Ok, obviously there's a lot going on in the world right now between Wisconsin, Michigan, Japan, the War on Women, the budget battle, amongst other things. But one story we need to keep in the forefront is this: it's Wallstreet's wild speculations and bailout that has led to the unemployment and budget crises, not unions, not Planned Parenthood, and not NPR. Unfortunately the Obama administration is working with the Federal Reserve to let the banksters, once again, decide for themselves how much they should pay out in dividends and as usual, those payments have little to do with actual capital and real income, but the speculation of reduced losses in the future.
Recovering banks who convinced our political elite that only a massive tax-payer loan of capital could save our financial system from complete collapse (largely do to their own doings) are now eager to increase dividends to shareholders, only they need to prove to regulators that doing so won't put the bank at risk. How will the regulators determine if the dividends are justified? By another round of "stress tests", there's a pesky problem though, banks get to choose themselves which metrics by which to prove their financial health! Jesse Eisinger tells us all about it in A Test Where the Banks Had the Questions and the Answers:
Later this month, the Federal Reserve is going to let banks know how they did on its most recent round of “stress tests.”
Of course, banks ought to have a good idea of the results. They came up with the questions — and the answers.
The Fed gave the banks one economic assumption — a recession — to test their books against, but otherwise the measures were chosen by banks themselves. The Fed just vetted them. Seems like a low bar.
“It’s a take-home exam where you supply the math and then it’s pass/fail,” said Joshua Rosner, an analyst with the independent research firm Graham-Fisher & Company.
In 2009, critics complained that the stress tests were driven by appearances and that the government’s true, and thinly disguised, goal was to shore up confidence in the markets. The conclusion — that, over all, the system was sound — was inevitable.
“The stress tests were designed to reassure the capital markets that the government was not going to restructure the banks,” said Damon A. Silvers, who serves on the Congressional Oversight Panel, which monitors the Troubled Asset Relief Program. “But the capital raises compared to the problem assets were not that big.”
Unfortunately, the central bank didn’t disclose enough information to actually judge the results. The Congressional Oversight Panel enlisted two University of California, Berkeley professors who specialized in banking and risk assessment to judge the tests. They had to throw up their hands.
The two “were interpreting shapes on the wall,” said Eric Talley, a professor of law at Berkeley, who worked on the project. “We couldn’t see what the shapes were, so had to look at residue to see if those were the shapes you would normally want to use.”
This time, the Fed hasn’t made even that cursory amount of criteria public.
The first round of tests was based on self-reported data of asset quality and loss estimates. This time around, that weakness is squared. Now the banks are reporting on their own internal capital plans based on their own asset assessment.
“It could be that banks have been really assiduous about own risk portfolios,” Professor Talley said. “Or it could be that too much control over the process has been handed over to banks. It’s hard to tell.”
We had better hope that the banks actually are healthy. The banks say ‘Trust us,’ and the Fed is doing just that.
So the banks themselves get to determine the questions asked by regulators...to better explain just why this is a problem here are some
excerpts from Delaware Senator Ted Kaufman's hearing on TARP Oversight hearing via bobswern:
a fair amount of the earnings of the large banks does not reflect actual cash that has gone into those banks. It reflects changes in assumptions about future losses.
The dividends that would be paid would involve actual money, not -- not assumptions or promises or other things, but actual money, so that on the one hand you have no money coming in for that part of those earnings, and on the other hand, dividends would involve real money coming out.
We need a lot more capital. It needs to be pure capital, real capital, not funky capital, not hybrid capital, not contingent capital. It needs to be real equity capital in our financial system. This is not costly from a social point of view.
The bankers don't want it. They hate it. They fight against it. All the arguments they put forward against it are pure lobbying. They have no research on their side. They have no analysis on their side. It is complete public-relations exercise.
Don't allow them to pay dividends today. Nobody knows - well we're all agreeing you need more capital, nobody knows how much capital is necessary. Even the bankers will concede that the easiest way to increase equity in the business is to retain earnings. They have profits now. That money stays in the bank, it belongs to the shareholders.
Paying out equity under these circumstances makes no sense in economic terms. It's irresponsible. It encourages risk taking of these banks, high leverage bets.
if you know that you're going to get bailed out, no matter what your losses are, then you have an incentive to take on more risk
JOHNSON: And I fear that the stress tests they're doing now, although they haven't disclosed anything really about them, I feel that those tests are even more gentle.
MELTZER: Yes. The bankers don't want it and they come down with lobbyists in hordes to tell the congressmen, you know, that's just disaster, you're facing disaster. There won't be loans for the public. There won't be capital to build industry. All that stuff.
Currently, we are working with the Federal Reserve to review the dividend plans at the large banking organizations. We believe that a comprehensive review of dividend and capital replacement plans across large firms is critical, since these payments were a large drain on cash reserves prior to the crisis, leaving financial institutions more vulnerable to the disruptions that followed. This is why the dividend plan review and TLGP repayment plans are intertwined. The regulators should not approve dividend and capital repurchases, which involve significant cash outlays by financial firms, until we are all fully confident that these firms will have the financial resources under both normal and stress conditions to repay debt guaranteed by the FDIC.
I think it is clear that there had to be some government action. It's also clear that we've all said the real mistake was letting things get to that position. And it's also the case that, given what we know now, the Fed knew that there was a lot of turmoil in the financial markets well before -- everybody knew.
So the banksters want to pay out risky dividents which diminish their capital and leave them vulnerable to another disaster because they now know they'll just be bailed out...Obama and the Federal Reserve are content trusting the banksters to decide their compensation, capital or consequences be damned. Don't forget this is the same Federal Reserve that couldn't find a single homeowner that was wrongfully foreclosed on. Those who lost their homes and credit will be held responsible for those losses while the banksters who are largely responsible for the economic crisis will soon be able to start receiving large dividend payments if it's up to the Federal Reserve...welcome to the American Dream.