August 12, 2009

Yep, the banks are pretty much insolvent

This interview with Elizabeth Warren (video below the fold), chair of the banking industry Congressional Oversight Panel, is truly frightening. Remember, she was appointed by the Democrats. About a minute in she admits that most of the toxic assets held by banks are still on their books despite the $700 billion we have already poured into them through TARP. Pat Buchanan, who I rarely agree with, hits the nail on the head about three minutes in when he asks if the assets were required to be "mark-to-market", i.e. if banks had to declare the actual current value of the assets on their balance sheet, most would be underwater (the rules were changed a few months ago). Warren admits that is the case. The short of it is: most of our banks are insolvent. If they posted the actual value of these assets on their books today, it would trigger a government takeover. This is as close to an admission of that fact as we're going to get (until after it all comes crashing down).

Warren also states that commercial real estate could see 50-60% default rates in the next few years, which will especially hit the smaller banks. And as we saw just last week, the wave of personal bankruptcies forestalled by the post-election foreclosure moratorium are just starting to work their way through the system. When asked if the economic Armageddon we were warned about last year was real (about 7:30), she admits that the real losers were going to be the old-time, big financial dinosaurs (Goldman Sachs, JP Morgan, et al.). While we avoided some pain, which is probably inevitable anyways, the bank bailout engineered by the Fed and (former Goldman Sachs CEO) Bush Treasury Secy Henry Paulson was for all intents and purposes to protect those companies and their shareholders.

Oh, and the commission report on the financial collapse isn't due until December 2010 - one month AFTER the congressional elections.

So what does this mean?

1) The banks are essentially insolvent, and they're playing games with their books to avoid triggering FDIC takeover.
2) The $700 billion we poured into the banks did nothing to address the fundamental problem, toxic assets, but were taken by the banks and placed on their bottom line (as Warren calls it, the Treasury's "Don't Ask, Don't Tell" policy).
3) The worse may be yet to come.
4) We're all pretty much screwed, notwithstanding the world-changing powers of Teleprompter Jesus.

Video below the fold:

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By Barbarossa at 10:11 PM | Comments |