From Swine Flu to Bank Stress Tests, Washington is the Problem
May 1, 2009

"Creeping Socialism" -- Any pro-labor measure adopted by a Democratic administration. It is the 58th variety of socialism, invented and christened by the Republicans.

"Business Cycle" -- The boom and bust sequence unknown under the planned economy of "communism" under which their is only permanent depression.

"Double Talk" -- The protective verbiage of all political theories comparable to the basic clauses of insurance policies. They must be beyond the grasp of the ordinary reader, lest their real meaning discourage the "prospect."

"Finance" -- According to Ambrose Bierce, "the art and science of managing revenues and resources for the best advantage of the manager." Communism, Russian style, amounts to exactly the same thing.

The Skeptics Political Dictionary
Max Nomad
Bookman Associates (1953)

First, we are pleased to announce that we have collected over 3,000 call reports for Q1 2009 using the new real-time system implemented at the start of 2009 by the FDIC. When we have finished QA testing on the bank call report data, we will be publishing preliminary ratings for each US bank that has reported so far and will push out the remaining banks as the call data become available.

As we noted earlier, the new FDIC system for making call reports available is taking roughly a month off of the waiting time for investors and others to access this data. While the call reports contain only a fraction of the total data and metrics used by IRA to calculate all of the ratings and Economic Capital benchmarks in the IRA Bank Monitor, we do have sufficient data to prepare summary versions of the QuickSheet displays for each bank and BHC. We'll be talking more about the details of this process in our Picking Nits blog.

There is so much going on this week in the worlds of politics and finance, we thought that a Q &A would do the trick. We'll be expanding on some of these themes in the next issue of The IRA:

Q: Bank Nationalization: If a heretofore "private" commercial bank has sold equity to the US government and, more important, relies upon government guarantees to issue debt and deposits, is that bank nationalized? Are all banks that participate in the TARP now really just government sponsored entities like Fannie Mae and Freddie Mac and the other GSEs?

A: Yes. With JPMorgan Chase (NYSE:JPM) issuing at +350bp to the curve and Goldman Sachs at +410bp for their unguaranteed debt earlier this week, both banks are clearly nationalized and are de facto GSEs. Kudos to GS for issuing debt and equity this week at what may be the best terms available for banks for the rest of the year. Indeed, GS paying plus +410 to the curve for debt is much cheaper capital that taking money from the TARP. Will JPM, Morgan Stanley (NYSE:MS), et al take the hint?

Q: Flu Pandemic: Is the Obama Administration telling Americans the truth about the swine flu outbreak? How serious is the outbreak in NY, TX and elsewhere? Are the televised remarks yesterday by Vice President Joe Biden regarding the dangers of air travel correct?

A: Yesterday we received a note from a client that was sent to him by Dr. Marcus Gitterle, an emergency medicine physician based out of New Braunfels, Texas. This email message has since been posted on the web and has caused a furious response by state and federal officials. Decide for yourself. All we can say is look at the extreme precautions being taken by the White House to keep President Obama away from possible infection. And note that the Mexican government is already trying to shift blame to the WHO for their bad handling of the flu outbreak.

Q: Crisis Blame Game: Does former Fed Chairman Alan Greenspan deserve all of the blame for the subprime mortgage bubble and related policy blunders?

A: No, in fact we are in the process of researching the merry adventures of Peer Steinbrueck, the German finance minister and now head of the German bank bailout effort. Steinbrueck, it seems, was instrumental in encouraging the expansion of German public bank investments in US toxic assets. Several German bankers say that Steinbrueck personally oversaw the growth of the on and off-balance sheet financial operations of German landesbanks that will ultimately cost the German people dozens if not hundreds of billions of Euros in subsidies. So far, the German political establishment refuses to discuss or even acknowledge the role of Steinbrueck in creating this disaster. More on this next week.

Q: OBS Assets Come Home: Will the FASB rule change regarding off balance sheet assets go through in June?

A: Despite intense lobbying from the banking industry, FASB chief Robert Herz says that banks will be required to bring trillions of dollars in off-balance sheet ("OBS") assets back on balance sheet by year-end, creating yet another capital deficit for some of the largest banks. In a recent note on Wells Fargo (NYSE:WFC), for example, Dick Bove notes that WFC has over $1 trillion in OBS exposures. "Some in corporate America" have an "addiction" to off- balance-sheet treatment, Herz said at an accounting conference in New York sponsored by Pace University and reported by Bloomberg News. The OBS rule changes will be approved by Norwalk, Connecticut-based FASB in late May or June, Herz said.

Q: Stress Tests Idiocy: Does the decision by the Fed to delay the release of the stress test results indicate that the process is in trouble?

A: Yes. As we have warned our Advisory Service clients several times, the stress test process is badly flawed in terms of methodology and breaks a long-standing rule by US regulators not to make relative comments about or comparisons of the soundness of US financial institutions. We continue to be concerned that if and when the Fed makes a statement about banks that need more capital, the markets will react adversely.

As Nancy Bush of NAB Research noted in her comments to the Global Interdependence Center yesterday, there are several large regional banks in the Midwest that are clearly among the capital deficient banks in the stress test group that need to be resolved, but for which there are no buyers. With the bankruptcy filing by Chrysler and the impending bankruptcy by General Motors (NYSE:GM), the political pressure not to resolve this regional is intense - but how can regulators expect to keep these banks open after they have been singled-out by the Fed as inadequately capitalized?

Anybody who has ever worked in bank supervision & regulation can have only one reaction to the stress test snafu created by the Fed: Duh! The longer this mess goes on, the more it becomes obvious to us that Washington with its rescue is doing far more damage to the banking industry than has the financial crisis itself.

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