By Chris Carey, Bailout Sleuth

TARP-recipient West Bancorporation, Inc. has hired a new chief executive
after an eight-month search.

West Bancorporation, parent company of Iowa-based West Bank, appointed
David D. Nelson, former president of Southeast Minnesota business banking for
Wells Fargo Bank Minnesota.

SEC filings show that Nelson’s salary will be 10 percent higher than
that of his predecessor, Thomas E. Stanberry, who resigned just before the
company announced a loss of $5.3 million for the second quarter of 2009.

West Bank reported a net loss of $16.9 million last year, compared with a
profit of $7.6 million in 2008. The company had  earnings of $2.2 million
for the fourth quarter of last year, but noted that its nonperforming assets rose $1.2 million to $52.9 million and that its provision for loan losses as a percentage of total loans also was up from the same period in 2008.

West Bancorporation got $36 million through the Troubled Asset Relief
Program on the final day of 2008.

According to the company’s SEC filing on Nelson’s appointment, the new
CEO will receive a cash salary of $275,000 with a potential yearly incentive
bonus of as much as 50 percent of that amount. Performance bonuses, if any,
will be paid in long-term restricted stock.

Nelso also received a $125,000 restricted stock grant as a signing
bonus, and will get the same perquisites as other senior executives.

Thomas E. Stanberry, the former chairman and chief executive, resigned
in July 2009, in a move that the company described in its SEC filings as
involuntary. Stanberry had a base salary of $250,000, with additional cash and
stock incentives.

Because of TARP restrictions, Mr. Stanberry did not receive severance
package.

Jack Wahlig, West Bancorporation’s current chairman, noted that the
selection process was a thorough one. 
He praised Nelson for his more than 25 years of experience and his
strong background in credit administration.  He also pointed to Nelson’s ability to build relationships
as a deciding factor in his hiring.

More articles from the Bailout Sleuth….

By Chris Carey, Bailout Sleuth

Regulators seized a New York bank on Thursday, in
a rare departure from the usual carefully coordinated Friday night closings.

The New York State Banking Department took over
LibertyPointe Bank and appointed the Federal Deposit Insurance Corp. as
receiver. The FDIC arranged for Valley National Bank to take over LibertyPointe’s
three branches, its $209.5 million in deposits and its $209.7 million in
assets.

Valley National paid a 0.5 percent premium for
the deposits, and entered into a loss-sharing deal with the government on $181.5
million of the assets.

LibertyPointe was based in New York City and was controlled by real estate
developer Shaya Boymelgreen. It had long been on the FDIC’s list of troubled
institutions.

Regulators issued a cease-and-desist order against the bank last
July, citing a high concentration of commercial real estate loans, excessive
delinquencies and inadequate provisions for loan losses.

Last October, the bank was given 30 days to
raise additional capital to strengthen its financial position.

The FDIC estimated that LibertyPointe’s failure would
cost its deposit insurance fund $24.8 million.

LibertyPointe was the 27th bank to fail so far this year.

More articles from the Bailout Sleuth….

Zero Hedge

Yesterday we asked just who the counterparties on Lehman’s Repo 105 transactions were. Today we get our answer: the parties that Lehman used exclusively to mask its true leverage ratio were Barclays, Mizuho, UBS, Mitsubishi, Deutsche Bank, KBC and ABN Amro. This is accompanied by disclosure from the Examiner that these Repos, which should logically have been cheaper to Lehman due to the overcollateralization compared to regular matched repo (remember: 105 instead of 100 plus a minor haircut), in fact were pricier, prompting Lehman staffers such as Mike McGarvey to speculate that counterparties may “try to squeeze Lehman.” This is quite a critical development ahead of the lawsuit between the Lehman estate and Barclays (a Repo 105 counterparty), which not only refused to bail out Lehman in the 11th hour, but to subsequently go ahead and in the definition of a fire sale acquire Lehman Brothers’ North American brokerage operations for pennies on the dollar, coupled with some serious additional trickery on the side. Another oddity: none of the counterparties were US-based. Did US banks know too well about the imminent collapse of Lehman and thus refuse to participate in the Repo 105 window dressing game? Or, much more relevantly, was Lehman terrified by retaliation of its US-based peers, (be it CDS or stock-based) and as a result refused to open up its deplorable balance sheet to them?

