Stocks slipped to begin the week following news that the European Bank stress tests were an exercise in putting lipstick on a pig, much like ours were. That said, here in the US, significant government intervention has succeeded, at least for now, in propping up housing prices. As the Case/Schiller 10-City Index diverged from the baseline scenario in April of last year and hasn’t looked back since.
But about those banks, I have stated repeatedly that were it not for officially encouraged and promoted accounting gimmicks. The most significant of which being mark to model, essentially the banks opinion, asset valuations instead of the more accurate mark to market model version there would be a lot less banks around today than we currently have. Like the Europeans it’s all about extend and pretend in the hopes the banks can earn their way out of their predicament compliments of a sub 1% Federal Funds rate. This is essentially the Japanese model, at the time we roundly criticized them for it. Aside from being blatantly hypocritical the toxic assets on the banks books remain as toxic as ever as evidenced by the substantial haircuts delivered when the FDIC takes over a bank, routinely resulting in a 30 odd percent loss on the assets which in turn is charged to the FDIC’s Deposit Insurance Fund, now overdrawn, meaning that taxpayers foot the bill compliments of the Treasury’s generous line of credit.
This really struck me following the Labor Day Weekend as I got to thinking what do we labor for? All the usual stuff about a decent life for ourselves and our families comes to mind, in the process we of course pay taxes, and I’m ok with most of the tax part. But when our tax dollars are wantonly squandered bailing out the banks in a manner that has little regard for the rule of law, let alone much in the way of common sense and accountability whilst creating a huge moral hazard, I’m left wondering what do we really labor for.
Time and again the regulators failed to enforce the rules, in the FDIC’s case they failed to enforce Prompt Corrective Action this led to larger and more numerous bank losses and is a very big part of the reason why the FDIC DIF is overdrawn. The fantasy that is mark to model asset valuation is laid bare when the seized banks assets are liquidated and substantial haircuts results in substantial losses to the FDIC.
As bad as that is recent probes have caught a number of large banks out money laundering for terrorist groups and drug cartels, including Wachovia, now Wells Fargo, Credit Suisse, Barclays Lloyds and others. The result so far has been relatively small fines and deferred prosecution. It gets worse as investigators found that the banks in question deliberately set up whole sections to deliberately skirt the financial reporting requirements of the Patriot and other acts designed to prevent this.
Were not talking about minor rule violations here or a handful of isolated incidents. This is willful, widespread, systematic serious felony criminal activity, yet no one goes to jail. If you or I did this I can guarantee it would result in a prompt response from the authorities, a lengthy prison sentence and substantial fines.
When the government colludes with the financial sector in a manner such as this it makes a mockery of the rule of law and worse. While the banks are free to operate in a reckless manner they have to accept the consequences for their behavior, just like we do. When the government creates the world’s biggest moral hazard bailing them out and essentially rewarding them for their recklessness with our tax dollars. I have to wonder not just what I labor for but what do we labor for.
Because when the morally bankrupt behavior of the government and the corporations bankrupts the nation and its citizenry it is long past time to demand real change and real accountability.
Hi and welcome to The Profit Motive, I’m your host Caleb Lawrence. Once upon a time in America the media acted as the watchdog of the corporations and the state. In the modern era it’s all about ratings and profits, opinion has been substituted for news and frequently is presented as fact. 
