Jonathan Weil at Bloomberg wonders why the Obama administration has continued Bush's policy of continuing to subsidize insolvent banks.
...He could have ordered all U.S. financial institutions to immediately confess whatever losses they hadn’t yet recognized. And he could have backed that up by vowing to prosecute every officer, director and auditor the Justice Department could find who had approved numbers they knew to be wrong.
Obama didn’t do that. And now, six months into the government’s Troubled Asset Relief Program, his administration’s approach to the financial crisis is largely indistinguishable from its predecessor’s. The only objective, it seems, is to buy time, in hopes that an economic recovery somehow will materialize and lift the financial system back to health.
The Obama administration’s “strategy,” for lack of a better word, is to keep plying broken financial institutions with as much taxpayer money as the government can print. And so the government will keep subsidizing failed mega-banks indefinitely, rather than placing any into receivership or liquidating them...
I haven't read any opinion that supports Obama's plan to continue to prop up banks with a bottomless well of taxpayer money. As the Japanese example of the 1990's shows us, this is a losing proposition. So why continue? A former community organizer should recognize a groundswell movement against a political loser when he sees one.
It may be that taking decisive action would be taking ownership, and Obama may be content continuing to get mileage from blaming the previous administration. Weil lists a number of potential factors, including his advisors' ties to the banking industry, and a lack of sufficient manpower to handle failed banks. His first explanation is probably the most correct one, which is that it may lead to a large scale panic and meltdown if the extent of the banking problem were fully visible.
This would suggest that the banking problem is far worse than what we've led to believe, particularly in light of recent news and accompanying bear market rally. I've been highly skeptical of recent claims of bank profitability, and I'm not alone. Captious Nut on Wells Fargo's Sunshine Numbers:
They just reserved $3 billion less for loan losses than they did last quarter. Easy enough, right?
Flashback to last July, as Wells was getting its butt handed to it, in a show of false bravado they decided to raise their dividend. The stock rallied from the low 20s to eventually 44.00 in part on that BS lying. Then of course, only a month ago, they reduced their dividend essentially to zero - from 38 cents to a mere 5 cents per quarter....and the stock fell below $8.00 per share.
I also read that Wells actually made half of this alleged $3 billion on a Rohm & Haas stock position. That may be real money, but it's also a one-time charge. I'll need verification on this point.
Wells also lied about loan loss provisions and got caught in the fall. See - Wells Fargo Number Fudging.
Are Q1 profits an accounting trick, a temporary reprieve, or indicative of a larger recovery? The back routing of AIG bailout funds to various banks has probably been a short term boost, as have the recent wave of mortgage refinances. It also appears the foreclosures have slowed temporarily. On the other hand, unemployment looks dismal, real estate is still falling, credit card defaults are rising, and one can't help but wonder if a significant portion of the bad assets are simply kept off the books. It's hard to believe good news when there are still so many negative persistent economic indicators. Deninger thinks that if the banks really are that healthy, then they're going to have some explaining to do.
Then there's the issue of the recent bank stress tests, or more to the point, the issue with delaying the release until Q1 earnings are reported. If any of it were good news, it would probably have been reported already. Mish's take:
Furthermore, the one thing we know for sure is the longer the Treasury delays reporting and the less detailed information the Treasury provides, the worse the actual results, regardless of what is actually reported.
Even more important is what's up ahead. The full extent of banking losses won't be realized until the housing market and unemployment hit bottom. Mr. Mortgage sees a wave of defaults and foreclosures hitting in the next few months:
What's the end game? Let's assume for a second that the banks have been lying through their teeth about their continued solvency, and the treasury department is aware of this and continue to provide cash infusions and run interference for them until...what? Catastrophic losses can't be covered up forever, and even the Obama administration has to know that we'll eventually run out of money trying to fill up a bottomless pit. Assuming the mobs don't show up with torches and pitchforks before that happens.
Can you let go when you have a tiger by the tail?
Update: Wells Fargo may need 50 billion.