Unfortunately it applies to some tens of thousands that had lucrative careers in finance until summer 2007.

In case you have not seen it, last week ago, Institutional Risk Analytics interviewed Josh Rosner of Graham Fisher & Co and David Kotok of Cumberland Advisors, and the discussion is one of the most direct and revealing of the true political nature of the financial collapse I have yet seen. As I have written before, using reports from the Fed, FDIC, and Comptroller of the Currency, the financial problems are very tightly concentrated in a handful of the largest banks, with over 8,000 plus smaller and regional banks having declined to participate in Wall Street’s derivatives madness.

But in this interview, the participants explain that there are only six large banks and financial firms that are the core of the problem – and the problem is not being addressed in the public’s best interest because of the huge political power these firms have. Citigroup, Bank of America, JPMorganChase, Wells Fargo, and to a lesser degree, Goldman Sachs, and Morgan Stanley are essentially dead. The enormity of their losses this year is going to force a break through the political obstacles these big banks have selfishly created to actually solving the financial and banking crises.

Rosner flat out states, “I am hearing very clearly from within the regulatory community that it is their primary concern that whatever they are planning is predicated on the notion that we must keep the large banks alive.” Kotok confirms, and notes

The motivation of keeping big banks alive is driven by a desire to avoid another Lehman on the Obama watch. I hear people saying that we cannot have another Lehman, therefore we cannot permit a failure…

They then go on to explain how the big banks can now, with tools developed since the crises began, be easily euthanized without destroying the entire financial system:

Rosner: Exactly. In operational terms, there are no longer institutions that are too big to be resolved. As we discussed with the tree analogy, that is different from 'failing'. Any risk of a run on C[itigroup] or the other banks is now ameliorated. The recently enacted changes to guarantees on deposits, non-interest bearing transactions accounts, etc, addressed that issue. The other systemic issue was counterparty risk, but with the qualified financial contract rule just put in place by the FDIC that risk is also largely gone and you can resolve a bank's counterparty exposures into a good bank/bad bank configuration with little problem and without creating larger systemic risk. If the a counterparty's financial contracts are adequately collateralized, then they can go with the good bank, but the FDIC must retain unilateral power as receiver to reject or accept contracts. The notion that we can't allow C[itigroup] to be wound down and broken up is a spurious argument. I think this argument has less to with Lehman and more to do with the fact that the Fed of New York and the Board have always benefited from the failure of small institutions and the absorption of those assets by the big banks.

A bit later, Kotok explains that Volcker and Summers are running the show, but IRA argues that an internal battle between Volcker on one hand and Summers and Rubin on the other has yet to be decided.

. . . Paul Volcker and Robert Rubin, and Larry Summers, represent very different and ultimately incompatible world views. Volcker is all about public service, transparency and fairness. Rubin and also Summers represent political duplicity and malfeasance on a grand scale, especially when you look at their role in blocking regulation of OTC derivatives and structured finance.

include Rubin. From Kudlow to Rubin to Jederbanker; the impairment proceeds.

http://mauberly.blogspot.com/

How many of the Banks are affected, in the US or around the world. This is like propping up a house of cards with matchsticks and chewing gum.

It might work, one slip (increasingly likely over time), and oops...

I appreciate your ability to describe economic arguments in a manner those of us without a post graduate economics degrees can understand.

It's a gift to be able to operate in the one world and then also to be able to take from that world and bring it back to the people.

There will however, be those that would prefer most of us remain in the dark.

I did inhale.

is, in fact, what used to be the case until recently. Mark to Market is the innovation, and to some extent, he's right in both directions. Mark to Market allowed banks to value bubble assets at the bubble, and tehn forced them to take write downs that may, or may not, be justified.

Mark to Market became "Mark to model" which became "mark to myth."

Mark to market doesn't work with illiquid or volatile assets, and yet that is what banks deal in - providing liquidity against assets with a fundamental value against market fluctuations. Like say a house.

This argument, whether the "tape tells all" or whether there is fundamental value, isn't going away, and therefore the accounting problem that goes with it isn't either.

The problem in this decade is that we had a macro-policy of monetizing value, which banks then took advantage of marking to market. Bob's bank included. It's a bit late to be complaining about mark to market after having helped advised the "reforms" that put it in place.

The solution first, is to stop monetizing that value. Unfortunately, everyone is addicted to it, and Team Obama (who just went 0 for the Republican Party) isn't about to change that.

The second solution step, which Obama's people are moving on is to create liquid markets for all assets. This should have been done before, but was not. The players wanted the assets to be illiquid.

The third solution step is on solvency accounting. Bob's half right, mark to market isn't the solution. However, what he's proposing, basically "turn the clock back" isn't going to work. Instead what I would propose is that banks would have to buy "volatility insurance." That they would carry the asset at cost, old style, but they would have to pay insurance on the volatility spread between assets and the mark to market value over and above an actuarial standard for the asset class, which would be determined by government, not private, models.

Mark to market didn't work, what Rubin is calling reserve accounting didn't work either (abused by Enron and others, which is why it was replaced). The answer is some new standard which avoids the abuses of both.

in his book "Limits to Growth" writes that when he served with Summers at the World Bank he brought up the notion that resources were finite and that any economic paradigm needed to consider this fact. Summers responded "that's not the right way to think about it".

