Geithner, knowing full well that he isn’t qualified to actually regulate anything (isn’t that the SEC’s job?) has turned to four experts: Credit Suisse, Goldman Sachs, JP Morgan, and Barclays Plc. These banks have all demonstrated their ability to fully understand the risks of derivatives and are models of conservative banking and fiscal responsibility except that:
Goldman Sachs received a $10 billion bailout directly from the government and, while maintaining it had nothing to gain by its independent advice, advised the government to bailout AIG for $180 billion. AIG promptly paid $13 billion to Goldman. It helps of course when the CEO of AIG was a former director of Goldman, and was appointed by the former Treasury Secretary Hank Paulson who was a former CEO of Goldman. After receiving the handy $13 billion from AIG, Goldman crowed about how it was so financially responsible that it could repay the TARP funds early. Thanks Tim! After giving such blatantly self serving advice to the government that benefited nobody but itself, secretary Geithner is rushing back to Goldman for even more independent advice.
Barclays narrowly avoided getting a bailout from the UK government, which would have involved taking on subordinated debt and preferred shares at a hefty cost of 11% per year. Instead, the bank courted the states of Qatar and Abu Dhabi for $7.3 billion in convertible preferred shares and subordinated debt paying a ridiculous 14% interest. The management considered this a better option for shareholders because it avoided the executive compensation limits that the UK government was trying to impose.
JP Morgan was one of the first in line when the TARP funds became available and received $35 billion off the top to shore up its derivative losses. Meanwhile, other banks further down the foodchain that went bankrupt due to the mortgage crisis were told to get screwed.
Credit Suisse was forced to arrange its own $10 billion bailout from the same Middle Eastern sources that Barclays tapped.
Having received advice from the experts, Geithner is now considering a few wise moves in regulation, such as:
Making the Federal Reserve the regulator
This makes sense because the banks own the Fed, so there won’t be any conflict of interest. The SEC seems to have missed this job because it failed to notice a $50 billion ponzi scheme and lost all credibility. The Fed, on the other hand, failed to notice the entire banking system it was supposed to regulate going bankrupt to the tune of $12.5 trillion -- the equivalent of 250 Madoffs -- and actually GAINED credibility.
Increasing capital requirements for banks, corporations, hedge funds, and energy companies that trade in the OTC derivatives market.
Who ever heard of capital requirements for hedge funds? And for energy companies??? In fact, the only corporations that are set up to meet any sort of capital requirements are banks such as Goldman Sachs, Barclays, JP Morgan etc. The rest will be barred from trading in the OTC derivatives market except by paying commissions to banks such as... ah, I get it... great objective advice wasn’t it?
Having OTC traders report to the Fed
This is probably the most blatant power grab by the banks. ALL traders in OTC derivatives, such as hedge funds and energy companies, would now have to report everything to the Federal Reserve. From being a simple bank-owned and operated money printing machine, the Fed will become the de facto regulator of industry, hedge funds, pension funds, and securities companies.
The final version of the draft legislation hasn’t yet been released -- except to bank which are working on it to ensure that it is as fair as possible (to banks).
Once it does go through, American corporations won’t be able to enter into hedging contracts without paying commissions to banks for execution. No wonder banks make up such an outlandish percentage of US market cap -- they own the market!
Two more banks fail
Two Illinois banks, Strategic Capital Bank and Midland States Bank, were shut down by regulators on Friday. In the first 18 weeks of this year, 36 banks have now failed. The steady stream of two banks a month hasn’t slowed down at all. There were still 76 banks undercapitalized based on the updated regulatory capital guidelines as of March 31. There are now 74 and falling.
With bank failures being a leading indicator of economic recovery, it does make government claims that the economy is bottoming look like the brown stuff that comes out of the rear end of a bull.
Cheers,
Peter.
