Bill Moyers Interviews William Black; Charles Bowsher Resigns

Sorry for the focus today on very little stock market wise - it's really hard to discuss much in the stock market other than to "buy on faith" and "make those shorts burn". I do indeed hope to one day return to an era where 95% of our focus are stocks, sectors, macro trends that affect companies, and the like. I doubt we will enjoy such a benefit anytime soon.

There are a lot of very prominent and respected people speaking out on the sham (handout) that is the Geithner plan (PPIP). As I said in the weekend summary, non market participants are taking the signal that the market is going up as a sign "this must be the right plan". They are right! It IS the right plan....for Wall Street's financiers! Unlike PIMCO's Bill Gross who speaks mostly in self interest and calls it a "win/win/win" for all parties involved - a lot of respected voice who don't have profit at stake are calling it lose/lose/lose. For the taxpayer at least.

I had promised to post a lot of different opinions 2 weeks ago when PPIP first came out (market was up 7% so clearly it was "a good plan") but so many other things were going on in this rapid fire market I did not have time. Here are some latest news events/opinions - not just on PPIP but just this whole clustermess from accounting to bailouts to stress tests to taxpayer handouts.

First, a little discussed development, which again makes your heart simply sink as many in the inside who have a moral compass have simply "given up"...Charles Bowsher - comptroller general of the US from 81-96 and more recently Chairman of the little known (but HUGE) Federal Loan Home Bank's Office of Finance... resigned. In apparent disgust.

Per Bloomberg

• Remember this man’s name: Charles Bowsher. He’s one of the few people leaving the banking crisis behind with his reputation enhanced.
• He didn’t want to put his name on the banks’ combined financial statements, because he was uncomfortable vouching for them. Bowsher, 77, had held the post since April 2007.
• The job Bowsher left is a crucial one. The Office of Finance issues and services all the debt for the 12 regional Federal Home Loan Banks. That’s a lot of debt -- $1.26 trillion as of Dec. 31, making the FHLBank System the largest U.S. borrower after the federal government. The government-chartered banks, which operate independently, in turn supply low-cost loans to their 8,100 member banks and finance companies. If any of the FHLBanks were to fail, taxpayers could be on the hook.

So what specifically was the issue?

• The finance office’s board also oversees the preparation and auditing of the FHLBanks’ combined financial statements. Some of the banks have run into trouble the past year because of plunging values for mortgage-backed securities they own. “I was not comfortable as an audit-committee member in signing off on the financial statements, after I became aware of the standards and processes for valuing the mortgage-backed securities,” Bowsher told me.
• Bowsher told me he was concerned, in part, with the methods used for determining when losses on hard-to-value securities should be included in banks’ earnings and regulatory capital. The way the accounting rules work, as long as such losses can be labeled “temporary,” they don’t count in net income.

So... as long as you "believe" losses are temporary i.e. that Cisco stock I bought in 99 is still worth $80... only a temporary issue! you can mark assets to "imagination". Hence the losses you really have ... are hidden. The losses you state.... are a fraction of reality. Welcome to accounting in America. (remember as we pointed out last week in the mark to model discussion, all the problems in the country are due to the accountants - we shall exterminate tham one by one via political pressure to change the rules to the "way they should be")

• For the fourth quarter of 2008, the FHLBanks said their total preliminary net loss was $672 million. It would have been many times larger, had they included all their red ink.
• The year-end balance sheet at the FHLBank of Seattle, for example, showed $5.6 billion of non-government mortgage-backed securities that it says it will hold until maturity. Yet the estimated value of those securities was just $3.6 billion. (not a math major but in my world thats a $2 billion mis-statement. Generally we call that some form of fraud but in Cramerica we call that correct accounting. Because as we all know - the housing market is set to rebound shortly as the economy rebounds)
• The bank, which reported a $199.4 million net loss for 2008, said the declines were only temporary. They’ve been anything but fleeting, though. Most of those securities have been worth less than they cost for more than a year. (it's all in how you define "temporary" - in my world temporary means anything under 100 years. Problem fixed)
• The FASB’s rules on this subject, which have never been well defined, are now in flux. Today, after caving in to pressure by the banking industry and members of Congress, the Financial Accounting Standards Board is set to vote on a plan to relax its rules on mark-to-market accounting, so that companies can disregard market prices and ignore losses on their securities indefinitely. (this was written before the FASB caved to pressure and indeed allowed losses to be ignored indefinitely - the same thing Japan did. But we're not Japan)
  
