Showdown looming; clueless bankers part mille

There's an excellent article in today's Times about the stresses building between balied-out banks and their government benefactors. Seems the banks are getting very itchy only a few months into the latest round of government propping-up, and are looking to change the rules ASAP as stress test results loom.

The general sense one is left with is that some banks are frantically gaming the system. They know how truly insolvent they are, and are desperately clinging to survival. In this regard, nothing has changed since August 2007...And read til the end, for an especially delicious bit reminiscent of Louis XVI.

Here's the article (by Stephen Labaton and Edmund L Andrews): Showdown Seen Between Banks and Regulators

Excellent reporting all around. Some particular juicy tidbits, emphases mine:

• Regarding bailout loans: banks are balking at the hefty premium they agreed to pay when they took the money.
• Regarding toxic assets: ...the Obama administration wants weaker banks to move more quickly to relieve their balance sheets of the toxic assets, the home loans and mortgage bonds that nobody wants to buy right now. But the banks are resisting because they would have to book big losses.
• Regarding stress tests: there is increasing anxiety in the industry that the administration could use the stress tests of the 19 biggest banks, due to be completed in the next three weeks, to insist on management changes....
• Regarding Obama's plans: Senior officials, recognizing that the next few weeks could prove pivotal for both the industry and the bailout effort, are moving ahead with major plans
• Regarding weak banks (read: Citi/BoA): The immediate concern for the administration is how to get the weaker banks to relieve their books of deteriorating mortgages and mortgage-backed securities. Industry analysts estimate that United States banks alone have more than $1 trillion of such mortgages on their books but have recognized only a small share of the likely losses. Economists at Goldman Sachs estimated recently that banks were valuing their mortgages at about 91 cents on the dollar, far more than investors are willing to pay for them. < Note - this is exactly the same point consisently noted by Whitney and Mayo...>
• Regarding how dire the situation is: Even though the Treasury Department plans to subsidize the purchases of toxic assets by giving buyers low-cost loans to cover most of their upfront cost, a growing number of analysts warn that many if not most banks will remain reluctant to sell.
  “The gap is still very wide,” said Frank Pallotta, a former mortgage trader at Morgan Stanley, now a consultant to institutional investors. “If every bank was forced to sell at the market-clearing price, you’d have only five banks left in the market.”
• Regarding shades of Spring, 2008: If the test indicates that the losses would leave a bank with too little capital, the bank will have six months to either raise extra money from private investors or get money from the government.
• Regarding Simon Johnson's Oligarchy concerns, look at this particular gem: Both large and small banks have pressed the Obama administration to make it less costly for them to exit the bailout program by waiving the right to exercise stock warrants the banks had to grant the government in exchange for the loans. At a meeting last month, the chiefs of three of the largest banks separately asked Mr. Obama to direct the Treasury not to exercise the warrants.
• Regarding cluelessness - well, I guess bankers can be incredibly clueless. Here's another absolute gem, from a hitherto obscure West Virginian banker named Douglas Leech: Douglas Leech, the founder and chief executive of Centra Bank, a small West Virginia bank that participated in the capital assistance program but returned the money after the government imposed new conditions, said he complained strongly about the Treasury Department’s decision to demand repayment of the warrants. That effectively raised the interest rate he paid on a $15 million loan to an annual rate of about 60 percent, he said. < OMIGOD!!! A banker bitching about predatory lending and high interest rates!! You cannot make this up. >
• But wait, there's more! Another pearl from Douglas Marie Antionette Leech: “What they did is wrong and fundamentally un-American,” he said. “Even though the government told us to take this money to increase our lending, the extra charge meant we had less money to lend. It was the equivalent of a penalty for early withdrawal.”

Folks buying into Wells' announcement of Thursday am are missing the forest for the trees. Many systemically important banks (and insurance firms) are insolvent, and no amount of fiddling with accounting rules and lobbying on Capitol Hill will change that reality. More chicken coming home to roost, starting in about 10 days, and continuing into the Fall as TARP 2, Son of TARP, Son of PPIP, etc etc are rolled out.

To beat a dead horse: not until a number of these institutions are temporarily nationalized (pre-privatised),their toxic assets quaranteened from healthy ones, and the institutions broken into smaller, more rational pieces, will this crisis begin to get resolved. (One example of such 'rationalization': Combine Citi's cards and deposit/retail bank units with Amex. You'd have a powerhouse lender with a healthy deposit base which is used to support that lending, not to prop up losses in derivatives. Hundreds of smaller such much-needed rationalizations are out there. Bankers must stop clinging to never-workable supermarket models.)