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The McKinsey & Company consulting firm may agree in its recent bank profitability forecast. It states "2009 will be unprofitable (and) net investment income "drops dramatically in 2009 as deposit spreads compress (reflecting consumer and commercial), then (begin to recover) going forward. Yet by 2013, McKinsey sees revenues at $142 - 153 billion compared to $156 billion in 2008 with profits beginning to pick up after up after $53 billion in 2009 operating losses. For 2008, McKinsey said banks posted a $1 billion profit, excluding all taken and untaken write-offs. It affirms a very sick industry with no prospect of profits if they're included.Institutional Risk Analytics co-founder and managing director Chris Whalen agrees in his March 13 analysis titled: "Stress Test Zombies - Not Too Big to Fail? Tough Tootsies Little Banks!" He refers to Bernanke and Geithner "cowardly feed(ing) the zombies." It's "not sustainable financially" nor workable politically and must eventually be changed. At some point, "the Obama administration may need to choose between our (banks and) foreign creditors and American voters."
"The Bernanke/Geithner approach to not dealing with the financial crisis amounts to a hideous public subsidy, a transfer of wealth from American taxpayers to the institutional investors who hold the bonds and derivative obligations tied to the zombie banks, AIG and the GSEs." All these companies will need continued cash subsidies in the trillions of dollars to keep them out of bankruptcy.
The fact is that "bailing out toxic waste sites....could cost trillions of dollars....The only issue is whether we recognize it directly, via a public resolution, or hide (it) via public subsidies and future inflation."
The right strategy is to break up or close down zombie banks, keep taxpayers out of it, and let bond and equity holders absorb the cost of "marking (their) assets to market" and ending the charade that they're profitable or heading toward it.
On March 10, the Wall Street Journal's front page reported that repeated Citi bailouts haven't helped so "US officials are examining what fresh steps they might need to take to stabilize the bank if its problems mount, according to people familiar with the matter....(called) 'contingency planning.' " Weekend discussions were held with Citi officials downplaying their seriousness. But given the bank's condition, profitability claims (the next day) are deceptive, so how long can the charade continue.
Further, on March 12 according to Bloomberg.com, there's more. "Four Citigroup Inc. executives who bought the bank's stock last week have already generated a $2.2 million paper profit, regulatory filings show." Insiders included:
-- director Roberto Hernandez bought six million shares on March 2 at an average $1.25 price; after briefly dipping below $1, it closed on March 5 at $1.52 for a paper profit of $1.7 million;
-- Latin America CEO Manuel Medina-Mora bought 1.5 million shares on March 3 at an average $1.24; and
-- other buyers included vice-chairman Lewis Kaden buying 100,000 shares and controller and chief accounting officer John Gerspach 65,000 shares - in each case ahead of Pandit's profitability claim and the day earlier Wall Street Journal front page story saying Citi is in trouble.
Another key point is that the US Securities Exchange Act of 1934 "prohibit(s) the making of false or misleading statements to a public company's auditors." It's also "a crime to knowingly and willfully make a false or fraudulent statement in any matter within the jurisdiction of the executive, legislative, or judicial branch of the US government" (18 U.S.C. 1001, January 2007). Further, it's unlawful to mislead investors or violate any provision of the 1934 act. True or false, Pandit's memo was internal and only covered a two-month period, not the full Q 1 filing for after March 31, so likely no violation occurred.
That aside, there's the issue of stock manipulation and insider trading with the above-cited evidence casting suspicion. It's illegal for anyone to buy or sell securities based on non-public information, and those doing it face prosecution if caught. A high-profile case was against former Qwest CEO Joseph Nacchio - indicted in December 2005 on 42 insider trading counts involving $100 million worth of his company's stock, then convicted on 19 counts in April 2007. He was sentenced to six years in prison and ordered to forfeit $52 million in fraudulently earned profits plus a $19 million fine, $1 million for each count.
The Wages of Reckless Spending
They're painful, costly and, according to Michel Chossudovsky, heading the country for "fiscal collapse" in an analysis that's stunning but unsurprising. A "Second New Deal?" Quite the contrary to:
-- continue the most massive wealth transfer in history;
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