• While that wouldn’t make the banks any healthier, it would make their numbers look prettier. The FHLBanks have been among the most vocal lobbyists pressing for the change.
• Bowsher said the process of valuing such assets was fraught with doubt already. “Now if you think about it, the FASB might be changing the whole thing, and everybody might mark their assets up,” he said. “Who wants to be part of that?” (uhhh... everyone? the market moved up smartly hence it must be "the right plan" Mr. Bowsher)

Anyhow what credence does this guy Bowsher have?

• Tough stands are nothing new to Bowsher. As comptroller general, he was in charge of the General Accountability Office, the investigative arm of Congress. At his direction, the GAO was among the first to warn the public about the brewing savings-and- loan crisis during the 1980s. He testified before Congress in 1994 that there was an “immediate need” for “federal regulation of the safety and soundness” of all major U.S. derivatives dealers.

Oh.

• Now the question for taxpayers is this: If Charles Bowsher can’t get comfortable with these banks’ financial statements, why should anybody else be?

Well - mark another one down for the Wall Street team and another loss for the few watchdogs we had as peasants.

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Next! William Black please step up... please introduce yourself

• The financial industry brought the economy to its knees, but how did they get away with it? With the nation wondering how to hold the bankers accountable, Bill Moyers sits down with William K. Black, the former senior regulator who cracked down on banks during the savings and loan crisis of the 1980s. Black offers his analysis of what went wrong and his critique of the bailout

These next 3 videos are about 30 minutes in total and of the PBS variety so perhaps only being of interest to a smaller portion of our viewing audience. Below that I put more quick action videos from Yahoo Tech Ticker...

First the 3 PBS vids







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Onto the more bite size 5 minute videos fom Yahoo Tech Ticker

Geithner's Stress Test a Complete Sham

The bank stress tests currently underway are “a complete sham,” says William Black, a former senior bank regulator and S&L prosecutor, and currently an Associate Professor of Economics and Law at the University of Missouri - Kansas City. “It’s a Potemkin model. Built to fool people.” Like many others, Black believes the “worst case scenario” used in the stress test don’t go far enough.

He detailed these and related concerns in a recent interview with Naked Capitalism. But Black, who was counsel to the Federal Home Loan Bank Board during the S&L Crisis, says the program's failings go way beyond such technical issues. “There is no real purpose [of the stress test] other than to fool us. To make us chumps,” Black says. Noting policymakers have long stated the problem is a lack of confidence, Black says Treasury Secretary Tim Geithner is now essentially saying: “’If we lie and they believe us, all will be well.’ It’s Orwellian."

The former regulator is extremely critical of Geithner, calling him a “failed regulator” now “adding to failed policy” by not allowing “banks that really need desperately to be closed” to fail. (On Saturday, Geithner said on Face the Nation, if banks need "exceptional assistance" in the future "then we'll make sure that assistance comes with conditions," including potentially changing management and the board, but did not say they'd be shut down.)

Black says the stress test must also be viewed in the context of Geithner’s toxic debt plan, which he calls “an enormous taxpayer subsidy for people who caused the problem.” The fact bank stocks have been rising since Geithner unveiled his plan is “bad news for taxpayers,” he says. “It’s the subsidy of all history."

Mortgage Fraud Epidemic - How the FBI Blew It and Why There are no "Perp Walks"



In the wake of the bursting of the housing bubble, you'd think there'd be a significant number of investigations into criminal wrongdoing and accounting fraud, similar to what occurred after the S&L crisis and bursting of the stock bubble in 2000.

But two years into the crisis the FBI "doesn't have a single major conviction or indictment of anyone," notes William Black, a former senior bank regulator and S&L prosecutor, and currently an Associate Professor of Economics and Law at the University of Missouri - Kansas City.

