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Let me reiterate that I have zero belief in "market efficiency" - we can see that over the past 18 months as we switch from panic to euphoria back to panic back to euphoria. Markets at all time highs in Fall 2007 clearly forecasted what was to come "in 4-6 months". In the near term, stock movements have a lot more to do with psychology and herd behavior than any fundamentals. 2.5 months ago I was posting "happy" videos because the mood was so dour, and I felt like I was piling on with my "fact" based entries.... Now? If I post anything negative I feel like the snitchy neighbor trying to call the cops on the raging keg party. What kind of sour puss would do that.

I did watch in awe Friday as Wells Fargo (WFC) priced nearly $9B shares at $22, opened at $24 and closed at $28. It is clear people want in, at any price. The government has laid out the gauntlet that we will be Japan - no matter what is inside these major banks they will live, and be subsidized. While I talk about the rising yields on long term bonds potentially causing harm to the house ATM rebirth plan, it will only increase the magnificent profits banks can make on current loans.

The fact Bernanke is "ok" with this when his original intent was to drive rates down as low as possible so people could refinance everything in sight, makes me wonder if what they see inside the banks is so poor that they think the better battle plan is to make this yield curve as wide as possible so the banks can "earn" their way out of their losses. The same plan as Japan two decades ago. I don't know ... despite intellectually knowing the (not so) Invisible Hand is everywhere, it is hard to throw away year upon year of experience using sign posts and adjusting to the new normal. So I guess, going forward, all these non-market comments will just be intellectual exercise with very little grounding in terms of "market" based decisions.

As people with integrity have given up - such as Charles Bowsher who resigned when he could not sign off on the "new normal" [Apr 6: William Black on Charlie Rose, Charles Bowsher Resigns] - and others who were there in our last financial disaster, when much harder lines were drawn on the banking system (pre financial oligarch era) - I guess we can only sit and listen to their words and ... well, just listen. Nothing will come of it.

William Black was on Yahoo's Tech Ticker with a series of videos... one of them had to do with PPIP; it is funny ... that seems like something proposed 18 programs ago, and with the government rubber stamping "all is fine" with just another $75 billion needed, the PPIP seems like a prop from another era. Just imagine, $75 billion to fix the entire banking system - that's just two AIG bailouts. Easy as that.... the crisis is over. (I'd also like to ask in what other country on Earth do financial institutions get to "negotiate" with their regulator over the results ... some of these things would not even make it into a fiction book as they would be deemed absurd. But this is our reality - truth stranger than fiction)

As a reminder William Black was the senior regulator who was cracking down on the S&Ls during the crisis of the late 80s / early 90s.... aka someone not to be listened to inside the halls of power, as we rely on the architects of deregulation such as Larry Summers & captive to the bank folk such as Timmy G - he who oversaw all the NYC powerhouse banks as their main regulator at the NY Fed.

Again, this is only for humoring yourself if you are intellectually curious. Do not let it cloud your decisions regarding purchasing stocks ...

The Big Lie: Stress Test Optimism Just Wall Street Propoganda, Former Bank Regulator Says

Results of the stress test brought a collective sigh of relief from Washington D.C. to Wall Street Friday, and stocks were rallying again on a growing sense the financial crisis has past.

Don't you believe it, says William Black, an Associate Professor of Economics and Law at the University of Missouri - Kansas City.

"It's in the interest of the financial community to send this propaganda out," Black says. "It's remarkable not that they do it but that it still works."

In other words, this isn't the first time we've been told "the crisis is over" and that "banks are well capitalized" - and probably won't be the last.

The professor and former financial regulator foresees another wave of foreclosures and future bank losses of more than $2.5 trillion vs. the government's $599 billion estimate.

