Monday, November 02, 2009

Wall Street Bailouts Are Killing The Banking System And The Economy

Let's get something out of the way first since Wall Street supposedly earned substantial profits a few weeks ago.

Wall Street did not earn a single penny of profit. Nor have they paid back the American people. That is a lie. Let's look at the facts. The banks and the economy are being backstopped by over $12 trillion in government money. Frankly, it's really a lot more than that if you really factor in all of the government involvement. Additionally, Wall Street firms are still holding horrendous amounts of mispriced assets and are effectively insolvent.

Were the United States taxpayer to withdraw trillions of dollars of support for the economy and Wall Street, Wall Street would again collapse. It would collapse that very day. As long as trillions of dollars of American citizen's money are needed to backstop Wall Street, these pseudo-profits being used to pay massive bonuses remain nothing more than outright theft. Every single dollar in operating profit reported in this environment should be used to rebuild banks financial balance sheets and repair the damage these crooks have done to the American economy. Instead the government is allowing these firms to steal even more money from the citizens of this country. There are no financial profits. Only mobsters who screwed Americans on the way up and are now screwing them on the way down while millions of innocent Americans rot. Stopping the financial system from complete collapse is one thing but then letting the subsequent behavior to continue is corrupt. And these financial firms telling us they need to pay these mobster racketeering salaries to hire more people to continue to criminally gamble with our money is a perfect example of another use of Hitler's propaganda technique known as the Big Lie.

Our system of government and democracy must, as a baseline, first serve the common good. Or at least do no harm to the common good. Any policy that then serves this baseline can then be expanded to serve individualism and personal achievement. In other words, Wall Street must either do no harm or serve the common good first. The system today is misrepresented by thieves who ideologically cite greed as good without any limits placed on the morality of that statement or of government policy. Government policy on a wide swath of issues is harming economic opportunity and the common good. Policy supported by both parties. And banking is one such issue.

We have been remarking since this crisis started that the Federal government/Federal Reserve is killing the underlying economy and the banking system in their efforts to save these mega financial firms. Part of this dynamic is support for policies which enrich these mega banks at the expense of banks attempting to serve the underlying economy - a role mega banks and Wall Street clearly are not filling. Many, if not most smaller banks and community banks remain in serious crisis while Wall Street uses its taxpayer booty to lever up the same risky schemes they have been utilizing for years to illegitimately drain capital out of the economy and out of legitimate community and regional banks. This dynamic is picking up momentum as mega bank's use of trillions of dollars in taxpayer monies gives them an incredibly unfair advantage in the market. An advantage that legitimate regional and local banks simply cannot compete against. Almost a self-fulfilling prophecy of harming heretofore healthy banks by being able to offer taxpayer subsidized services at below the cost of health banks or the market. A nearly exact sentence we wrote about almost a year ago on here. This is structurally damaging the banking system even more than the shock caused by the initial crisis. A dynamic we have highlighted for almost a year and one that remains a serious, serious problem of maintaining these government-backed zombie banks.

In other words, Wall Street and Washington in their corrupt dance are unwittingly creating our own future. An unpleasant future. And both are financial benefiting handsomely by doing so. By both paying lobbyists and politicians tremendous taxpayer backed monies to keep reform from taking hold and by Wall Street mobsters extorting hundreds of billions of dollars in bonuses for perpetuating this dynamic.

This crisis is far from over. As an example, we have been unique in our consistent remarks that we believe Goldman Sachs has a very substantial probability of facing future crises and possibly even failure at some point due to the unsustainability of its business model. Goldman is dealing with the same dynamics which led us to remark that Merrill Lynch's business model was not sustainable.

If we look at community banks and regional banks - which serve the underlying economy - we see that most rallied less than two months off of the March lows versus the eight month rally seen by the general stock market. In fact, the regional banking index shown below had half of its rally in the first week off of March's bottom where it gained approximately 4.5 of its total 9 point rally. Many community banks are still scraping near the bottom of their March lows. The fact that the regional banking index hasn't made a single point of progress in six months and community banks are in similar or worse situations tells us a stark reality. That firms (and by inference American citizens) not on the government dole remain in serious trouble. That even hot money realizes these firms aren't worthy of a trade. For it is only being on the government dole that guarantees firms will be able to show pseudo-profits.

Given the business of regional and local banks reflect fundamentals comparative to Wall Street's taxpayer-funded unsustainable casino-methods of making money, we get a better look into economic reality by looking at local and regional banking results. Results remain muted at best and continue to deteriorate at worst.

Wall Street is contributing to this crisis by trading the economy into collapse and buying government debt to rebuild their balance sheet rather than investing in the economy. Wall Street's greed at all cost is generating short term trading profits which are in fact contributing to deteriorating fundamentals.

In an effort to re-ignite the status quo instead of instituting the economic and financial reforms needed, the government and the Federal Reserve are both unwittingly killing the economy and our banking system. A major reason why government should simply set very sound rules for commerce in the economy, enforce them diligently and stay out of the way. Fiddling and fidgeting with new rules, regulations and special favors encouraged by monied interests simply adds to the malaise and ultimate destruction of economic opportunity.

The government remains the primary hindrance to economic reform.

S&P Regional Banking Index (3 wave rally count complete?)

posted by TimingLogic at 10:32 AM