We read from the report:

In the 2007 to 2008 period, Lehman’s Repo 105 counterparties were primarily restricted to Mizuho, Barclays, UBS, Mitsubishi, and KBC, though some of these also tapered off their Repo 105 trading in 2008. E-mail from Chaz Gothard, Lehman, to Mark Gavin, Lehman, et al. (Sept. 4, 2007) [LBEX-DOCID 4553246] (“KBC are no longer able to finance our 105 agency trades. . . . This effectively means we only have 3 counterparts with which to transact this business – Mizuho, Barclays & UBS. Whilst they have taken all the paper we’ve thrown at them to date this situation should not be relied upon.”); e-mail from John Feraca, Lehman, to Ian T. Lowitt, Lehman, et al. (Feb. 28, 2008) [LBEX-DOCID 3207903] (reporting Repo 105 trades with “Barclays – $ 3 billion, UBS – $ 6 billion, Mizuho – $ 2 billion”); e-mail from Mark Gavin, Lehman, to Daniel Malone, Lehman, et al. (May 20, 2008) [LBEX-DOCID 736184] (noting in e-mail with subject line “RE: Repo 105 CPS” that “Mizuho – $5bln,” “[n]o longer at the table: Barclays up to $15 bln,” “UBS up to $10 bln,” “Mitsubishi up to $1 bln,” and “KBC up to $2 bln”);

And some other counterparties attempted:

In February 2008, Lehman found a new Repo 105 counterparty in ABN Amro Bank NV (London Branch). See e-mail from Nirav Patel, Lehman, to Kandy Hosea, Lehman, et al. (Feb. 29, 2008) [LBEX-DOCID 3383394]. Deutsche Bank was also a Repo 105 counterparty to Lehman in 2008. When a Repo 105 transaction with Deutsche Bank failed, Tonucci assigned Carlo Pellerani (International Treasurer) to ensure the problem was resolved. See e-mail from Paolo R. Tonucci, Lehman, to John Coghlan, Lehman (Mar. 25, 2008) [LBEX-DOCID 117336].

So now that we know who the counterparties were, here is how we know that they knew all too well that Lehman was in trouble and could be bled dry, as this was the last recourse the firm had:

Given that in a Repo 105 transaction, Lehman provided its counterparty with more collateral for the same amount of cash as in an ordinary repo, one might expect the interest rate to be lower, as the terms were better for the lender, i.e., had greater protection in the form of more collateral in the case Lehman did not repay its borrowing. The Examiner’s analysis shows that, on the contrary, the interest rate in a Repo 105 transaction was higher than in an ordinary week-long repo despite the overcollateralization. Based on witness statements that Lehman was in a “price taking situation,” and documents such as the e-mail in which Lehman staffers begged to increase the Repo 105 credit line with Mizuho to improve the balance sheet profile at quarter end, the higher interest rate in a Repo 105 transaction was likely a consequence of Repo 105 counterparties being aware of Lehman’s desperation.

Mike McGarvey, who is currently part of the Lehman Derivatives unwind team, said is noted as saying the following:

McGarvey, the author of the e-mail, stated that counterparties such as Mizuho knew that Repo 105 transactions received off-balance sheet treatment and as a result might “try to squeeze Lehman.”

