Financial Crisis Commission Hearing on Capitol Hill

10-member Financial Crisis Commission headed by the ex-State Treasurer of California (well that gives a lot of credibility to the Commission, doesn't it?) is holding a hearing on Capitol Hill today and tomorrow.

Comments from people watching the proceedings are those of disappointment and sarcasm. The 9-11 Commission seems to come to most people's mind - i.e. grand-standing with no substance.

It's quite telling, to me, that the ex-banker (Merrill Lynch) sits right next to the commission chair and asks totally inane questions like why Goldman Sachs didn't offer to take less than 100 percent in payments from AIG.

Where does Brooksley Born sit? She sits at the end. She's about the only one in the commission that has credibility. I would have believed more in the seriousness of this commission if she were the chair.

Wall Street CEOs were "grilled" in the morning, and now it's financial analysts' turn. But did the Commission invite those analysts and economists who had long predicted the financial crisis that finally hit in September 2008? People like Peter Schiff and Meredith Whitney?

For those of you like me who don't have TV anymore, you can watch the hearing live on C-SPAN on the Internet.

If you want to let the Commission know how you feel about the hearing, you can write to them. (I was thinking of filling the comment section with "LOL LOL LOL LOL.....")

In one of the episodes of BBC's excellent comedy Yes Prime Minister, Sir Humphrey Appleby the Cabinet Secretary advises the novice Minister Jim Hacker thus: When we don't want to find out about anything, we form a committee.

Exactly.

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No Wonder Big Banks Make Money

An interesting thing I've noticed on my past few visits to the local branches of big national banks like Wells Fargo, Bank of America, and Chase.

All these branches are staffed with people who look barely out of college if not high school. Nowhere can I find someone who looks over 30. And it's not just tellers at the windows. So-called bankers, with own cubicles and talking to customers sitting at their desks, look no older than 30. I have no idea how it is in other cities, but where I am, that's what I see these days.

One such banker in one of the branches not only looked and talked as if he hadn't quite finished his community college courses but also kept chewing gum all the time we were talking. I went to another bank, and walked up to a teller and told him I needed to pay my credit card bill. "Excellent choice!" he exclaimed.

Ummm, do I have any choice? Probably his most recent job was an waiter in a family restaurant.

While I am happy that these young people getting their careers started as bankers, I'm just wondering what happened to those people whom I used to see at those branches who looked over 30 and who seemed to know what they were doing? Were they fired?

These young bankers cannot be earning a lot more above the minimum wage. (They shouldn't, judging by the way they interact, or cannot interact I should say, with their customers.) No wonder these big national banks make profits. They hire cheapest people, they've received practically free money from the government (i.e. taxpayers), they cut off credit limit (or worse, simply close the accounts) for millions of card holders just when they need extra help, they refuse to lend to businesses and turn down mortgage applications in the last minute.

The irony is that all the 'money' for card loans and home mortgages have been created by these banks out of thin air. Fractional banking at its best for them, worst for the rest of us. It's a myth that banks make loans out of deposits or out of excess reserves that they keep at the Federal Reserve. They do no such thing. (Read this paper by the New York Fed: excess reserves have nothing to do with banks' making loans.) It cost banks absolutely nothing to create new money. As long as they get to collect interest on those loans, it's an infinite profit for them without risking any real assets.

Returning TARP money won't earn them praise from anyone but themselves and their sycophants and apologists in the media.

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Obama Jawboning Bankers: Lend!

O Horror! What's gonna happen if they actually start lending?

Obama implores top bankers to increase lending
(Tom Raum, 12/14/09 AP via Yahoo Finance)

"WASHINGTON (AP) -- President Barack Obama implored top bankers Monday to help keep the fragile recovery from faltering by boosting lending to small businesses and getting behind an overhaul of financial regulation. "We rise and fall together," Obama declared.

"In response to the president's burst of populist jawboning, some banks pledged to increase loans and exercise more self-control over outsized compensation. But the full impact of Obama's intervention was hard to gauge: The government is losing leverage as major banks repay bailout loans.

"Obama's lecture to the bankers was also part of a broader election-season Democratic effort to tie sluggish bank lending to continued high joblessness -- and to try to tie the banking industry to Republican efforts against Obama's financial overhaul legislation.

"It's a tough balancing act, given past contributions of big banks to Democratic as well as Republican candidates."

You're not kidding.

"We rise and fall together," Mr. President? Who are "we"? Wall Street and Main Street? Or Bankers and the president?

