Benedict Geithner Speaks.

The entire financial/market rally yesterday was on the backs of Tim Geithners speech to Congress about the state of the economy/banks. The PHLX Banking Index went from being down 5% to up over 7% by the end of the day. Geithner basically reiterated what I said he would last week with regards to Stress Test Results, that everything is all good, and that the banks don't need any additional capital. Theoretically the banks don't need any money, because collectively they all think a turn in the economy is imminent and that employers cant wait to start adding jobs by the busloads as soon as the dust settles. This is why banks like Wells Fargo don't want to take on additional reserves for future credit losses, why take reserves when we know the economy is going to get better?

Geithner is hinting that most banks will pass stress tests because their capital ratios have been getting better since the treasury pumped in only $3 Trillion. Lets back track here for a moment, even after the treasury loaded the system with stimulus, the banks were still crap, it was only after they started to cut dividends as well as mark up bad positions on their balance sheets did the ratios start to get better. Remember, the entire fiasco could have been prevented if the banks were just allowed to participate in accounting fraud via mark to market pricing. Also, the banks are going to have to reinstate dividends some time in the future. This is all taking into account if the losses just magically stop here today. What we have heard from JP Morgan and Bank Of America about deteriorating credit fundamentals cant be pushed aside, has the Treasury Sec even read the earnings reports so far from Citigroup, BOFA, Zions, JP, MS, State Street, and BONY? Or is he just reading the state of affairs by looking at Goldman's and Wells Fargo's earnings shenanigans? I am thinking the latter of course. No well read or self suspecting rational person who was listening to Zion's, BOFA, JP, BONY, C, or even Moose's Earnings call this morning can come away with stating that "everything is all good". The entire Obama Administration is in total damage control containment mode. Minimize the bad news while talking up anything that is positive. Again, I see no change from the Bush Days, actually its worse.

From reading the WSJ as well as a few Dow Jones stories, I get the idea that somehow Geithner has taken a "tough" stance with the banks. Don't believe it for a second, Geithner doesn't work for the taxpayer or even Obama, he works for the likes of Blankfein, Dimon, and Ken Lewis. His basic obligation should be towards public service, but its total submission to the banks is what his true obligations are. The banks have been on a "Jihad" ever since Obama got elected. No ax to grind, look at the facts. They wasted every ones time with these ridiculous Stress Tests, that were never going to be properly audited anyway. The banks knew the primary problem they had was the pricing of toxic securities on their balance sheets and that relaxation (fraud) of mark to market was the way out of it, but if the government is going to hand out trillions anyway, why not take it to finance their trading positions and mortgage origination's?

The banks want to pay back TARP, because guess what?, they never really needed it anyway! The only thing it made the banks was more diluted. The banks actually got a much sweeter deal with TLGP (Temporary Liquidity Guarantee Program) This is a FDIC program that basically guarantess any bonds/debt securities that are issued by the banks. The debt that is issued via this program is loss cost, so the banks collectively have saved $600 Million issuing via TLGP then on their own. Also TLGP has less stringent rules with regards to executive compensation. This program was originally intended to help banks re build balance sheets and facilitate lending, but currently Bank Of America and Goldman Sachs are using it to cheaply finance their trading positions. Actually Goldman does little lending, as they boasted on their conference call that they have no exposure to consumers via loans.

Goldman and BOFA want to have it both ways. They want the explicit and implicit financial benefits that come from Uncle Sam, including the widespread perception that it is "too big to fail," and it also wants to be relatively unfettered in its ability to pay people and make investments. Even after raising $5 billion of equity capital last week in a common share offering, Goldman's tangible leverage is still 20-to-1. Goldman would love to repay TARP and get back to doing business more or less as usual, paying its employees whatever it wants to pay them. Back in its record year of 2007.

Geithner has been told by the financials that they want to go back to business as usual. What else can we expect going forward?