Taxpayer Contributes to Record Bank Profits in More Ways Than One

Spring has yet to "spring" here as temps are going to be 40-50 degrees for the foreseeable future. Only a little over 2 weeks until my Caribbean vacation where I can be assured of 80-95 degree weather all week long! Just have to hold on.

Tonight's Post
I usually try to present 2-3 ideas on a given night and go in depth into them. Today there was simply so much information out there I cannot pick out just a couple of areas I would like to cover. This post will have more sections but with more limited commentary as I need some time to wrap my head around all the data. Long weekend of reading ahead!

Hong Kong Going Yuan?
The G20 meeting featured all kinds of talk about getting another reserve currency in use to offset the dollar's dominance. Most observer's laughed it off, and I myself still think something like that is unlikely in the short term.

Seems the city unto itself, Hong Kong, is getting ready to saddle up a bit closer to China and use the Yuan to settle their accounts:

Hong Kong Ready to Start Trade Settlement in Yuan
April 9 (Bloomberg) -- Hong Kong plans to be the first city outside mainland China to start settling trade in yuan, expanding use of the currency in a city whose exchange rate is pegged to the dollar, Chief Executive Donald Tsang said.
“It will reduce foreign-exchange risks for companies, create more business for Hong Kong banks and diversify use of yuan funds,” Tsang said at a press briefing in the city. “The policy has already been approved. It’s almost here.”

An interesting development that bears watching. Later in the article we see a list of countries that have opened swaps with China:

China is seeking to promote the yuan as an international currency after signing 650 billion yuan ($95 billion) in swap agreements with Hong Kong, Argentina, Indonesia, South Korea, Malaysia and Belarus in the past four months.

What was that children's TV show song that went "One of these things is not like the other"? I mean how did Belarus get into this deal?

FDIC Backstop All Part of the Plan
Kevin Depew's "Five Things You Need to Know" is simply a must read any time he has it up on Minyanville. Today's offered some insight into the reasoning behind getting the FDIC involved in making loans for the PPIP program even though that authority is outside the charter of the FDIC. From today's #1 need to know:

And that brings us back to the FDIC. Earlier this week NY Times writer Andrew Sorkin reported that the FDIC is going to be insuring 85% of the debt - funneled through the Treasury - that "private" investors will use to acquire assets via the Public-Private Investment Program, or PPIP.

Although this is way beyond the scope and charter of the FDIC, certainly well above the provision that limits the FDIC to insuring no more than $30 billion, it's okay, we're told, because the FDIC can pretty much do whatever the hell it wants if the Treasury Secretary thinks it is necessary. Which he does.

It this sounds complex, don't worry... It's not. The nut of the thing is this: The FDIC, which was forced in March to raise fees to bolster its $15.7 billion bank insurance fund, and despite an increasing list of at-risk banks with deposits it will likely be be forced to cover, is being used to "guarantee" loans to investors.

Why? That also isn't very complex. The FDIC has effectively been hijacked by Wall Street to protect banks, shoving the FDIC's original mission -- to protect depositors -- a notch or 2 down the financial food chain.

Naturally, the FDIC "projects no losses" on these loans, as Sorkin reported in his original article. Because if they did, they wouldn't be able to make them in the first place.

So what happens if, for some unexpected reason, the loans do show some losses? Good question. And if you think about it for a moment, you can begin to see precisely why the FDIC is being used in this way: Congress won't authorize $1 trillion dollars in loan guarantees to finance the PPIP, because that would be a direct ripoff, and people would get upset. Seats would be lost.

But, if the FDIC guarantees the loans, and makes a mistake, well... We have to save the FDIC - they guarantee all our deposits.

It's a beautiful scheme. Indeed, in the most perverse way imaginable, it's the kind of scheme Americans can be proud of.

No additional commentary is needed. A dirty, nasty backdoor trick to bypass Congress (like getting them to agree would be hard anyway!?) that further undermines confidence.

Somebody is Right, and Somebody is Wrong
Today we were treated to even more "leaks" which told that the banks are doing much better in the stress tests than thought. What a shocker! Hard to square the glowing reviews thus far with this report by an independent research firm:

JPMorgan Chase, Goldman Sachs, Citibank, Wells Fargo and More Than 1,800 Other Institutions Believed to Be at Risk of Failure Based on Fourth Quarter 2008 Data

The report by a Dr. Martin D. Weiss of Weiss Research INC is a stark read of the situation. Both versions of the truth cannot be right, but I think the better sounding one will get more traction.

Taxpayer Contributes to Record Bank Profits in More Ways Than One
Let me start off with a word about the "stress tests" I covered last time. After the news of today I will not spill any more ink (pixels?) on this absurd farce. The whole thing is a joke. I was naive yet again (I know, grow up already) in thinking that these tests may have some real information of value and lead to some needed reform. After today there can be no doubt the entire sham was another avenue to pump banks stocks in readiness of new stock offerings. I offer this as evidence:

No U.S. banks will close due to stress tests: source
WASHINGTON (Reuters) - U.S. officials will not look to close any banks based on the results of "stress tests" being conducted to determine how the largest U.S. banks would fare under more adverse economic conditions, a source familiar with official talks said on Thursday.
"You can't close a bank based on a hypothetical," the source said, speaking anonymously because the tests, being done by the U.S. Treasury, are still being finalized. "And you wouldn't want to anyhow, based on the size of the banks."
However, the tests are likely to show that some banks may have sizable capital needs under the conditions being tested, which is "common sense," the source said. Officials are still discussing how to release the results of the stress tests, and the decision will likely be made by the Treasury, the source said, adding that officials are aiming to release them in some form at the end of April after the bank earnings season is over.