After having criticized the nation's large banks for causing the financial meltdown last year by years of risky lending and speculation, the president is demanding that the same banks to do the same, for the sake of the economy.

"The meeting came amid growing friction between the president and the banking industry, a day after Obama denounced "fat cat bankers on Wall Street" who enjoy big bonuses but "just don't get it.""

Get what? How can he denounce "fat cat bankers on Wall Street" who bankrolled his campaign? Easy. Because this is a political grand-standing to appeal to American voters who are increasingly disillusioned with his presidency. His own B+ assessment doesn't seem to agree with what Americans are thinking about his performance.

Obama shouldn't push too much on compensation for those "fat cats", when the average pay for federal workers are 76% higher than the average pay for private workers, i.e. Main Street. Scrawny cats on Main Street still can read the news. (See my post from yesterday, about the middle.)

I just wonder if Obama is aware of what will happen if banks take his words too seriously and start lending out of the excess reserves that they hold at the Federal Reserve. $1 trillion of them. The Federal Reserve, to compensate for the drain on the liability side of the balance sheet, would be forced to sell assets at a market price. The assets include agency bonds (current holding $156 billion) that no one else in the world buys but the Fed (and some risk-taking hedge funds, I suppose), and mortgage-backed securities ($854 billion) that no one wants at par. After that, they will have to sell some Treasuries ($777 billion), or do the fire sale of the holdings at Maiden Lane SIVs (65 billion). They could sell gold (the Fed owns 13 million troy ounce, mostly at NY Fed), which they account at $43 per troy ounce. (Treasury Department's gold holdings are separate from the Fed's, but they are combined and the combined amount shows up on the Fed's balance sheet.)

(The amounts of the Fed's holdings are taken from the latest Fed balance sheet, 12/10/09. The mount of gold held by the Fed is from Treasury Department data.)

In short, if the banks actually start lending out of the excess reserves, the Fed will be forced to dump the assets, thereby causing lower prices for those assets in the market. Treasury prices go down, the rates and yields will go up. Foreign creditors will be furious, and U.S. dollar will go down. There's your exit strategy, Chairman Bernanke. You will have no choice but exit, if the banks start draining the excess reserves. You'd better hope you have a very tight control over your member banks.

So my guess is what I already said above: this is just a grand-standing on Obama's part. He demands that the banks lend, and the banks say oh yes Mr. President. But the banks know, and Obama knows, they cannot lend, so they won't. Then Obama gets to blame banks even more loudly as the economy continues to stagnate or contract, appealing to the ignorant (or so he thinks) American voters. It's all those bad bankers' fault!

But where can the new money go in a stagnating economy with all the excesses that caused the bubble and the crash still there? More misallocation of resources won't solve any problem. About the only thing that has improved this year is the stock market.

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Earnings Date For Financials

This morning before the market, Goldman Sachs (GS) reported a blowout earning ($4.93 a share, vs $3.49 analyst estimate) due to big gains in trading and underwriting. The stock is down 24 cents at the moment (12:13 PM EST, go figure), and I saved the commission by not playing the stock either way (long or short).

And here's the list of major financial firms reporting earnings this week and next:

American Express (AXP): July 23, after market
Bank of America (BAC): July 17, before market
Bank of New York Mellon (BK): July 22, before market
Capital One (COF): July 23, after market
Citigroup (C): July 17, before market
Fifth Third Bancorp (FITB): July 23, before market
J.P. Morgan Chase (JPM): July 16, before market
Morgan Stanley (MS): July 22, before market
Regions Financial (RF): July 21, before market
State Street (STT): July 21, before market
US Bancorp (USB): July 22, before market
Wells Fargo Bank (WFC): July 22, before market

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FDIC's Bair says bank CEOs will be replaced

Here comes. According to Reuters,

"Federal Deposit Insurance Corp chairman Sheila Bair said some U.S. bank chief executives will be replaced in the next couple of months as regulators assess lenders' financial strength, Bloomberg News said on Friday, citing a television interview to be broadcast this weekend.

""Have they been doing a good job? Are there people who can do a better job," Bair said. Asked about chief executives being replaced, Bair replied, "Yes," according to the report."

"A good job", "a better job", defined by who? By her? By someone else at the administration?

The stock market has been heading heading south in a grinding manner. No cheer, no panic that I can sense. Just quietly selling off for the good 3 hours, and the selling seems to be accelerating into the final hour of trading.

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