And in the vacuum of responsibility, here are some names which the Attorney General may want to invite for a conversation:

When asked directly, Joseph Gentile, a former FID Finance executive who reported to Gerard Reilly, did not believe that Lehman’s motive for undertaking Repo 105 transactions was financing. Gentile stated unequivocally that no business purpose for Lehman’s Repo 105 transactions existed other than obtaining balance sheet reliefGentile said that he received his “Repo 105 education” sometime near the end of Lehman’s 2006 fiscal year from Ed Grieb, Lehman’s Global Financial Controller who reported directly to then-CFO Chris O’Meara. According to Gentile, Grieb explained that Repo 105 transactions were a balance sheet management mechanism: “a tool that could be use d to reduce Lehman’s net balance sheet.” Gentile recalled that “Repo 105 was a vehicle that Grieb owned and he was using it to take my balance sheet away.” When the Examiner asked for further explanation of that statement, Gentile said that if FID had “excessions” in its balance sheet, Grieb would authorize additional Repo 105 capacity to alleviate potential breaches of the balance sheet limit. Gentile explained that two ways existed for FID to make its balance sheet targets where excessions existed: by selling assets or by engaging in Repo 105 transactions. Similarly, Matthew Lee said there was no legitimate business purpose for Repo 105 transactions. In his view, Lehman’s Repo 105 practice was for “window-dressing the balance sheet to make the credit rating higher.”

First, it is beyond a reasonable doubt that 105s were merely used for window-dressing as the following chart from the Examiner demonstrates.

Second, we urge regulators to promptly sequester Mr. Grieb and ask him pointed questions about not only Chris O’Meara’s knowledge of Repo 105s, but what CFOs were subsequently requesting that Lehman use the same off-balance sheet book cooking vehicle.

Third, as getting information out of US banks has proven next to impossible, it is time to bring in the counterparties: Mizuho, Barclays, DB, UBS and Mitsubishi, and demand that they disclose if any other banks use or have used comparable off-balance sheet gimmicks.

Lastly, it is time for Bob Diamond to take the witness stand, and disclose just how much of a factor any potential activity on his behalf to raise Repo 105 rates into Lehman’s collapse may have had. Here is the proper analogy: just as Goldman benefited the most by cranking up its AIG collateral demands on it CDO exposure, so Barclays could have easily done the same. Net result: the purchase of Lehman NA for sub-blue light special price. As the lawsuit against Barclays is set to commence imminently, we will be very curious as to what disclosure Mr. Diamond reveals under oath.

More articles from Zero Hedge….

Zero Hedge

Earlier today the Census Bureau came out with its February retail sales announcement which was classified by CNBC’s Bob Pisani as “terrific” on the basis of a 0.3% increase over January. What few point out is the January revision, which changed the January retail sales estimate  from 355,777 to 354,339. As February came in at 355,546, one can see why the government’s game of endless data fudging continues. Had January been unrevised, February retail data would have been a drop of 0.1% instead of a rise of 0.3%. We fully anticipate yet another downward revision to February numbers once March data comes out, to make the March increase even bigger. Yet what nobody at all is pointing out is that the Consumer Spending data reported by Gallup, which tracks “the average dollar amount Americans report spending or charging on a
daily basis, not counting the purchase of a home, motor vehicle, or
normal household bills”, and whose 14 day rolling average for the month of February came not only at a drop of 5.8% from January’s average read of 63.4, but came in at a series low 59.7, which was an improvement only on the 59.1 recorded at the lows of the US market crash in March 2009. US Consumption, when not parsed by the ever so creative eye of the US government, has rarely been as low as it was in February.

Below, we demonstrate an indexed chart of US Consumer Spending as tracked by Gallup, and compare it to the Census Bureau’s Total Retail Sales data. The numbers speak for themselves.

If anyone believes the numbers coming out of the US government anymore, we suggest you relocate to China: you will get just the same “correctness” of economic data reporting.

With Geoffrey Batt

More articles from Zero Hedge….

