The Government Lied When It Said It Only Bailed Out Healthy Banks … 12 of the 13 Big Banks Were Going Bust

 

The big banks were all insolvent during the 1980s.

And they all became insolvent again in 2008. See this and this.

The bailouts were certainly rammed down our throats under false pretenses.

But here’s the more important point. Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy, when they were not. They were insolvent.

Tim Geithner falsely stated that the banks passed some time of an objective stress test but they did not. They were insolvent.

We explained:

[All of the big banks were] insolvent in the 1980s, but the government made a concerted decision to cover that up.

Financial writers such as Mish and Reggie Middleton pointed out in late 2007 and early 2008 that B of A was again insolvent.

Nouriel Roubini noted in January 2009 that the entire U.S. banking system is “bankrupt” and “effectively insolvent”:

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion.”

***

“The problems of Citi, Bank of America and others suggest the system is bankrupt,” Roubini said. “In Europe, it’s the same thing.”

We noted earlier this year:

The American government’s zero interest rate policy is very much like the British Libor manipulation scandal … it’s nothing but an attempt to breathe life back into the insolvent banks, at the expense of the taxpayer.  And see this.

And the “financial reform” laws passed in the wake of the crisis have, in some ways, actually weakened regulations of the financial markets, allowed the big banks to get a lot bigger, and have intentionally allowed fraudulent accounting (and see this).

Likewise, the “stress tests” in both Europe and America have been a total scam … a naked attempt to put lipstick on a pig to cover up the fact that the big banks are insolvent.

Matt Taibbi adds details to the bailout scam:

The main reason banks didn’t lend out bailout funds is actually pretty simple: Many of them needed the money just to survive. Which leads to another of the bailout’s broken promises – that taxpayer money would only be handed out to “viable” banks.

Soon after TARP passed, Paulson and other officials announced the guidelines for their unilaterally changed bailout plan. Congress had approved $700 billion to buy up toxic mortgages, but $250 billion of the money was now shifted to direct capital injections for banks. (Although Paulson claimed at the time that handing money directly to the banks was a faster way to restore market confidence than lending it to homeowners, he later confessed that he had been contemplating the direct-cash-injection plan even before the vote.) This new let’s-just-fork-over-cash portion of the bailout was called the Capital Purchase Program. Under the CPP, nine of America’s largest banks – including Citi, Wells Fargo, Goldman, Morgan Stanley, Bank of America, State Street and Bank of New York Mellon – received $125 billion, or half of the funds being doled out. Since those nine firms accounted for 75 percent of all assets held in America’s banks – $11 trillion – it made sense they would get the lion’s share of the money. But in announcing the CPP, Paulson and Co. promised that they would only be stuffing cash into “healthy and viable” banks. This, at the core, was the entire justification for the bailout: That the huge infusion of taxpayer cash would not be used to rescue individual banks, but to kick-start the economy as a whole by helping healthy banks start lending again.

This announcement marked the beginning of the legend that certain Wall Street banks only took the bailout money because they were forced to – they didn’t need all those billions, you understand, they just did it for the good of the country. “We did not, at that point, need TARP,” Chase chief Jamie Dimon later claimed, insisting that he only took the money “because we were asked to by the secretary of Treasury.” Goldman chief Lloyd Blankfein similarly claimed that his bank never needed the money, and that he wouldn’t have taken it if he’d known it was “this pregnant with potential for backlash.” A joint statement by Paulson, Bernanke and FDIC chief Sheila Bair praised the nine leading banks as “healthy institutions” that were taking the cash only to “enhance the overall performance of the U.S. economy.”

But right after the bailouts began, soon-to-be Treasury Secretary Tim Geithner admitted to Barofsky, the inspector general, that he and his cohorts had picked the first nine bailout recipients because of their size, without bothering to assess their health and viability. Paulson, meanwhile, later admitted that he had serious concerns about at least one of the nine firms he had publicly pronounced healthy. And in November 2009, Bernanke gave a closed-door interview to the Financial Crisis Inquiry Commission, the body charged with investigating the causes of the economic meltdown, in which he admitted that 12 of the 13 most prominent financial companies in America were on the brink of failure during the time of the initial bailouts.

On the inside, at least, almost everyone connected with the bailout knew that the top banks were in deep trouble. “It became obvious pretty much as soon as I took the job that these companies weren’t really healthy and viable,” says Barofsky, who stepped down as TARP inspector in 2011.

***

A month or so after the bailout team called the top nine banks “healthy,” it became clear that the biggest recipient, Citigroup, had actually flat-lined on the ER table. Only weeks after Paulson and Co. gave the firm $25 billion in TARP funds, Citi – which was in the midst of posting a quarterly loss of more than $17 billion – came back begging for more. In November 2008, Citi received another $20 billion in cash and more than $300 billion in guarantees.