So there you have it. You cannot close a bank is "hypothetically" unemployment reached 9% and the bank is proven insolvent. You would not want to anyway, as the source says, due to their size. Why even bother if all this is old news? I guess now the government will have a fleshed out price tag on how much will finally be needed to prop up the banks. At least for now. Who just said commercial real estate bust? Who yelled out credit card defaults? You could start a panic doing that kind of thing!

In Tuesday's article (Consumers Borrow Less; Credit Crunch or On Purpose?) I was irate that the banks were hiking credit card interest rates while at the same time they were getting the best borrowing rates ever seen on earth from the benevolence of the FED. This act of greed was enabled by the FED and is the end result of getting involved with thieves.

Karl Denninger over at Market Ticker picked up on this right away and puts the mechanism into words far better than I ever seem able to:

Here's the deal guys:
Spreads have widened over the last year on broker (and direct bank) mortgage pricing .vs. Fannie and Freddie bond pricing.

How much?

About 200 basis points worth.

Why is this important?

Because you, the consumer, are getting cornholed in the "pricing" these guys are "offering" you!

That is, the banks are exploiting the dislocation in pricing and the credit markets to screw you and post what Wells now says are record profits.

Are you being told about this? Of course not.

Are regulators stomping on this? Of course not.

Are you being looted to pay for this? Of course you are.

You are seeing near-zero (or actual zero) interest earned on money you loan to the bank (when you make a deposit or buy a CD you are loaning money to the bank) and yet when you go to borrow money you're being screwed with record-high spreads that the bank is pocketing - in mortgage and credit card interest rates charged.
How much does this add up to?

About $4,000 in extra profits per mortgage on top of the "usual" $1,000 profit.

That's right - the banks are making five times the "usual and customary" profit per loan, and it is coming right out of your hide.

I've been hollering about this for months (as has Mish Shedlock) but it appears that both our intrepid lawmakers and the mainstream media simply refuses to talk about it.
When does this stop?
When you, America, are tired of being ripped off and demand that it stop.
Remember, the mantra of both government and The Banks is "never waste a crisis."

Great deal for the banks. I understand there are many people out there that are taking advantage of the new lower mortgage rates to refinance and save some money. I think that is both prudent and correct. I only ask this:

- Why use the banks as intermediaries here? Why can't the FED just loan to people direct? If you thought 5.5% on a 30 year fixed mortgage was great, try on a 1% loan on for size and see how it fits!

No wonder the government officials keep screaming for "more lending, more lending", the massive profit spread the banks can book on this may actually lessen the bailout load! Don't worry, you still get to pay higher taxes forever and pay relatively high loan rates to keep the show on the road. I mean, there is no free lunch right?

Karl was on a tear today, so I offer one more snippet from this post concerning Wells Fargo's earnings "pre-announcement":

So Wells comes out this morning and says they're going to make a "record" profit, claiming an expected 55 cents (.vs. mid 30s expectation)

It must be nice to be able to keep loans on the books at whatever price you feel like, receive billions of taxpayer money including "assistance" in rolling up Wachovia, and then turn out to not need it, right?

That is, if these numbers are accurate.

Wells premarket is ramping from $14.89 at the close yesterday and now trading premarket at $18.10, up over $3 or some 30%.

This leads one inescapably to the following:

Either Wells is lying (obfuscating losses through unrealistic marks, etc) OR
These "bailouts" were no such thing - they were a simple and transparent looting operation by the banks that is now showing up directly in "earnings" (and will shortly show up in the bonuses of executives too!)
So which is it folks?

A good question. Please note that the WFC news today WAS NOT AN EARNINGS STATEMENT no matter what you read in the news. WFC reports real earnings on April 22, 2009.

One last tidbit on the whole bank spread travesty. From this story on Wells Fargo:

Here's a closer look at the drivers behind Wells Fargo's record profit:

-- CHEAP MONEY. Think a 4.8 percent interest rate for a 30-year mortgage is good? Try 0.2 percent -- that's what banks are paying to borrow from each other through the Federal Reserve.

Where it might have cost a bank $4 in interest for every $100 it borrowed a year ago, it now costs less than $1 to borrow the same amount of that money. Banks' borrowing costs have fallen more than consumer borrowing costs have (especially when you consider credit card rates, which are largely rising).
Still, much of the reduced cost of borrowing is being passed on to consumers to help generate new business.

The bucks are being passed alright, from the taxpayers and borrowers (one in the same) right into the banks balance sheets. Thanks for all the help guys, can I at least get a free toaster?

Have a good night, but sleep on your wallet!