Why The Banks Must Fail, by gimleteye

If our economic crisis were a baseball contest, we are two or three innings into the game with a long way to go. We will never see anything, again, like this in our lifetimes.

I hope the game resolves to the side of fiscal accountability, without destroying most of the wealth of the United States. We are living through the greatest gamble in US economic history: that homes and real estate can substitute for asset creation based on diversified sectors of manufacturing and technology.

I am dead-set against bailing out corrupt finance-- from lenders, to insurers, to builders and the whole web of county commissioner majorities, state and federal legislatures that became rich and powerful and now struggles to survive under the weight of toxic debt measured in the trillions.

Here's the problem: once you start bailing out banks, insurance companies, and--yes-- homeowners who either gambled badly or invested unwisely or used their homes as piggy banks or were otherwise sucked into the frenzy, once you start saving Fannie Mae and Freddie Mac, you cannot stop. The better point is: where would you stop?

Do you just bail out your friends at Countrywide, or US Century, or the lobbyists turned rock miners? Or do you also bailout every homeowner sold a toxic ARM, whether the loan docs were fraudulent or not?

Breaking contracts, which is the essential feature of a bailout, and putting the US taxpayer in the place of shouldering the consequences will crush the US dollar; a value that is only worth what an investor-- in this case, foreign investors-- are willing to pay for it. It has not been good news, so far.

What we are in the midst of, is not just an oil shock-although gasoline and energy prices are certainly the most immediate and visible impact to ordinary Americans. What we are in the midst of, is not just a global competition for commodities-although our own splendid patterns of consumption have put bedrock industries, like Detroit and GM, on the threshold of Chapter 11.

We are in the midst of an economic crisis we have not seen the likes of, since the Great Depression: brought on by Wall Street, land speculators, production home builders, their spin masters and shills and the whole supply chain including Congress and the White House that abandoned fiscal conservatism and sound management of the economy.

They are fighting like mad to keep up appearances.

A year ago, I spent an afternoon on the Miami Dade court house steps, watching foreclosure proceedings in which loan originators and owners-- mostly large financial institutions like Deutche Bank-- bought back titles for a song. It was a scenario playing out across the nation. Only very few people were paying attention how it was playing.

Even then, it was only a question of time when federal regulators would require the banks to mark those assets to market: in other words, at a value a buyer could be found. Apparently, it is starting to happen now.

So here we have the problem with the US economy: it is like a swimming pool filter clogged with gunk and debris. The only way to get clean water flowing again is to flush out the system, according to the law of contracts and of supply and demand. There is no way around it.

In the post below by Geniusofdespair, what jumped out was one lender, Indymac.

In a recent letter posted on its website, Indymac writes:

"In light of the current environment and related deterioration of our financial position since last quarter, we have been working closely with our federal banking regulators with respect to the actions that they and we must take to meet our mutual goal of keeping Indymac safe and sound through this crisis period. In that respect, based on information we have provided to our regulators, they have advised us that we are no longer “well capitalized”, which we stated on May 12 was a possible scenario. Our regulators have also asked us to submit to them a new business plan for their review and approval, something on which we have been working with them for some time. We have agreed on the basic elements of the plan, and the regulators have directed us to begin executing on it. An important element of our plan is to improve our capital ratios. Without an external capital raise, the traditional way to improve safety and soundness is to sell assets and shrink the balance sheet, which in normal times generally has the effect of improving capital ratios and bolstering liquidity. Yet in this environment, where either there are no bids for most of IMB’s mortgage loans and securities or the bid/ask spreads are abnormally wide, “fire-selling” assets would actually deplete capital further. As a result, the most realistic and cost-effective way to shrink both our balance sheet and our servicing rights asset (which, as discussed in previous communications, is up against the regulatory cap limit), is to curtail most new loan production.

In addition to needing to shrink our assets to improve our capital ratios, we also need to do so to ensure that we maintain prudent operating liquidity. A consequence of falling below well-capitalized is that we are no longer permitted to accept new brokered deposits or renew or roll over existing ones, unless we get a waiver from the FDIC. While we have submitted a waiver application, it is uncertain as to whether such a waiver will be granted."

"No longer well capitalized" is the phrase that precedes the instruction by regulators to lay the bank's head on the chopping block. "A waiver" means a plea to not to carry through with the execution.

But I don't see a way out for Indymac or the rest. I don't see a way to get the water running clear again until taxpayers and investors are confident that the principles of fiduciary responsibility and accountabiity have been restored both to the private sector and to government.

On this last note, American voters are due a clear reckoning by the candidates to be president of the economic crisis. From their point of view, of Obama and McCain, their problem is parsing how much truth the American voter can stand. So far, not so good.

This is the problem with lies and deception: it is not so easy to stop especially when the economy is in the midst of a trillion dollar meltdown.