Zero Hedge

• Built on a lie – the fundamental flaw of Europe’s common currency (Der Spiegel)
• It has been a while since we had a Greece rumor: EMU States near €20-25 billion Greece aid accord (Market News. Banking News)
• Germanry and France have decided that Greece needs €55 billion until the end of the year to prevent insolvency (Euro Intelligence, h/t Paul)
• No snow in February – Retail sales in US rose in February (Bloomberg), so did credit card chargeoffs
• IPO window still weak despite melt up: AVEO raises 23% less than sought in first biotech IPO of 2010  (Bloomberg)
• Not so lonesome doves: Janet Yellen to be next Fed vice chair (Reuters)
• Goldman’s biggest hedgie departs (Barron’s)
• Another market top signal: KKR to move stock listing to NY from Amsterdam (Bloomberg)
• “Invisible Power” of London money exposed as mayor fights back (Bloomberg)
• Is America’s foreign-owned debt a threat to the national economy (Forbes)
• A new chapter in bankruptcy (NYT)
• Why Wall Street hates Elizabeth Warren (Newsweek)

More articles from Zero Hedge….

Zero Hedge

• Americans’ net worth rised 1.3 percent in the fourth quarter to $54.2 trillion.
• Asian shares mixed, Japan stocks gain on speculation central bank to add funds.
• Eurozone industrial output jumps by massive 1.7 percent in January.
• Money fund assets fell by $36.22 billion to $3.090 trillion in latest week.
• Obama to nominate Yellen to post of vice chairman of Federal Reserve.
• Oil drifts above $82 in Asia as month-long rally loses momentum amid weak US crude demand.
• Retail sales probably fell as blizzards kept US shoppers home.
• Democrats resolve disputes over Obama’s health overhaul plan; still hunting for votes.
• Total US household debt fell 1.7% in 2009 to $13.5 trillion – fastest pace in a decade: Fed.
• Agrium to terminate offer to acquire CF Industries.
• Air China Ltd. announces plans to raise $954M in a share sale to help fund new planes.
• Air Methods’ Q4 profit fell 27% on a sharply higher income-tax bill. Revs up 1.1% at $120M.
• Caterpillar considering relocating some heavy-equipment overseas prodn to a new US plant.
• Discover Fincl Srvcs expects to report Q1 loss on $305M increase in loan-loss reserve.
• Exxon Mobil said it would expand its oil and natural gas production by 3-5% this year.
• Fannie Mae sold $6B of three-year notes in a benchmark issue.
• India’s Ranbaxy targets $3B in consolidated revenue in 2012.
• Komatsu says China sales of mining machinery to increase by 50% in 2010.
• Lehman Brothers hid off-balance-sheet transactions to understate its leverage.
• Lenovo will focus on mobile Internet, sales in faster-growing emerging markets.
• Lyondell to reorganize based on a company value of $15.2B after a judge overruled objections.
• Lyondell to tap the debt markets.
• National Semiconductor’s Q3 net more than doubled to $53.2M as revs grew 24% to $362M.
• Pall Corp misses by $0.05, posts Q2 EPS of $0.42. Revs rose 3.1% to $560.4M.
• Potash Corp. of Saskatchewan sees Q1 EPS at $1.30-1.50 vs. prev view of $0.70-1.00.
• Quiksilver’s Q1 loss narrowed sharply to $5.4M, revs slipped 2.4% to $432.7M.
• Sell-down of unwanted assets by Citigroup may not impose a drag on profit: Bank.
• Smithfield Foods returns to the black, posts Q1 profit of $37.3M on margin strength.

Economic Calendar: Data on Retail Sales, Mich Sentiment & Business Inventories to be released.

Earnings Calendar: ANN, BPZ, HH, HIBB, KIRK, LACO, NWPX, UXG.

RECENT RATING ACTIONS
TEEKAY CORP (TK)
KROGER CO/THE (KR)
ZIONS BANCORPORATION (ZION)
US CONCRETE INC (RMIX)
NAVISTAR INTERNATIONAL CORP (NAV)
ALLERGAN INC/UNITED STATES (AGN)
MARSHALL & ILSLEY CORP (MI)
HUNTINGTON BANCSHARES (HBAN)
COLLECTIVE BRANDS INC (PSS)
ANHEUSER-BUSCH INBEV NV (ABI BB)
PARKER DRILLING CO (PKD)
CHEVRON CORP (CVX)

Data provided by Egan-Jones Ratings and Analytics

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Zero Hedge

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By Karl Denninger, The Market Ticker

In conjunction with what I wrote on this morning, the potential for massive hidden losses in our banks, I keep getting the following sort of anecdotal reports, all in relationship to the banking giants.