We’ve repeatedly noted that the government’s whole strategy in dealing with the financial crisis is to cover up the fraud, and Taibbi notes:

Now, instead of using the bailouts as a clear-the-air moment, the government decided to double down on such fraud, awarding healthy ratings to these failing banks and even twisting its numerical audits and assessments to fit the cooked-up narrative.

***

A key feature of the bailout: the government’s decision to use lies as a form of monetary aid. State hands over taxpayer money to functionally insolvent bank; state gives regulatory thumbs up to said bank; bank uses that thumbs up to sell stock; bank pays cash back to state. What’s critical here is not that investors actually buy the Fed’s bullshit accounting – all they have to do is believe the government will backstop Regions [bank, as one example] either way, healthy or not. “Clearly, the Fed wanted it to attract new investors,” observed Bloomberg, “and those who put fresh capital into Regions this week believe the government won’t let it die.”

Through behavior like this, the government has turned the entire financial system into a kind of vast confidence game – a Ponzi-like scam in which the value of just about everything in the system is inflated because of the widespread belief that the government will step in to prevent losses. [Exactly.] Clearly, a government that’s already in debt over its eyes for the next million years does not have enough capital on hand to rescue every Citigroup or Regions Bank in the land should they all go bust tomorrow. But the market is behaving as if Daddy will step in to once again pay the rent the next time any or all of these kids sets the couch on fire and skips out on his security deposit. Just like an actual Ponzi scheme, it works only as long as they don’t have to make good on all the promises they’ve made. They’re building an economy based not on real accounting and real numbers, but on belief.

And see this.

Category: Bailouts, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “The Government’s Entire Bailout Strategy Was to Cover Up the Truth”

  1. Greg0658 says:

    I forget what show I was watching yesterday that a comment came across that I yelled something like
    “the banking system had to be saved – or we would be in anarchy today”

    here @TBP we’re all about the most proper way to have done that
    and now get out of the mistake (if it was a mistake :-)

    I do remeber the Ravens/Denver game that I said (and took back)
    “I wonder if they teach the receivers where the replay cameras are so they fall into the blind pocket”

    so back to ‘effectively insolvent’ – so what —- its the laborers money in them #’d accounts
    next
    were not still bickering that AIG didn’t pay up on all the Failure Insurance Instruments are we
    next
    ‘the government’s whole strategy… is to cover up the fraud’ – well yah —- laborers might say “whats the point”

  2. Conan says:

    I still say we have more in common with Japan than you think. Japan imploded in 1989 to 1990, more than two decades ago from a HUGE stock market bubble and real estate bubble ( Remember the Emperor’s Palace in Tokyo was worth more than the state of California?) In the US we had the Dot Com bubble of 2000 and the real estate bubble of 2008. Europe has a huge banking crisis, much more leverage than a US Bank. Spain, Ireland, England, big real estate problems also.

    So in Japan the banks became insolvent and if you remember at the time they were some of the largest in the world…So instead of clearing the books the policy was zero interest rates. Now the US and Europe are both going through their flavor of a similar crisis. Folks don’t count on this being a historical 16 years +/- 2 to end this secular bear market!

    We have a long way to go to deleverage and for the stock market PEs or regression to the mean to achieve bear market lows. This has to happen or you must believe we are in new era that this time is different………..

  3. ByteMe says:

    in which he admitted that 12 of the 13 most prominent financial companies in America were on the brink of failure during the time of the initial bailouts.

    Ok, so let’s look at that. What’s the government’s role in a failed bank? It’s to guarantee the deposits up to a certain point. That’s the FDIC. Anciliary to this, they also guarantee pension funds that were heavily HEAVILY invested in bank bonds, bank investment vehicles related to mortgages, etc.

    So if a bank with deposits fails, what happens next? The FDIC steps in and makes sure the bank depositors can get their money. With those 12 banks, what would that have meant? Trillions in taxpayer money. Or, alternatively, the FDIC doesn’t have enough money to do that and you have a lot of depositors who are suddenly broke and unable to pay their bills.

    And then the pension funds with all that bank paper would also be insolvent. So the PBGC steps in and tries to pump money into those to make sure pensioners get their money. Trillions in taxpayer money. Or, alternatively, the PBGC can’t do that and you have a lot of pensioners suddenly broke and unable to pay their bills.

    So a few hundred billion went into the banks — in exchange for stock — to keep them afloat and keep millions of depositors from freaking out or worse. And taxpayers got most of those billions back.

    We all would have preferred some different outcome, but the reality is that everyone will make a flawed decision or two in a crisis. Instead of whining about it, celebrate that you can get your money out of “big box bank” today and it didn’t cost taxpayers as much as it could have.

  4. Fred C Dobbs says:

    The banks are the most powerful political force in the US. They got Congress and the White House to put their real estate lending competition out of business (S and Ls), and give them a monopoly. They got Congress and the White House to buy their real estates, and give them a taxpayer-guaranteed profit. They go Congress and the White House to enter the Wall Street Casino business with taxpayer-guaranteed borrowed money. Got Congress and the White House to refuse to prosecute all but a extremely few executives. Can’t get much better than this. Money, Money, Money into the pockets of hundreds of thousands of New Yorkers who eat off of Wall Street and the National Banks.

