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Op-Ed: The Great Bank Swindle


Short-term rally comes at grievous long-term cost.


Editor's Note: James Quinn is a senior director of strategic planning for a major university. James has held high-level financial positions with a retailer, homebuilder and a university in his 22-year career. He can be found online at

McKinsey has concluded that there are still $2 trillion of toxic assets sitting on the books of US banks. The International Monetary Fund has estimated total credit write-downs of $4.1 trillion, with $2.7 trillion in US institutions alone. And Nouriel Roubini estimates the total losses on loans made by US financial firms will reach $1.6 trillion, with an additional $2 trillion in losses on securities.

The US banks and broker dealers are exposed to half of this figure, or $1.8 trillion; the rest is borne by other financial institutions in the US and abroad. What's even worse: That $1.8 billion figure doesn't include commercial real-estate losses, credit-card losses, and losses from the next wave of mortgage resets in 2010.

With $2 trillion of write-offs to go, how could Treasury Secretary Timothy Geithner make the following statement to a Congressional panel last week: "Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators."?

The entire US banking system has only $1.4 trillion of capital. Therefore, the US banking system is effectively insolvent. While there are 8,500 banks in the United States, the top 19 control 45% of all deposits - and these are the banks that are insolvent. Citigroup (C), Bank of America (BAC), Wells Fargo (WFC) and the other "too big to fail" banks are the ones who created the toxic loan instruments that went on to infect the worldwide economic system. The vast majority of the 8,500 banks in the country are in good shape.

Of course we all know that the largest banks all reported better-than-expected profits in the last 2 weeks. Let's examine these tremendous profits:

  • Bank of America reported profits of $4.2 billion. $1.9 billion came from the gain on sale of CCB shares.
  • $2.2 billion came from marking to market adjustments of Merrill Lynch notes.
  • Non-performing assets were $25.7 billion compared to $7.8 billion one year ago, a 329% increase in one year.
Without these convenient accounting adjustments, Bank of America would have lost money. The first-quarter bank profits were merely a public-relations campaign to convince the country that the big banks were in fine shape.

The Financial Stability Plan (or FSP) was supposed to save our banking system. As laid out by the Treasury, the plan is meant to enable:

"Increased Transparency and Disclosure: Increased transparency will facilitate a more effective use of market discipline in financial markets. The Treasury Department will work with bank supervisors and the SEC and accounting standard-setters in their efforts to improve public disclosure by banks. This effort will include measures to improve the disclosure of the exposures on bank balance sheets. In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending.

"Coordinated, Accurate, and Realistic Assessment: All relevant financial regulators -- the Federal Reserve, FDIC, OCC, and OTS -- will work together in a coordinated way to bring more consistent, realistic and forward-looking assessment of exposures on the balance sheet of financial institutions."

It's fascinating that the FSP specifically states that banks ought not be "overly conservative." Which of the top 19 banks in the country have run their businesses in an overly conservative manner in the last 10 years? Has the Federal Reserve -- or the SEC, or the FDIC -- been overly conservative? Have consumers, homebuilders, credit-card companies, and retailers been overly conservative? If there were ever a time to be overly conservative, it's now.

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