposure to the banks to what they can afford to lose. As a result, the collapse of one bank does not bring down the entire financial system.
Please re-read the preceding as this is the necessary condition for ending our current financial crisis.
Your humble blogger is not alone in calling for this. See the article "What's inside America's Banks' based on this blog written by Frank Portnoy and Jesse Eisinger as well as Nassim Taleb's call for an anti-fragile system.
Soon after TARP passed, Paulson and other officials announced the guidelines for their unilaterally changed bailout plan. Congress had approved $700 billion to buy up toxic mortgages, but $250 billion of the money was now shifted to direct capital injections for banks....
This new let's-just-fork-over-cash portion of the bailout was called the Capital Purchase Program. Under the CPP, nine of America's largest banks – including Citi, Wells Fargo, Goldman, Morgan Stanley, Bank of America, State Street and Bank of New York Mellon – received $125 billion, or half of the funds being doled out. Since those nine firms accounted for 75 percent of all assets held in America's banks – $11 trillion – it made sense they would get the lion's share of the money.
But in announcing the CPP, Paulson and Co. promised that they would only be stuffing cash into "healthy and viable" banks. This, at the core, was the entire justification for the bailout: That the huge infusion of taxpayer cash would not be used to rescue individual banks, but to kick-start the economy as a whole by helping healthy banks start lending again.
This announcement marked the beginning of the legend that certain Wall Street banks only took the bailout money because they were forced to – they didn't need all those billions, you understand, they just did it for the good of the country.
"We did not, at that point, need TARP," Chase chief Jamie Dimon later claimed, insisting that he only took the money "because we were asked to by the secretary of Treasury." Goldman chief Lloyd Blankfein similarly claimed that his bank never needed the money, and that he wouldn't have taken it if he'd known it was "this pregnant with potential for backlash."
A joint statement by Paulson, Bernanke and FDIC chief Sheila Bair praised the nine leading banks as "healthy institutions" that were taking the cash only to "enhance the overall performance of the U.S. economy."
But right after the bailouts began, soon-to-be Treasury Secretary Tim Geithner admitted to Barofsky, the inspector general, that he and his cohorts had picked the first nine bailout recipients because of their size, without bothering to assess their health and viability.
Paulson, meanwhile, later admitted that he had serious concerns about at least one of the nine firms he had publicly pronounced healthy.
And in November 2009, Bernanke gave a closed-door interview to the Financial Crisis Inquiry Commission, the body charged with investigating the causes of the economic meltdown, in which he admitted that 12 of the 13 most prominent financial companies in America were on the brink of failure during the time of the initial bailouts.
On the inside, at least, almost everyone connected with the bailout knew that the top banks were in deep trouble. "It became obvious pretty much as soon as I took the job that these companies weren't really healthy and viable," says Barofsky, who stepped down as TARP inspector in 2011.
Please re-read the highlighted text as it confirms what your humble blogger has been saying since the beginning of the financial crisis that the financial regulators chose not to communicate to the market their true assessment of the solvency of the banks.
This is very important as the financial regulators have a monopoly on the information that market participants need to assess the solvency of each bank. If the financial regulators misrepresent the banks' financial condition, there is no way for market participants to properly adjust both the price and amount of capital they provide to the banks.
More importantly, once the government started lying about the condition of the banks, everyone knew it.
How?
Please notice that the interbank lending market froze at the beginning of the financial crisis because banks with deposits to lend could not determine which banks were solvent and could repay the loans and which were not.
The interbank lending market is still frozen.
This is the banks' way of telling the market that they are still concerned with the solvency of other banks because they know that they too are hiding losses on and off their balance sheets.
This early episode would prove to be a crucial moment in the history of the bailout. It set the precedent of the government allowing unhealthy banks to not only call themselves healthy, but to get the government to endorse their claims.
Projecting an image of soundness was, to the government, more important than disclosing the truth. Officials like Geithner and Paulson seemed to genuinely believe that the market's fears about corruption in the banking system was a bigger problem than the corruption itself.