“My property foreclosed in <bubble state> and <Big Bank X> had written a $200,000 HELOC, which was drawn down.  The first lender foreclosed and is holding the property in inventory (it is not listed.)

<Big Bank X> reported the account as charged off in my credit report, but has a notation that “debtor has an arrangement to make partial payments.”

I have not even spoken with <Big Bank X>.

Then there’s stuff like this from the forum:

“My home in CA was purchased for $685k in May 2006. Because of 14 months of unemployment, a mortgage payment hasn’t been made in months. Mortgage holder just had the property appraised and the value came in at $319k. After the appraisal was completed, I was told by the mortgage holder not to worry about foreclosure proceedings beginning. I’ve also been told by the mortgage holder that they have “many” internal plans for modifying loans and that they would continue to work with me until we found a suitable “solution” enabling payments to resume.”

That’s the general gist of these emails.  Another said that they were “offered” payments on a massively-delinquent first that were well under 1% on an interest-only basis.  Like under $100/month on a loan that should have even an I/O payment of several times that amount.

The obvious question is whether these “charged off” and “How about you pay us $50/month, which is a tiny fraction of even an I/O payment” loans are being manipulated so that they can be considered performing assets on these bank balance sheets.

And if that is the case, then the obvious next question is how many of these loans are there, and what sort of material misstatement does this all add up to when one looks at these balance sheets as a whole?

If I had received one or two of these sorts of anecdotes over the last year or so I wouldn’t be so alarmed.  But that’s not what’s happened. Instead, I’ve received a bunch of these over the last few months and I suspect I’ll get even more now that I’m “outing” that I’m getting these emails on a regular basis.

Unfortunately I can’t verify any of this since I can’t pull someone’s credit - but why would borrowers send me these sorts of claims if they weren’t true?

If they are true then the obvious question is whether the sort of “Repo 105″ deal Lehman was running is just a tiny bit of the balance sheet fraud that is going on in these big banks?

Folks, this sort of thing makes no sense.  Reporting payments that aren’t being made to credit bureaus in the “comments” field (while showing “charged off”) has no probative value for the bank – unless it’s to please an auditor or government official who is questioning whether that loan is in some way “performing” and/or has some sort of recovery value, thereby supporting an intentionally-false mark!

Folks, this whole cesspool stinks like dead fish, and the disclosure of what Lehman was up to makes clear that the banks believe they can pretty much do whatever they want when it comes to balance sheets and get away with it – provided they can find someone will will give them an opinion that its legal (even if the “someone” isn’t in the US!)

More articles from the Market Ticker….

By Karl Denninger, The Market Ticker

The Lehman Report on which I wrote last night regarding deeply troubling issues surrounding the Lehman Bankruptcy, has laid bare some very ugly facts relating to our financial system, corporate governance, and our government’s active complicity not only in the Lehman collapse, but in ongoing balance sheet shenanigans and the current investment picture.

The conclusions I am forced to reach, after much reflection and sleeping on this article overnight, are not pretty.

They compel me to advise that, in my opinion, the market is now trading both technically and on a fundamental basis, exactly as the Nasdaq was in 1999.

I recognize this is a serious charge and has implications that are most unpleasant, in that it implies a probable detonation ahead at some time in the next year – one that will not only destroy all of the gains made since March of last year but go beyond that – indeed, perhaps as far as the banner on The Market Ticker has for the major indices.

The technicals of the last month leave no doubt what’s going on – the market is moving in a parabolic upward fashion, exactly as was the case for the Nasdaq in ‘99, and indeed, we are approaching the sort of gains in the broad market that Nasdaq saw in 1999.