So there you have it.

and the four major nationals - C, BAC, JPM, WFC - could soon be toast, as well as their equity-holders...bond-holders? Not sure, yet:
(more from the Institutional Risk Analysis round-table)

The Big Banks vs. America: A Roundtable with David Kotok and Josh Rosner
January 26, 2009

"Banking bailouts were sold to us as a "necessary evil" because we were told only our existing network of banks could irrigate the economy with cash and so rescue industry. Now we know they can't do that because their legacy absorbs all the resources, it would appear more sensible to let the old banks fail and start a new generation of banks. After all, the best credit risk is the institution that has no debt. So you could say the error wasn't to let Lehman collapse, but not to have allowed all the banks to collapse in order to have a fresh start. And right now the job market has plenty of bankers available to set up and run new institutions. With just a quarter of the $800 billion or so already splashed about you could start a whole new Wall St. It's not a matter of saying "no more banking system" but "no more fatally compromised old banking system burdened with structural insolvency." (Ban)king is dead. long live (ban)king."

A reader of The IRA

The term "bad bank" is being tossed around Washington dinner tables this week, a sign that the situation facing the largest banks is reaching a boiling point. It is amazing to us to see how little people understand the choices facing us with the big banks, how narrow those choices truly are and how the numbers in terms of losses are so BIG that they will ultimately force us to do the right thing. A couple of points:

First, IRA's estimate for accumulated bank charge offs for 2009 is in the neighborhood of $1 trillion vs. $1.5 trillion in Tier 1 Risk Based Capital at all US banks today. Good news, though, is that 2/3 to 3/4 of that loss number comes from the top 4 - Citigroup (NYSE:C), Bank of America (NYES:BAC), JPMorganChase (NYSE:JPM) and Wells Fargo (NYSE:WFC), in that order of risk profile.

Since most of the toxicity in the banking system is concentrated among the larger banks, with perhaps US Bacorp (NYSE:USB) on down viable in the long run, perhaps we can rebuild the industry using the next round of TARP funds to bulk up these relatively smaller banks and thereby end up with 10-15 larger super regionals in the $300-$500 billion asset range. There may even be banks of this size still doing business under the current names of C, JPM, BAC, etc, but these new banks will have new owners and creditors.

Second, the Good Bank/Bad Bank debate is really a political battle between the large banks listed above plus Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) et al among the Sell Side survivors in NYC vs. the rest of the industry and the US economy. In preparing their plans for review by the White House, we hear that the Fed and OCC are supporting further bailouts for the larger banks, while the rest of the industry is being resolved and recapitalized a la Washington Mutual and Lehman Brothers.

Perhaps we ought to feed the "good bank" parts of the "too big to fail" crowd, a crowd prone to leverage and bad risk management, to the smaller and plain vanilla bankers that comprise the nominal majority of the industry. This would solve many things including reducing the lobbying power that Wall Street has in Washington. Come to think of it, President Obama should think about banning lobbying by any company participating in the TARP.

Remember that the entire banking industry stands in front of the taxpayers in terms of loss absorption at the FDIC, so you can understand why the smaller banks in the industry are SERIOUSLY PISSED OFF at the large banks and their minions in the Obama Administration like Tim Geithner and Robert Rubin. Oh, and don't forget Chairman Ben Bernanke and the entire Fed board of governors. These leading officials are increasingly talking the side of the large banks in the battle over limited financial resources, a fact that is causing the community bankers to rise in anger.
Stay tuned.
(much more, incl. a round-table discussion that is equally meaty...

(from the round-table discussion):
The IRA: How do you avoid a haircut for the C bond holders if we see loss rates at 5-6% of total loans and leases? A 30% loss rate at C wipes out the equity several times.

Kotok: I agree. How do you restructure these banks without a bankruptcy for the parent, especially given the loss estimate from you and Chris among others?

Rosner: The answer is that the FDIC has the power to abrogate contracts and seize institutions, we have already guaranteed the debt holders. The Machiavellian mandarins at the Treasury and the Fed seem to have sold us on the notion of taking equity warrants. It means that if the FDIC comes in to do their jobs, they must wipe out the taxpayer equity.

Kotok: But the problem you have is how do you get the bond holders to agree? These are very loss-averse, well-organized investors. Why should they agree to a haircut? This is why the sub-debt of Fannie and Freddie has not been touched.

The IRA: At least not yet. As we've said before, the loss numbers from the GSEs and the large banks will be so large that we will no longer have a choice but to embrace a resolution and receivership. We'll leave it there. Thanks.

http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

The sans-culottes are in the streets, and if Obama, Summers, et al, don't want to simply (and fatally) lock in moral hazard as an institutional precept, backed by the "full faith and credit" of his administration, the "Big 4" of banking will be tossed into the debris skip, and Bob's yer uncle.

---

_{“les Etats-unis, c’est le seul pays à être passé de la préhistoire à la décadence sans jamais connaitre la civilisation…”...Georges Clemenceau}

That the problem with the public markets is their short term mentality, but fair value accounting, or mark to market accounting is the absolute shortest term mentality possible.

If you have a piece of real estate on your books with a good tenant, with good credit, paying their mortgage with no intention of ever selling the building, why in the hell do you have to write that asset down in a market that is down. You don't, but in this stupid new regime you actually do, hurting your balance sheet, limiting your ability to make future loans and damaging all the other assets in the chain.

This rule change was the stupidest thing that was ever foisted on business, how it got through I will never know. Rubin is so absolutely right on this issue. I don't know how many banks out there with excellent assets and balance sheets are forced to write down their assets not because the assets are bad, but because the short term market is bad forcing cap rates up and values down. This 'write down' then limits their ability to make future good loans and places a restriction on the net available credit that continues to hurt value.

It is stupid, and it needs to change in exactly the manner the Rubin indicates. It's not about bad loans here, its about good loans being forced lower based on factors that have nothing to do with intrinsic asset quality. Geithner and Summers totally understand this and in more normal times the disaster of mark to market will be corrected.