"IT'S A FARCE" William Black: banks "lying to the public" in their earnings reports (Bloomberg)

[kpete]

William Black: banks "lying to the public" in their earnings reports
by skymutt
Thu Apr 16, 2009 at 07:09:54 AM PDT

Kudos to Bloomberg for putting veteran bank regulator William K. Black on the air for about a five minute interview this morning. Black is, as most of you probably already know, an outspoken critic of our bank regulation as it is currently being undertaken. Black, of course, pointedly expressed those criticisms in an interview on Bill Moyers' show a couple weeks ago, an event that generated a good deal of controversy here.

I quickly typed up Bloomberg's interview of Black, since I thought it might be of interest here. Here it is in its entirety:

Bloomberg: Since J.P. Morgan has just reported, beating the estimates... what do you make of their earnings report and what it says about J.P. Morgan and the banks more broadly?

Black: We can't really trust any earnings reports we get, since they changed the accounting rules about two weeks ago, so that management now can give values to assets that it thinks they should have... well, of course they think they should have very high values.

Bloomberg: Well, when you look at something like the credit card losses and the default rates-- is this the kind of problem that a bank like J.P. Morgan kind of can take in stride? or not? and more broadly, what does this mean for all the banks? Because everyone faces this now.

Black: Well, their defaults on their credit card portfolio were up very substantially. That's very bad news going forward, not just for them, but for all similarly situated competitors, who are going to be experiencing that. It's going to be a lagged effect, as people lose income and jobs, they're going to start defaulting on credit cards more.

Bloomberg: Well, what about bank reserves then?

Black: Well, bank reserves are grotesquely too small. So, that's where the real games are being played. They're not reserving for the losses. And that's what the accounting rules were just changed to facilitate exactly that kind of lying to the public.

Bloomberg: Ooh! Well, what about the stress test? Isn't that what they're going to test for-- that they're going to have enough reserves relative to the economy?

Black: Well the stress test doesn't test for reserves at all, because it doesn't test for asset quality at all, or for losses at all. It's a farce in truth. I called it a sham in print, and that's what it's going to be. And you see what of course the leaks are that everybody passed the stress test even though there's supposedly a two trillion dollar hole according to Treasury Secretary Geithner. Well how can all the banks collectively pass the stress test if they collectively need two trillion dollars in U.S. taxpayer money?

Bloomberg: But isn't the idea that before we get the results, that the Treasury or someone is going to announce that for the weakest banks, they're going to do pre-emptive capital injections, maybe arrange some pre-emptive mergers?

Black: Well, if they arrange mergers that actually strengthen banks without even bigger bigger banks-- because we've seen that the bigger the bank, the worse the problem-- that would be a good thing. If they're going to put capital in, well that's a violation of the law. We have a law-- the Prompt Corrective Actions law, that says you're not supposed to be doing anything like that. The prior administration violated that law, and the current administration is violating that law. It's a terrible policy and it's not very good to violate the law.

Bloomberg: Terrible policy-- Tim Geithner, the Treasury Secretary-- doesn't he know what he's doing?

Black: Geithner has a record of being a failure at every step of his career. Most recently he was president of the Federal Reserve of New York, which of course is supposed to regulate the largest bank holding companies in the United States. Well you can see how well he did at that-- he didn't take a single effective action against this coming subprime crisis; he didn't even warn about it. When he was asked recently in Congress, he said well, I've never been a regulator. Well, his job description was to be a regulator; I grant you that he never regulated, but that's not the same thing.

Bloomberg: What's the next step here, what's the next big shoe to drop?

Black: Well, commercial loans are already dropping, so I think that commercial real estate is going to be a world of hurt that's going to flow through not just into banks, but into many insurance companies which hold commercial real estate. As you can see, credit cards are already hitting as well.

Bloomberg: Citigroup-- is this a bank that's ever going to be viable? Is it going to be nationalized despite all the protestations of the goverenment?

Black: It is a perfect example of if it's too big to fail, it's too big to run and it's too big to regulate. It desperately needs to be broken up into units. Some of the units might be salvageable, but as a whole, it's simply a disaster.

more at:
http://www.dailykos.com/storyonly/2009/4/16/720721/-William-Black:-banks-lying-to-the-public-in-their-earnings-reports