More Extortion By The Banks

By Karl Denninger, The Market Ticker

Yeah, that’s a strong word.

In my opinion it is also the only word that’s appropriate for the circumstances:

The Fed has been informed by dealers that they would be willing to enter into very sizable amounts of reverse repos with the Fed, if asked to do so, provided they could get some relief from Tier I capital constraints, MNI also understands.

Ah, the old “let us lever up and we’ll do it, but if it blows up, we’ll then be back at the public trough for another bailout since we’re too big to fail.”

Two words need to be spoken to these clowns by Congress; the first begins with “F” and the second with “Y”.

It was precisely the relaxing of leverage limits by Congress and The SEC that got us into the mess in the first place.  Henry Paulson, you remember, got the former 12:1 leverage limit dropped, and the consequence is now known.

BEAR STEARNS, AIG, LEHMAN, FANNIE AND FREDDIE – ALL BLEW UP SPECIFICALLY DUE TO EXCESSIVE LEVERAGE.  ALL HAD MORE THAN DOUBLE THE PREVIOUS LIMIT.

ALL OF THEM.

NONE OF THEM WOULD HAVE BLOWN UP UNDER A 12:1 LEVERAGE LIMIT.

LET ME REPEAT THAT: NONE OF THEM WOULD HAVE FAILED HAD THEY BEEN OPERATING UNDER THE FORMER LEVERAGE LIMITS.

Zerohedge reported back on October 21st that the repo test was allegedly “a failure.”  We now have confirmation that it indeed was, and in addition, we now apparently have the primary dealers – once again these are the “really big oligarchs” – Goldman, Morgan Stanley, JP Morgan, Citibank, etc – that are now twisting The Fed’s arm to allow them to do exactly what caused the meltdown in the first place as “compensation” for entering into these reverse repos.

We also have this:

Amid the ongoing financial regulation overhaul, the banking industry is hoping to pull off a quiet power grab that has eluded its grasp since the Great Depression, by stripping the independence of the board that sets financial accounting standards.

The move could effectively let banks set their own accounting standards in rough economic times.

That is unbelievably outrageous.  The bottom line is that the banks feel that not only was the blatant extortion pulled this spring with “mark to market” appropriate, but now they want the ability to force changes to the accounting rules any time they get in trouble to make it look like they’re all ok when they’re not!

Not one thing has been done about what got us into this crisis.  The causes of this mess are:

• Asset bubbles blown by intentionally loose monetary policy coupled with intentionally-absent regulation and monitoring.  None of that was a mistake – it was willful blindness and intentional promulgation of known-dangerous policies.

• A legal structure that has allowed banksters to asset strip Americans.  Specifically, the law explicitly allowed the peddling of so-called “mortgages” that were designed to not be affordable beyond their “teaser expiration”, thereby guaranteeing that the applicant would have to come back for another bite at the apple.  In addition Congress has both allowed unlimited interest rates to be charged on credit cards and (at the banksters behest) made dramatic modifications to the Bankruptcy Code that had the effect of turning many debtors into debt slaves, prohibiting discharge of those debts in liquidation.  At the same time corporations can and do file bankruptcy without the same consequences for the directors and officers of the firm!

• Intentional lobbying for (by Henry Paulson when he was with Goldman Sachs before becoming Treasury Secretary), the granting of, and then full utilization of ever-increasing leverage.  As noted above every single one of the large bank and bank-style institutions that has failed had more than double the formerly-level “investment bank” limit of 12:1 leverage.  The housing asset bubble could not have effectively grown beyond 2004 without this change as investment bank capital requirements would have stopped it in its tracks.

• Willful and intentional blindness to insolvency in financial institutions.  The FDIC has been repeatedly found wanting in this regard, in that of the over 100 banks that have failed essentially every one of them has been “underwater” at the time of seizure, typically by 30, 40 or even 50%.  Prompt Corrective Action (12 USC Ch 16 Sec 1831o), if actually followed, makes this outcome impossible.  More than two years into this mess our banking regulators including the FDIC, OCC, OTS and Federal Reserve are still willfully and intentionally refusing to follow the law, for the simple reason that if they did they would have to have seized hundreds of banks including several of the “too big to fail” ones.

