Tuesday, January 20, 2009

The "Aggregator Bank"- find someone who can run a bank!

Just when it seems Wall Street can’t get any more arrogant, Federal Deposit Insurance Corp. Chairman Sheila Bair, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson announce their interest in creating a toxic waste dump known as an "aggregator bank" – a place where financial institutions can unload their toxic waste at a "fair value." There-in of course lies the rub. Maybe the most concise assessment was provided by a WSJ reader named killben:

"A fair price will make the banks insolvent and a not-so-fair price will end up screwing the tax-payers as has been happening of late .. any guesses who is going to get screwed … banks or tax-payers?" (Killben)

After having conned the American taxpayers to support a $700 billion dollar bailout package, and received billions in loan guarantees, the big banks are coming back to the well to drain it dry.
What the US is experiencing is a preparation for Round Three of Big Banks versus the taxpayers. The Big Banks clearly won round 1 in receiving $300 billion in bailout funds and not only not being to held accountable for it, but using it grow through acquisition. Under the artful guidance of House Speaker Nancy Pelosi, they seem to be managing Round 2 to a similar end- with the Big Banks getting the outstanding balance of the $700 billion without the ability of Congress to control the use of those funds. In Round Three, the Big Banks have indicated that knowing they have taken their credibility to the limit with the "bailout" fund, they are trying to sell the taxpayer a new approach for solving the problems of about 10 large firms that have absorbed 80% of the bailout funding (1). At the end of the day, how the assets are transferred into the ‘dump’ means little – who gets to determine fair value means everything.

Lessons Learned
So far, we have learned who cannot determine fair value: the insurers, the big banks, the Wall Street brokerages who pushed liars loans, bought discounted loan insurance from hedge firms that didn’t have collateral to back the insurance, insurance companies and brokerages that could not represent fair value of their investments to their investors and hence find themselves in court now for misrepresentation. Nor can the Government Sponsored Agencies (Fannie, Freddie, FDIC) be relied on as arbitrators of value. They that have their own legal problems as a result of audit findings saying they misstated values on their books either through incompetence or corruption. Obama has been seemingly blinded by the contributions of the big bankers who managed to install their agents as the economic experts, and at this point it appears any appointment coming from whispers of Geithner or Summers would mean the big banks get to determine what fair value is.
On the other hand, Americans should have also learned who can determine fair value- although no one is asking. In 2008, there were 7,146 commercial depository institutions reporting to the FDIC, with $12 trillion in assets. Less than three hundred have been provided assistance, although those 300 account for $10 trillion in assets. That leaves about 6,850 companies whose employees probably represent a better chance of assessing value than the 300 banks who claim they have problems. If Obama needs the field narrowed a bit more, of the top 50 bank holding companies, 15 have not received bailout assistance. Of those 15, at least 8 are subsidiaries of foreign firms. That leaves 7 of the top 50 bank holding companies from which to pick expertise.
Having someone in charge that understands market value and is secure enough not to be bought-off is what is required to get the Big Banks to ‘unwind’ these securities. That way, the market can restore "fair pricing" and accountability for past misrepresentations.
1. Data for analysis presented in ,Analysis of US Bailout Fund Recipients, by EP Heidner, http://www.scribd.com/doc/10945321/Analysis-of-Bailout-Funding19012008

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