Black, who was counsel to the Federal Home Loan Bank Board during the S&L crisis of the 1980s and blew the whistle on the "Keating Five" in 1989, reiterated what he told us in November: Though the FBI warned of an "epidemic" of mortgage fraud in 2004, they subsequently made a "strategic alliance" with the Mortgage Bankers Association, which Black calls the "trade association of perps."

Indeed, as much as 80% of the fraud during the boom was "induced by the lenders," who either encouraged people to lie on loan applications or actively altered documents to make them more likely to be approved, says Black.

How extensive was the fraud?

"There was the appearance of fraud or misrepresentation in almost every file," Fitch Investors declared in late 2007 after reviewing nonperforming subprime MBS (the same stuff they, S&P and Moody's rated triple-A).

Black estimates there are as many as 500,000 cases of mortgage fraud that need to be investigated. Furthermore, such extensive mortgage fraud led to accounting fraud, which led to securities fraud at any/all publicly traded mortgage lenders. As with the FBI, the SEC was "completely ineffective" in stopping such crimes, much less investigating them now, he says.

Among the biggest mortgage lenders, IndyMac was put into FDIC receivership, Countrywide was acquired by Bank of America, Golden West was acquired by Wachovia, and WaMu was ultimately acquired by JPMorgan.

This is relevant because the government's current practice of keeping banks' senior management and boards intact (unlike, say GM's) is effectively prohibiting any investigation of possible (likely) wrongdoing at those firms.

It is for these reasons Black says the FBI's current level of 800 cases per year is "no longer symbolic prosecutions, it's shambolic prosecutions."

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And to finish off this most disheartening of situations in which people apparently have no more control over what the ruling class shall do with our money, comes this study by Harvard and Princeton professors via Clusterstock. Not that it matters... because the "stock market endorses this plan".

• The government's official view that toxic assets are incorrectly priced due to illiquidity "fire sales" is wrong, a new study by Harvard and Princeton finance professors suggests. You can read the whole paper by Harvard's Joshua Coval and Erik Stafford and Princeton's Jakub Jurek below. The striking conclusion is that the low prices of toxic assets actually reflect the fundamentals, rather than being driven by an illiquidity discount.
• This contrasts sharply with the analysis that underlies most of the financial rescue programs launched by the Federal Reserve and the Treasury Department. The white paper released to support the Private-Public Investment Partnerships, the program that seeks to encourage private firms to buy toxic assets with government subsidized loans, took the opposite point of view.

Many prominent economists--including such diverse types as Anna Schwartz and Paul Krugman--have taken with this official view, saying the government was mistaking a solvency crisis for a liquidity crisis. This latest paper effectively demolishes the "fire sale" view. It draws three important conclusions.

• Many banks are now insolvent. "...many major US banks are now legitimately insolvent. This insolvency can no longer be viewed as an artifact of bank assets being marked to artificially depressed prices coming out of an illiquid market. It means that bank assets are being fairly priced at valuations that sum to less than bank liabilities."

• Supporting markets in toxic assets has no purpose other than transfering money from taxpayers to banks. "...any taxpayer dollars allocated to supporting these markets will simply transfer wealth to the current owners of these securities."

• We're making it worse. "...policies that attempt to prevent a widespread mark-down in the value of credit-sensitive assets are likely to only delay – and perhaps even worsen – the day of reckoning."

In short, the government cannot save the banks by improving liquidity or changing mark to market rules because the problem isn't illiquidity or accounting. The problem is that highly leveraged financial firms own assets that are worth far less than they thought they would be, and the firms are insolvent as a result. This is why the latest bailout plans secretly give huge subsidies to banks--because the only way to keep the insolvent zombies afloat is to transfer billions of dollars to banks, bank stockholders, and bank creditors. The alternative--allowing the insolvent banks to fail, seizing the assets, wiping our shareholders, giving bond holders a serious haircut--is still not on the official agenda.

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Back to my comments. I've just sort of given up on the whole thing. They will do as best fulfills their self interest and those that matter. The peasant class either doesn't care or it is simply too complicated to understand... which is most likely a purposeful goal of those in charge. Make it so complicated that anyone outside of financial geeks will have their eyes glass over. Not much more you can do if the working folk are happy to play along in return for their 201k returning to a 301k.

Reverse Robin Hood. It's here - it's large - it's in charge. And no one seems to care; in fact many cheer.