DON’T WORRY! HERE’S WHAT WASHINGTON IS BANKING ON
FOUR US banks are in trouble.
Four! And maybe just three.
How do I know?
Because I asked a source of mine who closely follows the industry to run a “stress test” like the one being proposed by Washington.
Now, understand this: having four large troubled banks that issued millions of mortgages and countless other consumer and business loans isn’t a great situation.
But this is a far cry from what we’ve been hearing all week – that, in vague terms, the US banking system would have to be nationalized and taxpayers will somehow be paying for all of this until their children’s children have children.
President Barack Obama gave a fine speech the other night telling us that the “day of reckoning” had arrived but that America will end up stronger, better, happier, sunnier and with whiter teeth when all of this is over.
And even if you didn’t support the guy for election I suggest this: Back him now, because if he screws up, then we all get screwed.
But nice presidential rhetoric can only go so far, especially when the hired help at the US Treasury and the Federal Reserve are out of tune, making it sound like the world is coming to an end and the entire banking system is going to need to be junked.
It reminds me of when I bring my car in for an oil change and the mechanic starts shaking his head while he’s poking around under the hood.
So, again, let me say it.
Four out of the biggest hundreds of banks are probably in trouble. Another 6 percent to 10 percent of financial institutions, according to my friend Chris Whalen of Institutional Risk Analytics, might have enough problems to cause them to merge with others banks.
And perhaps the Federal Deposit Insurance Corp. might even have to intervene temporarily. “Most of the banking system is fine,” Whalen told me.
In fact, he said, $5 trillion to $6 trillion in assets are being held safely by financial institutions that are so boringly ordinary that you’ll never even hear their names brought up in Congressional hearings.
So which banks are causing all the trauma and drama?
Citigroup is often pegged as the top problem. The company simply strayed from its mission of granting loans and collecting a nice interest. Instead it ventured into the wild word of financial derivatives – those hard to understand investments made from things like mortgages – and flopped.
Bank of America is troubled bank No. 2. But its main problem is that it did Washington a favor by taking over Merrill Lynch without remembering the old adage about no good deed going unpunished.
No. 3 is Wells Fargo, which bought Wachovia last year. Neither bank during the past 10 years ever felt a house was too overpriced or a mortgage applicant too under qualified for a loan.
And then there’s JPMorgan Chase, which was knee deep in derivative securities at one point but which over the past four years has been climbing out of its hole, according to Whalen.
Fixing the problem isn’t going to be nearly as easy as describing it. And it becomes even more difficult because there are interested parties who don’t live in this country and who don’t really care if you and I suffer through a recession.
A lot of the sewage now clogging up our banking system – and notice I refused to call it toxic waste – was shipped to banks in Europe and Asia. And those investors – grateful as they were to get a piece of the action back then – are now insisting that Washington does what is best for them.
And we have to keep these foreign interests happy because, well, we’ll need to borrow more money from them in the future.
So the situation is complicated. And it is troubling. And it could get worse – especially if officials keep over-emphasizing the problems.
But it is far less overwhelming and ominous than the thought of the whole banking system being so troubled that it will need to be taken over by the government.
That is what the folks at Treasury and the Fed keep de facto threatening, even as there are repeated denials that such thoughts are going through their heads.
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New York Attorney General Andrew Cuomo has John Thain in his sights for handing out rich bonuses to Merrill Lynch employees even as the firm was closing its doors as an independent operation and was being unloaded at the government’s urging on Bank of America.
But I’m hearing rumors that big shots at Lehman Brothers are still crowing about how well they made out in a similar situation.
Internally it’s being referred to as “getting the last check.” The one difference, of course, is that Lehman wasn’t helped by Washington – a point of later controversy – and ended up having its pieces sold here and there.
Still, the word is that there were billions in bonus pool money that got distributed at the last possible moment. And some New York guys got what may have been the payout of a lifetime.