Simply put, the stress tests weren't strong enough to be considered "wimpy," Black says. Furthermore, Fannie Mae, Freddie Mac, AIG and IndyMac were deemed to have "passed" much more stringent government stress tests before their respective failures, he notes, recalling the grim history:

  • Fannie and Freddie: In July 2008, Treasury Secretary Paulson testified that Fannie and Freddie were "adequately capitalized" under the test. In August 2008: "even in [Freddie's] most severe stress tests, [show] losses ... less than $5 billion." Actual losses: 20 to 40 times greater.
  • AIG: "It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those [CDS] transactions." AIG claimed in 2008 "Using a severe stress test ... losses could go as high as $900 million."
 Actual losses: 200 times greater.


  • IndyMac: Sold over $200 billion of "liar's loans." Actual losses: 160 times greater than its tests.
  • Rating Agencies: Their stress tests gave AAA ratings to toxic waste. Actual losses: more than an order of magnitude greater.


"The examinations and stress tests are shams -- always precise, always farblondget," Black claims.

So while others are celebrating the end of the crisis, ask yourself this: If the government sees up to $599 billion in additional bank losses, why are they requiring banks "only" raise $75 billion? That suggests the government thinks the banking sector is overcapitalized by $525 billion.

"Once people learn they're being lied to, they react very badly," Black says. "And of course this is not the first lie."

Maybe you really can fool some of the people all of the time.

Beware Crisis' Next Wave: Option ARM Foreclosures, More Debt Defaults

Along with the reaction to the stress tests, the upbeat response to Friday's jobs report is evidence of our collective "disaster fatigue," says

William Black, an Associate Professor of Economics and Law at the University of Missouri - Kansas City. "Every day is bringing a disaster. [539,000] jobs lost is a catastrophe but now we think ‘that's not so bad.'"

An optimist would say Black is missing the improving trend in the labor market: Although the unemployment rate rose to 8.9%, its highest level since 1983, April's 539,000 job loss was the smallest since October and compares favorably to March's decline of 699,000, February's 681,000 (both revised) and January's 741,000.

But Black's point is the improvements are, if not illusory, then certainly transitory. He foresees bad loan "shoes yet to drop" that will be like "Imelda Marcos' closet in an earthquake":

  • Commercial Real Estate: This is already on Wall Street's radar screen but future losses could account for a big chunk of the government's stress test estimate of $599 billion of future bank losses.
  • Option ARMs: These "pick-a-payment" mortgages will lead to "waves of foreclosures" starting next year in the "hundreds of billions of dollars," he predicts.
  • Credit Card Debt: With unemployment rising and home equity loans unavailable to most Americans, this is a "major problem that's going to take down major lenders," he says.

The Greatest Boondoggle in History; Banks Buoyed at Taxpayers' Expense

Bank stocks soared Friday, including Wells Fargo (WFC) and Morgan Stanley (MS), which sold shares a discounts of more than 10% below Thursday's close.

The ability of banks to raise capital is certainly positive but the idea of shares rallying amid the capital raising and dilution is "counterintuitive," Bank of America CEO Ken Lewis said on CNBC this morning.

BofA (BAC) shares were also rallying even as the government said it needs to raise an industry-leading $33.9 billion. Citigroup (C) stock was also a big winner after the government's curious declaration that it "only" needs to raise $5 billion.

While much of the focus is on the stress tests and banks' efforts to raise cash, the real story is Geithner's Public-Private Investment Program (PPIP), says William Black, an Associate Professor of Economics and Law at the University of Missouri - Kansas City.

The PPIP is the "greatest boondoggle in the history of the world," says Black, a former bank regulator who was counsel to the Federal Home Loan Bank Board during the S&L crisis. As occurred during the S&L era, Black says the PPIP will allow banks to exchange "trash for cash" and turn "real losses into faulty gains."

If the goal of Tim Geithner and other regulators was "to rip off the American taxpayer for the benefit of the least-deserving wealthiest people you can imagine, well - mission accomplished," Black says.

Source: William Black on the Greatest Bank Boondoggle in History