The economy cannot resume sustainable growth and health until and unless the causes of the mess are remedied, as all of the above have led to unsustainable debt levels throughout the economy.  The current “remedy” being applied is to pretend the bad debt does not exist, pretend the excessive leverage does not exist, and meet the cash flow requirements by loading even more debt into the Federal Government.  This is a Ponzi Scheme writ large that is unsupportable in the medium and long term as a consequence of mathematics, irrespective of whether or not policymakers and banksters want the scams of the last two decades to continue.

This says the following things to me loud and clear:

1. EVERY ONE OF THE LARGE BANKS HAS TO BE BROKEN UP RIGHT  NOW.  They are ALL a public menace and have learned exactly NOTHING from the pain they have inflicted on America – and from which America is still suffering with sky-high unemployment, 30% interest rates on their credit cards and more.  No firm that is “too big to fail” can be allowed to exist and any firm that makes this argument in any form must be deemed to have declared its own demise.

2. MARK TO MARKET MUST BE BROUGHT BACK RIGHT NOW ACROSS THE BOARD AND ALL OFF BALANCE SHEET STRUCTURES MUST BE BANNED.  This gaming of the regulatory environment is beyond ridiculous – it is blatant robbery.

3. THE BANKS WILL NOT BEHAVE RESPONSIBLY UNLESS FORCED BY EITHER THE THREAT OF MARKET DISCIPLINE (BANKRUPTCY) OR THE BOOT OF GOVERNMENT REGULATION ON THEIR NECKS.  They will in fact attempt to use their position as primary dealers to force The Fed and Congress to allow them to take more and more risk once again siphoning off the wealth of Americans for their own personal benefit until they blow up the world again, at which point we will hear once again threats of imminent “Armageddon” unless we shovel in yet more taxpayer funds and guarantees.

4. THOSE INSTITUTIONS AND INDIVIDUALS WITHIN THEM IN OUR GOVERNMENT WHO THUMB THEIR NOSES AT THE LAW AND SOLID PUBLIC POLICY MUST BE REMOVED AND REPLACED.  Prompt Corrective Action (Title 12 Ch 15 Sec 1831o) is sufficient to prevent losses from being taken by the FDIC’s Deposit Insurance Fund – if it is followed as written.  Mark-to-market may cause many banks to go out of business, but that process of bankruptcy will also resolve the excessive leverage and debt, forcing asset prices to sustainable levels.  Leveling the playing field between corporations and individuals with regard to bankruptcy may force rates of interest to rise, but appropriately pricing risk is necessary for sustainable economic growth.  Raising The Fed Funds Rate may be politically difficult, but doing so will cause lending to resume as the “risk free” trade of borrowing at zero and buying 10 Year Treasuries at 3.5%, then swapping off the interest rate risk (without any nightly mark-to-market for the counterparty!) to yield 300 basis points (radically in excess of normal “AAA” credit risk profits) will disappear.

You’re seeing some evidence of recognition from over in the UK, to wit:

On the eve of the G20 meeting of finance ministers in Scotland, Andy Haldane, the Bank’s executive director for financial stability warned that the relationship between the state and banks represents a “doom loop” which will keep inflicting crises on the public unless arrested.

Yep.  Funny how over here in the United States the only people willing to speak truth are the bloggers and, oddly enough, The Huffington Post.

We cannot afford another disaster.  Each of the last three has been exponentially more expensive, with this last go-around being a $12 trillion outrage.

The next one will literally destroy our government and economy and unless we act now to prevent it from happening we will suffer this outcome.

Tim Geithner was involved in this mess through its construction and still is, as he has not made a public issue of the regulatory arbitrage and extortion – indeed, he was one of it’s chief architects when at the NY Fed.

HE MUST BE FIRED.

Be aware Congress: The People aren’t as stupid as you think.  There is a breaking point beyond which the people of this or any other nation simply will not tolerate the blatant extortion and theft of any hope for a better future for themselves and their children.

A 10.2% “official” unemployment rate and a real rate of unemployment approaching 20%, or one in five working-age Americans, after all the broken promises of “easier credit” (when the truth is 29.9% interest rates while the banks can borrow at ZERO) along with ”better times” out of both Congress and Obama might just be it – especially if you let this sort of outrageous conduct by the banksters and their lobbying arms continue.

More articles from the Market Ticker….