For those who need a refresher, here it is:

Now let’s look at the S&P 500 since the March lows:

And if you need a refresher on what happened to the Nasdaq after it topped in early 2000, here’s that unfortunate reality:

Not only did the entire ramp in 1999 disappear, more than another 50% was lost beyond that.

The seriousness of this cannot be overstated.  Anyone who bought into the start of the decline in 2000 was wiped out by doubling into a decline that took a literal 85% off the NDX from the peak.  Worse, today, nearly a decade later, we remain more than 50% below the peak valuation that the NDX reached.

The Nasdaq is not alone in this behavior.  The Nikkei 225 reached 38.957 in 1989.  Today it trades around 10,000 – a nearly 75% loss from it’s all-time highs, and despite 20 years it has not healed.

An analytical look at history says that when markets rise on fraudulent accounting and false claims - that is, the booking of asset values that is fictional, the claim of profits that were never really made, the hiding of losses off-balance sheet – the losses, when they come, are not recovered for a generation or more.

When this happens to individual companies, they go bankrupt.

When it happens on a broad basis in a market index, the result is utter destruction.

Such happened in the 1930s as well.  The DOW’s high of 1929 was not recovered until more than 20 years later, and due to FDR’s devaluation of the currency it was another decade before, on a purchasing-power basis, your original values were seen again.

So the seminal question for this alleged recovery has been whether or not the recovery is real – that is, whether the asset class at the core of the original problem, the banking system, now has clean balance sheets and it can be reasonably assumed that what is reported in terms of assets, liabilities and earnings is in fact real.

If you cannot be reasonably certain of this then you simply cannot, as an investor, be in this market.  The reason for this is clear on its face – we will, at some point in the not-distant future, have a point where the insolvency of these institutions rises to public consciousness.

When (not if) that happens the market will collapse. 

This is not conjecture.

It has occurred in each case through history where markets have been pumped through fraudulent balance sheets and similar game-playing, and when it happens the typical losses are in the 75-80% range.  Those losses are maintained even a decade or more later.

Now let’s examine the evidence on whether the core of the reason for the collapse – bogus accounting that led to the failure of Bear Stearns and Lehman Brothers – is in fact resolved and no longer present.

Tim Geithner and the Obama Administration understand this risk.  That much was made clear last year when they ran their so-called “Stress Tests.”  The market understood this too, in that the promulgation of those “results” was a large part of the underpinning for the rally in the markets that has followed.

Is that reliance reasonable?

The evidence says it is not.

As was made clear in the article I wrote last night, Lehman failed multiple stress tests internally, and yet they were repeated with ever-looser standards until an internally-conducted test passed – at which point Tim Geithner’s NY Fed proclaimed them healthy:

After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress‐testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.”5754 Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing.

Unfortunately the precise same practice took place with all of the other major institutions when Geithner ran the famous “stress tests” that were hung out in front of investors to “bring them confidence.” 

It was physically impossible for The Federal Reserve to actually perform the testing on its own – so instead, they provided metrics to the firms and asked them to run them.

This is the precise same process that was used to produce a “passing” grade by Lehman after the Bear Stearns failure and that process was administered by the same person who was responsible for the false Lehman outcome.

Now add to this that Diane Olick of CNBC has confirmed what I’ve been saying since the crisis began: If the banks really accounted for all the losses in the home loan market, they’d all be insolvent.

Wait a second.  If the “stress tests” were valid, then the capital raises that were done were sufficient and none of the banks are insolvent. 

Indeed, Diane Olick called this exactly as I have:

That’s why the Obama Administration has created this kind of shell game in the first place.

Shell game?

Further, the fact that these loans have no economic value isn’t just mine.  It’s also Barney Frank’s, who is the lead guy in Congress on the House Financial Services Committee.  He said:

Many second liens have little value because of the plunge in home prices, Rep. Frank wrote, adding: “Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans.”

