Halcyon Days

We have seen over the last few weeks stronger earnings from the financials. On the surface it looks like the banks are finally turning the corner. But in reality, the opposite is happening. The bank earnings like I have written about in the past were all accounting driven, not operationally driven. The Treasury along with the Fed have been on a major liquidity hunt the last 6 months or so. These two government parties just completed one of the biggest purchase programs on the secondary MBS market. They basically bought toxic mortgage paper that nobody wanted or even priced, and payed top dollar to the banks, using Tax Payer money to do it. The banks thus booked fake profits on these securities and then marked up all of the rest of the toxic crap on their books. Problem is, absence of another $500 Billion Government spending spree, where is the real market for these MBS? That is the problem. When the banks report 2ND results in July, are they still going to have overvalued and miss priced securities on their books? The banks have re priced all of their MBS positions to such a level that one would think that no such global crisis ever existed.

Why in the world does the Treasury, Federal Reserve, and the Obama Administration continually put a band aid on a situation that requires a drastic surgical procedure?
Why are they still allowing the banks to hold all of the cards? Why isn't the same surgical efficiency that was shown to GM and Chrysler not being inflicted on the Banks?

We all know that the recent stealth gains in the financials have most if not all analysts quite overly optimistic that these bank CEO's can actually run a business, but what is lost on me is the cheerleading from the best analysts that are covering the financials. We are right back to the halcyon days of the Tech Bubble.

Of the many difficult issues that have risen from this crisis, its easy to see how it corrupts even the most well intentioned parties. I would expect this type of behavior from Wall Street and Tim Geithner, but I expected better from Barack Obama.

At the end of the day, The Stress Tests were just window dressing. An exercise to let the masses know that government is doing something, not just wasting their money. So after the results came in, we found out that the entire exercise was much larger then even the Madoff Ponzy Scheme. We have found out even before the stress tests that Mark To Market accounting was the central theme to what ailed the banks. All that needed to be done was to allow the banks to put any phony price that they wanted to and let the government use tax payer money to buy them at those absurd high prices. The entire idea of TARP, TALF, and TAF that Paulson originally thought of is in actuality the biggest PONZY SCHEME of all time eclipsing Bernie Madoff by Trillions!

It is quite obvious to me that the banks cure for inadequate capital was not more capital, but an accounting magic trick. First, mark up the securities, if that doesn't work, convert all preferred stock to common stock, automatically increasing financial ratios. All this is in the most basic form is Financial Engineering or Financial Alchemy.

Thus the Stress Test was a waste of time and inadequate to even identify the underlying issue.

Most US Financials have a solvency issue like I have been saying for months. What they need is exponentially more dilutive capital. This is the only way for the banks and the broader economy to right itself. What the government and regulators are offering them is more accounting shenanigans, the same shenanigans that got the banks and the planet in this horrible mess to begin with.

This just gets back to my original message of bank nationalization and or receivership was and is the only correct ethical moral solution to this issue. Instead of cleaning the system up, we get more of the nonsense that got us in this quandary.

The whole entire system has been corrupted to the core for decades, please include the government, as they are no longer considered honest and straight forward with respect to how they have gone about handling this crisis.