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Profits mask coming storm
by W Joseph Stroupe
Asian Times Online
Contrary to surface appearances such as the recent stock market rally and "glowing" first quarter profitability statements from certain Wall Street banks, multipronged risks for renewed, considerable turmoil in the US financial sector are mounting.
The recent six-week rally on Wall Street, led mostly by banking and other financial shares, isn't based on any concrete turnaround in the deeply worrying fundamentals of the financial sector.
Instead, it is based largely on the fact that the new administration has trotted out into public view multiple and very large government programs aimed at cleansing the banks' balance sheets of huge sums of toxic assets, unlocking the persistently seized credit
markets, stemming the swiftly mounting foreclosure rate, creating jobs, and otherwise stimulating an early economic revival.
None of these aims and goals has been accomplished yet, not even in part, but investors were heartened by the raft of government programs that has been announced, and they have responded by bidding up banking and other shares on Wall Street, hoping that the bottom of the crisis in the financial sector has already been reached.
However, that bottom hasn't been reached, and is still nowhere in sight, despite the recent quarterly profit reports by a few of the largest US banks. It should come as no surprise that Wall Street financial institutions that have been in receipt of massive sums of bailout money and have been targeted by varied "liquidity" operations from the government are suddenly able to report a "profit".
Additionally, much of the "profit" reported for the first quarter resulted from one-off events that have little or no chance of seeing a repeat. In these most recent quarterly statements, the accounting and reporting methods have been altered so as to put a better face on their operations and fiscal position. Their already notoriously "fuzzy" math, which permitted banks to arbitrarily designate which assets are included in their profit statements and which ones are not, now also conveniently permits them to arbitrarily decide which losses are "temporary" and can be excluded from the statement altogether. Consequently, "fuzzy" has now gotten even fuzzier. Why? And, why now?
Wall Street financial institutions have suffered a gross loss of investor confidence in this crisis and have seen their share values ravaged as a result. Hence, there is a concerted and vigorous effort underway on their part to bolster that collapsed confidence, with the aim of driving the value of their shares back up.
Remember, these big institutions all participated in one way or another in the grossly deceptive schemes and practices that created and artificially inflated fundamentally risky investment assets, grossly overstated their creditworthiness, and sold them on to unsuspecting investors - the massive swindle that brought us into this crisis in the first place, a crisis that emerged right on Wall Street itself.
Hence, it is nothing for such firms and their accounting and credit rating accomplices to engage once again in spin, deceptively cooking the numbers to make their position look much better than it really is, so as to attract investors and drive up share prices. Sovereign wealth funds around the globe, having suffered huge losses on their investments in US banks, can be described by the adage "once bitten, twice shy". Many have decided to largely divest themselves of their holdings in US financial shares. Why? They no longer trust the banks to disclose their true financial position fully, accurately and honestly. The savvy investor will keep such facts very close in mind.
Now, with the May 4 deadline for releasing the government stress test results bearing down on us, Wall Street institutions have much greater reason and motive for spinning their financial position (propagandizing investors) - none of Wall Street's big banks wants to take a renewed hit as a result of being portrayed by the stress tests as being in a less-than-desirable financial condition.
Therefore, the Wall Street spin machines are operating at full speed, striving to portray the 19 banks involved in the stress tests as profitable, stable, healthy and vibrant. They are doing everything they can to maintain, and bolster, the fundamentally frail investor confidence they have regained in the past six weeks, and they are trying to position themselves to massively capitalize on the release of the stress test results if they can, or at least to minimize their potential ill effects.
The entire idea of the stress tests has come under fire as a bone-headed scheme that was aimed at restoring confidence but will almost certainly accomplish the exact opposite. If the results paint a rosy picture for all 19 banks, then investors will pan the stress tests as having no credibility, and their suspicions and fears that the banks and the government are lying about their true condition will probably skyrocket. If any of the 19 banks get less than flying colors in the stress test results, then those banks will likely see their shares take a renewed pounding as investor confidence collapses again.
There may well be depositor runs on such banks, depleting their capital and bringing on a renewed crisis. If the government and/or the banks themselves do not release meaningful data on May 4, then investors will conclude that the results were too grim, and a new crisis of confidence will result. But if too much information is released, then the same thing could likely be the result because a number of respected experts warn that the US banking system is fundamentally insolvent.
The government and the banks do not want investors at large to see hard data that only bolsters that dismal assessment. The Barack Obama administration has thus painted itself into a potentially very grim corner with the stress tests. Almost no matter what is done on May 4, the risks of a new crisis of confidence in the US financial sector are significantly rising.
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Profits mask coming storm
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Originally Posted by meriwether2
