It Has Happened Before.

The New York Times ran this story much earlier in the year.

http://www.nytimes.com/2009/02/13/business/worldbusiness/13iht-13insolvent.20163493.html?pagewanted=1&_r=2

"In the 1980s, during the height of the Latin American debt crisis, the total risk to the nine money-center banks in New York was estimated at more than three times the capital of those banks. The regulators, analysts say, did not force the banks to value those loans at the fire-sale prices of the moment, helping to avert a disaster in the banking system."

Simply speaking the the nations biggest banks were all insolvent in the 1980's when the Latin American debt crisis was happening.

Richard C. Koo - former economist at the FRB of New York and now chief economist for Nomura, confirmed last year in a speech to the Center for Strategic & International Studies that most of the giant money center banks were insolvent in the 1980s.

Koo's main points were:

•After the Latin American crisis hit in 1982, the New York Fed concluded that 7 out of 8 money center banks were actually "underwater"

•All the foreign banks (especially the Japanese banks) had to keep their lending facilities open to American banks so the American banking system didn't collapse overtly and out in the open

•The Fed knew that virtually all of the American banks were "bankrupt", but could not publicly discuss how bad the situation was. If went out and said the "American banks are bankrupt", the next day they will go overtly go bankrupt. So the Fed had to come up with a lot of stories like "its good debt on their books" Sound Familiar?

•Then-chairman Volcker instructed the banks to keep lending to the Mexican dictator so that the Mexican economy didn't totally collapse, because if Mexico collapsed it would become obvious that all of the U.S. banks were underwater, and they would immediately collapse.

•It took 13 years to manage the crisis.

The way that Volcker approached the problem was that he allowed U.S. banks to keep their lending rates relatively high, while the central bank brought short term rates down. The spread between the two ("Fat Spread") became revenue for the banks, and the banks used the high fat spread to gradually write off problem loans and to repair their balance sheets.

•Volcker's covert rescue of the American banks using secrecy and a high fat spread didn't cost U.S. taxpayers a cent. For this we owe him a debt of gratitude. Unfortunately the banks never learned their lessons visa vie LTCM, S&L, & Sub Prime.

•Koo points out that you can't use the fat spread approach where there are no borrowers as the situation we are in today.

All this shows is that this type of bank behavior has happened before and will continue to happen well into the future unless we make our elected officials accountable.

All of the largest US Banks gambled and speculated wrongly in Latin America and went bankrupt.

Have they learned their lesson or changed their behavior? No. They have not. They just went and gambled at a different casino. The CDO/CDL/CDS casino that was built on a house of cards that we call the US Housing Market. They bet and lost badly and the Fed/Treasury are just pretending that these guys are solvent.

At least Volcker didn't murder the Taxpayer with his scheme.
The Summers, Geithner, and Bernanke cabal's entire plan seems to be to restart the great leverage machines.

tradersutra.blogspot.com/2009/08/return-of-king.html

This plan is doomed.

The whole scheme revolves around restarting the shadow banking system and leverage the economy back up to stratospheric levels. That all of the boats will be lifted, asset prices will rise, and that "toxic assets" will regain their "true" higher value. The whole economy and financial credit system will be afloat once again, so we can all go back to singing in the rain.

One slight problem on the way to the arena. American are in a secular deleveraging cycle. They don't want to borrow. Most Americans do not trust the Government as far as they can throw them. They know the entire economy is a ponzi scheme. They know that Wall Street has looted them good. How in the world can the banks restart the shadow banking system if the biggest suckers are no longer willing to play the game?

Re leveraging the economy can not and will not work without a full frontal assault by the US Consumer. The same ones that have been looted.