How do we know Banks are lying about its Financial Position

The Dow fell 1.71% and the S&P fell 2.01%, followed by the Nikkei down 1.1% and European bourses down by a smaller amount this morning. The leader was the financial sector, the very thing that had inspired rallyettes earlier. The WSJ names JPMorgan, among others. To be fair, some of the move could have been profit-taking, but surely there was a reality check by some. Today we hear that UBS reported a Chf 2 billion loss and will cut 7500 jobs.

In what is developing into a Really Big Story, Goldman’s good earnings and ability to raise $5 billion yesterday, with the intent of paying back the government ASAP (to get out from under pay caps), has inspired the Treasury to disclose some of the results of the stress tests. Normally these would be kept private but now the Treasury feels that the public deserves to know where each of the 19 banks falls on the spectrum of viability. The NY Times says that last week the Treasury sent the banks an email asking them to keep mum about the stress tests during the earnings reporting season, their need for more capital or intentions to return government money. Goldman violated that instruction, and in a lesser way, so did Wells Fargo, Citi and BoA by saying results would be good.

At the time the keep-quiet order was made public, we joked about the government suspending First Amendment rights for banks, but it’s not funny—the banks are on a public relations offensive and setting up a conflict with the government that threatens government credibility. What if the Treasury says Citi (for example) needs X amount of capital to stay alive but Citi says it needs none? Government is unpopular and perceived as not being able to manage its way out of a paper bag, so the bias will be to believe the private sector. The public is ever-willing to have the wool pulled over its eyes. We honestly do think the Treasury is trying to protect the public.

Now consider that Citi, which releases results on Friday, has registered to issue new shares, which the SEC won’t approve until after the Friday results. Oh, dear. Can and should the Treasury tell the SEC not to allow Citi to issue new stock because it was untruthful about some filing disclosures? It would seem that Citi is gearing up to do battle with the Treasury and one of its main tools is financial disclosure—it is taunting the government to prove that its numbers are wrong. In essence, it is daring the government to take it over, believing the government doesn’t have the guts. Nationalization is undesirable not only because of the “socialist” implications but also because it’s very, very expensive. Banks almost always win in these shootouts. Let’s note, again, that virtually nobody is qualified to read a bank balance sheet today. Check it out—they make no sense. James Turk, who knows a hawk from a handsaw, has a good piece and concludes that Citi could easily go the way of Bear Stearns (http://www.marketoracle.co.uk/ Article4088.html). How do we know Citi (or any bank) is lying about its financial condition? Many reasons, but chiefly because they don’t have to mark-to-market regular loans.

By for Now

Barbara Rockefeller