Global Economic Crisis

With TARP, the Federal Reserve discount window and FASB rule changes that allow inflated valuations of toxic assets sitting on bank balance sheets, it takes a real act of heroism for an American bank to post a quarterly loss. However, in the last quarter of 2009 two banks from the U.S. government’s list of “too big to fail” institutions earned that dubious distinction. Bank of America posted a Q4 loss of $5.2 billion, while Citigroup lost $7.6 billion.

Both banks had their own list of excuses and spin to explain the red ink, including in the case of Bank of America the paying back of its TARP funds (a decision which seemed motivated by the primary purpose of removing government restraints on executive compensation and bonuses). Nevertheless, these numbers, glaringly bad despite unprecedented taxpayer assistance and accounting rule modifications designed to manufacture profitability out of thin air, are a clear reminder than in truth, much of the U.S. banking system remains mired in deep crisis, and confronting functional insolvency.

Since the onset of the global financial and economic crisis, there have been a number of these fool’s rallies on the stock markets of the world, led by Wall Street. These rallies have not been based on market fundamentals, but rather largely on the political prowess of Wall Street in its ability to intimidate decision-makers in Washington, compelling them to cobble up whatever stratospheric amounts of money have been demanded by them to “repair” the financial system.

Back in October, former Goldman Sachs chairman and then current U.S. Treasury Secretary Hank Paulson warned Capital Hill that unless Congress immediately allocated $700 billion to bailout Wall Street, the entire global economy would collapse, literally within hours. Congress, however, voted down Paulsen’s TARP boondoggle. In response, The Street mobilized its lobbyists, and pressured Congress into “reconsideration” of its vote. Congress conducted another TARP vote, and Wall Street got its $700 billion bailout. However, the rally from the initial losses incurred by rejection of TARP was short-lived and shallow. That has also been the pattern with similar rallies as the Global Economic Crisis has accelerated in its devastating impact.

The most recent sucker’s rally that elevated the Dow Jones from its depressing lows was sparked in large part by “leaked” memos from the CEOs of Citigroup and Bank of America, claiming that these insolvent institutions, only still in existence due to massive infusions of taxpayers bailout money, had actually returned to profitability in the first two months of 2009! It seems some creative bookkeeping went into that calculation.

The facts remain unalterable; American and global macroeconomic data points to massive demand destruction, rapidly rising rates of unemployment and the collapse of world trade. Enron-style accounting can only postpone the inevitable, not stop it. Since the Dow Jones hit its peak in October 2007 of just over 14160, it has lost approximately 50% of its value. This collapse in equity prices mirrors the Dow Jones contraction experienced during the Great Depression. However, with much worse economic data likely to emerge over the next several months from all corners of the globe, further massive losses on Wall Street are not only likely; they are a metaphysical certainty.

Wall Street has perpetuated a myth that it is a manifestation of market rationality, rather than a man-made construction infused with irrational exuberance, Machiavellian greed and outright manipulation. Despite all the bailouts Wall Street has secured for itself, at the expense of intergenerational debt that will burden the American taxpayers far into the future, it is heading into the abyss. Wall Street is indeed a ticking time bomb, set to detonate with full destructive yield. Don’t expect Timothy Geithner or a thousand leaked memos from American CEOs to disarm this financial time bomb.

When the banks fail, the remainder of the economy is in cardiac arrest. It appears that the disarray in America’s banking sector is growing, its vastly over-compensated management left only with the last resort of “restructuring” and cashing in their political connections for massive bailouts from Washington. The latest public revelations demonstrate how the Global Economic Crisis will take no prisoners, including America’s banks, both large and small.Citigroup, whose management once waxed at its acquisitions fueling excessive growth in the firm’s size along with their salaries and bonuses, has just announced a fourth quarter loss in excess of 8 billion dollars. The total losses incurred by Citigroup for 2008 amount to more than eighteen billion dollars. Now a panicky management is trying to “prove” it has a strategy for survival, based on splitting the banking conglomerate into two components: Citicorp, supposedly the “healthy” component, and Citi Holdings, with the “unhealthy” remnants that will be sold or liquidated. In the meantime, Citigroup took in another $20 billion infusion of TARP money from the U.S. Treasury, along with Bank of America. Another financial institution that grew to the point of indigestion, Bank of America will also receive a government guarantee of $118 billion to “backstop” the bank’s vulnerable assets.

What is actually going on with America’s banks? The dark secret that the government will not discuss publicly is that this vital sector of the U.S. economy is largely insolvent. The reason the Treasury provided $350 billion in TARP funding to the banks with no accountability or strings attached (and no improvement in bank lending to desperate businesses and consumers) is because the balance sheets of U.S. banks are so abominable, any taxpayer funds sent to them are being used solely to improve their dismal balance sheets.

The desperate borrow and spend tactics of the Fed and Treasury Department are akin to bailing out water on the Titanic after she struck the iceberg, hoping in defiance of logic that they can miraculously impede the inevitable sinking of the ship. The calamitous disaster-management techniques in the United States are being replicated throughout the world, as clueless central bankers and politicians add their own permutation on flawed reactions to the Global Economic Crisis.

The banking ship of the United States is going down, and with the connivance of Treasury, the Fed and Congress it will take the American taxpayers on its death ride to foggy bottom

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