  5. rd says:

    In 2008-09, I never expected to hear the financial sector leadership, especially the regulators, say things like “ATMs probably won’t be working tomorrow because of the crisis” as that would be a sure-fire way to amplify the crisis. So it is virtually a given that they will be lying about the stability of the system at a moment of crisis.

    However, somehow this morphed into the mantra that all of this just seemed to happen without any root cause and therefore there was no need to investigate and prosecute what appears to have been blatant fraud on the part of many in the financial system. This is the part that has been completely unacceptable and probably also acts as a contagion vector that will allow a new financial crisis to appear i nthe next few years as the behavior does not appear to have been changed signficantly. After the lying at the moment of crisis, responsible adults would then have made sure that the system was changed so that it would be stable for a couple fo more generations.

  6. Conan says:

    The Government is owned by the banks and or new soon to be head of Treasury, Jacob Lew, is more of the same.

    http://www.wsws.org/en/articles/2013/01/11/jlew-j11.html

    Here is a telling quote:

    “Lew’s nomination also makes clear that Obama has no reservations about naming a former Wall Street executive to head the department most responsible for the 2008 bank bailout and regulation of the financial industry. Lew’s predecessor, Timothy Geithner, despite a lifetime spent facilitating the banks’ crimes as a regulator, was never officially on their payroll.”

  7. Clif Brown says:

    We are lied to all the time. We are deliberately kept ignorant all the time. We are deceived all the time. It is an imperative in our democracy to keep the citizenry in the dark so that the same abuses of power that take place under other forms of government can proceed under a benign name.

    Look no further than the Pentagon Papers and Wikileaks to document this.

    The real crime in the financial mess came before the bailout when Congress, under the influence of the banks, let the banks free to play with unlimited risk.

    You know the old story of closing the barn doors after the horses are gone. This case differs in that Congress knowingly opened the doors and piled hay outside within the view of the horses and in the old story at least the doors were finally closed.

  8. dougc says:

    When the government admitted that not only the banks are too big to fail but in their failure to prosecute HSBC officials over money laundering and being AlQaeda’s bank that the major bank officials are too big to prosecute. This won’t cause them to reform their current practices.

  9. endorendil says:

    Old news. The question is more whether there was an alternative at all, and I don’t think that there was: the governments had to halt the crash and the public would never have believed (in time) that it was needed. There are two more interesting points to discuss, though. One is whether the banks have been saved yet, or are just walking dead, because in the end uncles Sam and Mario can’t keep up the act. The second – very related – one is whether in the aftermath the governments should have kept a higher level of pressure on the system, letting more big banks fail gradually and breaking up big ones (so parts could also fail).

    On the first question, my answer is simple: I think that Sam and Mario can’t pull it off. The best they can hope for is what happened after the dot-com bubble popped: keep things going long enough until the next bubble starts. That isn’t a long-term strategy in any case, but I don’t think it will work at all this time. The bad debt that is still out there is staggering – you can start with US treasuries – and the banking system is just up to the gills with it.

    On the second question, I think that pretending that the system was saved was a big mistake. Of course, at the same time, allowing uncertainty to persist was very risky. But forcing big recipients to split up in stead of merging them should have been possible. Letting large numbers of minor players fail (and components of big ones) should have been feasible. Yes, clarifying conditions like that to top level management might have make them dither until they went bust, but dithering managers could have been offered reduced criminal penalties as an incentive to do what was needed.

    Which in the end brings us to the idiocy that prosecution of top level personnel wasn’t immediate started, if only to focus the minds.

  10. Francois says:

    @ByteMe:

    Agree with what you wrote…but you stopped short of stating the obvious: banksters should have been all put out of work, golden parachutes forcibly declared null and void, then put into bankruptcy, toxic assets wiped clean, then resold to investors with a clean bill of health.

    Capitalism without risk is like religion without sin.

    What have we got instead? A financial system that is more dangerous, unstable (and unbelievably more arrogant) than ever. Think “splash crash” for instance. And that is just ONE example.

  11. Syd says:

    @Francois: good point that the financial system is even more dangerous now since it was not cleaned up.

    @ByteMe: good point about the pension funds being heavily invested in bank bonds and MBS, but I think it would have been better if the banks (including Fannie/Freddie) were put through an expedited bankruptcy process financed by the government/Fed, management dismissed (and prosecuted where fraud occurred), and shareholders wiped out. Bondholders could have become owners of the new, cleaned up banks and recovered losses over time. Investors should take losses if they put money in bad investments, and fraudsters should face grave consequences. It would have cost trillions to do, but it would have paid off over time. As it is the Fed shells out and guarantees trillions, but also props up the existing banking system, which makes huge fortunes for insiders but isn’t solvent without massive, ongoing Fed backing.