Karl Denninger, "Does Someone Know Something (Again)?"

"Does Someone Know Something (Again)?"
 by Karl Denninger

“If this turns out to be prescient - that is, if it turns out that this is insider trading on material non-public information and Bank of America collapses - it is time for every American to cease working and go sit in Washington DC on the Mall - and refuse to leave until the FOMC, Treasury and our President resign, stand trial for public corruption and are punished in accordance with law. The market says that this firm has a "book value" of one third of the claimed value on it's balance sheet.  If this is true then the bank is bankrupt at least six times over. That is, it's alleged "Tier 1 Capital" has been exhausted not once, not twice, but six times.

Either the market is correct or it is wrong.  The stock is either trading at 0.34 times book because the assets on the books are worth one third of the claimed amount (when offset against liabilities) or because the collective "wisdom" of the market is flat-out wrong. If the former is true then every corporate officer has lied through their teeth serially and wantonly when signing their quarterly reports, and under Sarbanes-Oxley has committed a federal felony for which they must be imprisoned.

There is really no other way to see this, in point of fact.  Either the firm has honestly reported its financial condition or it has not.  If it has, then this "valuation" is ridiculous beyond words, and you'd be nuts not to buy the stock with both fists, since you stand to profit for the tune of three hundred percent. But if the firm has lied, repeatedly and serially, then it is bankrupt six times over.

Our system of laws is supposed to prevent the latter from happening.  Yet it has not.  It did not with Bear Stearns, it did not with Lehman, and it has not with the myriad other public banks that went under over the last few years, including some for which we now have asset values. Colonial Bank, for example, which when acquired from the smoking ashes was shown to have claimed values some forty percent higher than reality.  In fact it is rare that one can find an FDIC-seized institution or one in which an "assisted" transaction took place where asset values were not radically overstated.

Since the advent of Sarbanes-Oxley this is no longer a matter for civil litigation - it is a matter for felony criminal prosecution. Our stock market is collapsing precisely because nobody believes the valuations reported by these institutions.  There is zero credibility precisely because there have been no prosecutions under Sarbox from the latest debacle.  Firm after firm has gone down with radically bogus asset valuations and in fact Kanjorski made such the law and regulation when he effectively forced FASB to permit "mark to make-believe" in the spring of 2009.

So now we're back to where we were in the spring of 2008.  Bank of America has its stock price under attack for the simple reason that nobody believes the bank's asset valuations. The market believes the bank is underwater to the tune of six times its reserves and is factually bankrupt. Confidence in our markets and financial institutions cannot return until these FICTIONS are flushed out of the system.  This means that financial institutions must prove their asset valuations and those who lie about them must be prosecuted - in each and every case.  If this is not done, and done soon, firms will come under similar speculative attack one-by-one exactly as occurred in 2008, and this time there is neither political will or financial ability to rescue them. That's what the stock price is telling you today folks and it is also why the early rally in the market has collapsed with a more than 2% move in the S&P 500 in the last two hours.

The question is this: Is the market right - or wrong, and is anyone in Washington DC and at The Fed listening? Incidentally, on the premise the market is right if this continues without a clean explanation, Tickercon will go to "1" within days - if not hours, as if BAC blows it will be Tickercon "Boom", not "1".

Bloomberg has deconstructed The Fed's secret lending programs and put forward a rather amazing abuse of the former 13.3 powers The Fed wielded during the 07-2010 time frame. Among the findings:

    * More than $1.2 trillion in public money was provided to banks and other institutions during the time period in question.

    * A good part of the money went to foreign institutions, including RBS, Deutsche Bank, Barclays, Credit Suisse, BNP Paribas, Hypo and others.

As Bloomberg said: “By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.”

That, of course, isn't the real question we should be asking.  The real question is this:  Why is it that these institutions got these loans, and thus were protected from the consequence of lending irrationally along with selling knowingly-bad paper to others (remember, Citi's former risk manager testified under oath before the FCIC that the bank was well-aware their loans were trash yet sold them anyway) while ordinary Americans were dispossessed of their homes and tossed on their ass?
 

“Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages.”

Isn't it funny how those institutions were protected while you were left to twist on the vine?  Further, The Fed did everything in its power to prevent these facts from becoming known by the public. The worst part of this debacle isn't that The Fed rescued these firms.  It's that despite being the primary regulatory body of these large institutions it has done nothing to prevent a need for another rescue, including but not limited to dismantling the interconnected credit default swap market and forcing massive capital raises to be undertaken so that there is no chance of a future demand for the same sort of "accommodations."

Might the attempted secrecy be because with the facts, along with the failure to prevent a now-apparently-emergent second need for even more of the same emanating from Europe, we would all demand the dismantlement of The Fed and imprisonment of the entire body of the FOMC?"

"I think so. Got this?"

- http://market-ticker.org/

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