The Nationalization Back-Door is Locked

By Fester:

The Obama Administration's bank plan was at best hazy, incomplete, vague and uncertain when it was announced.  Read in one light it might not be too bad, read in other lights, it is a plea for more time in the hope that things unravel themselves without significant changes to business practices beyond counting on a couple trillion dollars of implicit federal support.  And this was before the news that the Geithner plan was re-worked at the last moment because the original plan did not make any sense. 

The Not Too Bad interpretation required one to think that the purpose of the Stress Testing of the systemically important ($100 billion dollar or more in assets) banks was for some of the testers to come back to Secretary Geithner and President Obama on St. Patrick's Day and say something along these lines:

"Bank of XYZ is fundamentally bankrupt under any realistic scenario.  There is some salvage value in the bank, but no way to 'save' the Bank of XYZ without taking it through either the FDIC or a RTC like solution."

At that point, the back-door nationalization of the Bank of XYZ occurs as the government  seizes assets, sells off the bad debt to recover what it can, and then re-sells the remaining, and very healthy bank back to a new set of private owners. 

There is a problem with this plan or at least the hope of a plan.  The government does not have enough qualified inspectors to make this determination or to even conduct comprehensive stress testing. 

Naked Capitalism reports:

William Black is a former senior bank regulator, best known for his thwarted but later vindicated efforts to prosecute S&L crisis fraudster Charles Keating. He is currently an Associate Professor of Economics and Law at the University of Missouri - Kansas City.

More germane for the purpose of this post, Black held a variety of senior regulatory positions during the S&L crisis.He managed investigations with teams of examiners reporting to him, redesigned how exams were conducted, and trained examiners.

Via e-mail, he has confirmed our suspicions about the bank stress tests announced by Treasury Secretary Timothy Geithner: they simply cannot be adequate, given the number and experience of the staff, and perhaps as important, their relationship with the banks (see detailed comments below)...

Now this begs the question: why has the Treasury Secretary set in motion an obviously bogus process? It suggests the result is pre-ordained.

One possibility is that even a very quick and dirty look at many of the big banks' books will reveal them to be in very bad shape. In fact, the inadequate staffing could be part of the private conversation: "You know we didn't send in enough bodies to do this right, and even using your numbers, which we can assume in some cases will be flattering, you look like a goner."

But all of Geithner's actions to date are inconsistent with him taking a tough stand... I think it is more likely that the banks will get scorecards that show them to be in various stages of peril, but none will be found to be terminal....

So if the capacity to examine the banks is not present, and we are going through the motions, this is a plea for more time to do more of the same without disturbing pre-existing power relationships and political realities. 

We need to do better than that.