Time and again, they justified TARP as a move needed to "bolster confidence" in the system – and a key to that effort was keeping the banks' insolvency a secret. In doing so, they created a bizarre new two-tiered financial market, divided between those who knew the truth about how bad things were and those who did not....Please re-read the highlighted text because not only are the banks fighting to maintain opacity so they can continue to gamble and engage in bad behavior like manipulating Libor, but the government has committed itself to maintaining opacity.
As you can imagine, this effectively undermines the US financial system as it is based on the FDR Framework and its combination of the philosophy of disclosure and the principle of caveat emptor (buyer beware).
The sweeping impact of these crucial decisions has never been fully appreciated.
In the years preceding the bailouts, banks like Citi had been perpetuating a kind of fraud upon the public by pretending to be far healthier than they really were. In some cases, the fraud was outright, as in the case of Lehman Brothers, which was using an arcane accounting trick to book tens of billions of loans as revenues each quarter, making it look like it had more cash than it really did.
In other cases, the fraud was more indirect, as in the case of Citi, which in 2007 paid out the third-highest dividend in America – $10.7 billion – despite the fact that it had lost $9.8 billion in the fourth quarter of that year alone.
The whole financial sector, in fact, had taken on Ponzi-like characteristics, as many banks were hugely dependent on a continual influx of new money from things like sales of subprime mortgages to cover up massive future liabilities from toxic investments that, sooner or later, were going to come to the surface.
Now, instead of using the bailouts as a clear-the-air moment, the government decided to double down on such fraud, awarding healthy ratings to these failing banks and even twisting its numerical audits and assessments to fit the cooked-up narrative.
A major component of the original TARP bailout was a promise to ensure "full and accurate accounting" by conducting regular "stress tests" of the bailout recipients.
When Geithner announced his stress-test plan in February 2009, a reporter instantly blasted him with an obvious and damning question: Doesn't the fact that you have to conduct these tests prove that bank regulators, who should already know plenty about banks' solvency, actually have no idea who is solvent and who isn't?
The government did wind up conducting regular stress tests of all the major bailout recipients, but the methodology proved to be such an obvious joke that it was even lampooned on Saturday Night Live. (In the skit, Geithner abandons a planned numerical score system because it would unfairly penalize bankers who were "not good at banking.")
In 2009, just after the first round of tests was released, it came out that the Fed had allowed banks to literally rejigger the numbers to make their bottom lines look better. When the Fed found Bank of America had a $50 billion capital hole, for instance, the bank persuaded examiners to cut that number by more than $15 billion because of what it said were "errors made by examiners in the analysis." Citigroup got its number slashed from $35 billion to $5.5 billion when the bank pleaded with the Fed to give it credit for "pending transactions."
Such meaningless parodies of oversight continue to this day. Earlier this year, Regions Financial Corp. – a company that had failed to pay back $3.5 billion in TARP loans – passed its stress test. A subsequent analysis by Bloomberg View found that Regions was effectively $525 million in the red. Nonetheless, the bank's CEO proclaimed that the stress test "demonstrates the strength of our company." Shortly after the test was concluded, the bank issued $900 million in stock and said it planned on using the cash to pay back some of the money it had borrowed under TARP.
This episode underscores a key feature of the bailout: the government's decision to use lies as a form of monetary aid. State hands over taxpayer money to functionally insolvent bank; state gives regulatory thumbs up to said bank; bank uses that thumbs up to sell stock; bank pays cash back to state. What's critical here is not that investors actually buy the Fed's bullshit accounting – all they have to do is believe the government will backstop Regions either way, healthy or not. "Clearly, the Fed wanted it to attract new investors," observed Bloomberg, "and those who put fresh capital into Regions this week believe the government won't let it die."
Through behavior like this, the government has turned the entire financial system into a kind of vast confidence game – a Ponzi-like scam in which the value of just about everything in the system is inflated because of the widespread belief that the government will step in to prevent losses....
They're building an economy based not on real accounting and real numbers, but on belief.
The time has come to stop doubling down and build an economy based on real accounting and real numbers.
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