Accounting rules that Congress caused FASB to modify by literally pointing a gun at them.

I’m sorry folks, but the weight of the evidence is overwhelming on this point.

Whatever gains you think you’re chasing in the stock market at this point in time, you’re doing so against a risk of an 85% loss.  The idea that Government can prevent this sort of collapse if it initiates is fanciful – remember that in the summer of 2008 the common belief was that we’d never see a crash right in front of an election, as “they” would not allow it to happen.  If you bought into that belief, you lost half your money.

The risk here is even more severe.  If, in point of fact, those “Stress Tests” provided false confidence (and I believe the evidence is strong that they have) then it is simply a matter of when the market comes to realize that these losses in the large banks are still present but being hidden.

If we apply the FDIC’s own metrics to the expected losses from such a revelation that would “immediately appear” we get a number between $2 and $3.5 trillion that would have to be paid to depositors of the failed institutions - equal to somewhere around one full year’s Federal Budget and dramatically exceeding what the FDIC and Treasury could cover – by more than 10 times.

The consequence of such an event would be literally catastrophic. Having squandered over $3 trillion in the last two years in new borrowing by The Federal Government to prop up the economy (instead of clearing this bad debt through resolving the bankrupt financial institutions) it is highly unlikely that The Government would be able to, on short notice, raise another $3 trillion.

I’m out of all long positional trades as of this morning and will not be back in them until this issue is resolved.  Even if there is a potential 10 or 20% advance that I will miss by doing so, the downside risk of 85% is so extreme and the facts that we now have available strongly suggest that not only are all the large banks insolvent but that the government has been and is complicit in covering it up – not just temporarily, but as an ongoing practice, just as occurred with Lehman.

I’m sure many will call me crazy for this analysis. 

We will see if you still think so in a year or two.

More articles from the Market Ticker….

It would be great if people who reported on the budget deficit for major news outlets could be required to know the basic accounting identities that get taught in every introductory economics class. The key one that almost none of them seem to know is that the trade deficit (X-M) is equal to the sum of public and private savings (T-G)+(S-I). This identity means that if the United States is running a trade deficit, then the sum of public and private savings must also be negative. That has to be true — it is an identity. It’s just like 2 + 2 = 4. It is always true.

This matters for all the nutty deficit hysteria because no one every asks the deficit hawks how they would like to see the identity met. The U.S. has a large trade deficit because of the value of the dollar. At a given level of GDP, the main determinant of the trade deficit is the value of the dollar. Politicians and even many economists like to hyperventilate about “competitiveness” and talk about how we’re going to improve our trade situation by getting a better trained and educated work force, rebuilding the infrastructure, or fixing the tax code. But even if you gave any of these characters everything they wanted in whichever direction, there is no plausible story where their policy of choice would have even half the impact on competitiveness and trade as a 10 percent reduction in the value of the dollar — and even then we would only see the impact after many years.

So, the trade deficit is determined by the value of the dollar for all practical purposes. But, most of the deficit hawks see a fall in the value of the dollar as the worst possible outcome. This is their horror story. People will worry about whether the U.S. can pay its debts and then the dollar would fall, the horror, the horror!

Okay, so the deficit hawks want the U.S. to run a large trade deficit. Then the next question is what the rest of the equation should look like. Since they want a balanced or near balanced budget, the deficit hawks must want very low private savings. Again, we can hope to get the identity met by having high levels of private investment, but neither they, nor anyone else, has anything in their bag of tricks that will appreciable raise the level of private investment.

This means that Peter Peterson, David Walker and the rest of the deficit hawk crew want workers to have very low private savings, so that they will have nothing to live on in retirement when we cut their Social Security and Medicare. They may not say this, and it’s possible that they don’t even understand it themselves, but that is the logical conclusion of their position.

That may make Peter Peterson look bad, but accounting identities are even more powerful than rich Wall Street investment bankers with a billion dollars to buy newspapers, reporters, and economists.

–Dean Baker

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