The Dance of the Seven Veils

I'm back in the U.S. (to live), having traversed too many time zones in too short a period of time. The planes did feel like airborne virus cages, with the phlegmy cough in seat 14C recirculating a few dozen times, and I did appear to contract something but -- keep the CDC off my doorstep -- it appears not to be swine flu but rather a garden-variety head cold. In Tokyo (layover), there was an interesting scene of unknown conclusion: a phalanx of surgical mask-wearing health workers shot past a bunch of us deplaning passengers, followed by a hustling man carrying a videocamera. Where they were headed, and what they were doing, was unclear though ominous. So I'm back in the good ol' U.S. at last, which brings me to this first (short) entry, as I de-jetlag ...

The leakapalooza surrounding the Bank Stress Tests (why not capitalize? It feels like this has been with us for, oh, a few decades by now) has been interesting to observe. It is almost like watching a pilot (I'm in an aviation metaphor mood for obvious reasons) feather down a wide-body aircraft. With all the delays and all the leaks hinting at how the banks fared, all of which has been mulled and chewed over by bloggers and other media chattering heads at some length, you really REALLY get the sense that Geithner and crew don't want any bad surprises here.

Consider: (1) You can't exactly fail the test, as the government has made clear it will give inadequately capitalized institutions a chance to raise funds, or failing that, will supply money itself. (2) The leaks look very much packaged by the White House -- we haven't after all heard anything particularly damning about a given bank, but rather vagueness and broad hints of what's to come: e.g. "10 of 19 of the stress-tested companies need to raise capital." If these leaks hadn't been orchestrated by Team Obama, I'd expect to see more names and hard numbers. (3) The banks themselves are apparently actively negotiating what the final disclosure will say.

#3 is yet more evidence of the topsy-turvy state of what passes for U.S. capitalism, early 21st century. It has become obvious to even a casual observer that the financial institutions run the government and not the other way around. Imagine if you're a code inspector and you visit Tom's Lobster Shack and his electrical wiring is a jury-rigged abomination. You tell Tom, "Hey, I'm going to write this up; it's all wrong," and Tom says, "Wait a minute, let's negotiate this, it's not as bad as it looks -- the reason the dog got electrocuted was because his tail was wet, not because that's a bare wire." How often do you think this happens? Maybe, like, never? But the banks have made it clear in this crisis they don't bow and scrape to nobody, pal. Regulator, shmegulator.

What I'm interested in watching is how the stress test results affect PPIP, Geithner's planned public-private partnership to buy dodgy legacy securities and loans. Once again, I think the program is virtually dead -- I read an interesting NYT piece on the plane about how the big banks are giving Washington the cold shoulder, and several have made clear they are NOT interested in being part of PPIP, in any way, shape or fashion. The program is dead because the big banks want to earn their way out of this crisis, as is becoming clear from the Potemkin first-quarter profits they posted and changes in fair-value accounting that remove the teeth from mark-to-market rules, thus allowing them to postpone declaring losses on impaired assets.

I see Roger Ehrenberg is also a pessimist about the Geithner plan. He thinks PPIP is DOA too. The only saving grace for Geithner's proposal would be if he finds a way to muscle the banks into participating, whether they like it or not. If he was smart, he'd use the stress tests to do that and outfox his recalcitrant opponents. But in this crisis, the government has shown no instincts for cunning, only for rolling over.