Geithner to Banks: “Ix-Nay on the Solvency-Inay”

I suppose, if Wells Fargo boasted wildly in its earnings report that it not only made a profit, but passed its stress test with flying colors, and Bank of America and Citi remained silent about the results of their stress tests in their earnings report, then we all might conclude that Bank of America and Citi had fared rather poorly on their tests.

As opposed to all of us concluding that Bank of America and Citi failed their no-fail stress test based on the FDIC want ads and the way Geithner has been wandering around saying "Shhhhhhh!" all week.

Still. Isn’t it bad form for the Treasury Department to order financial institutions to hide data about their financial health on their earnings reports? (h/t Stephen)

The U.S. Treasury Department is asking banks not to mention the regulatory "stress tests" as part of their first-quarter earnings results, according to a source familiar with government discussions.

If I were a BoA or Citi stockholder, I’d be finalizing my suit against Geithner right now to avoid the rush.

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38 replies
  1. JimWhite says:

    It’s starting to look like the shorter list to prepare will be the Wall Streeters who don’t deserve to be in jail, rather than those we should lock up. How on earth can Geithner’s action here be legal?

    • scribe says:

      There was a provision in one of the Bush-era security acts which allowed a president to allow companies cooperating with the government on some secret project or other to keep the money they earned from the contract off their balance sheets. Initially, it was to hide the money from warrantless wiretapping, but it could just as easily go to defense contractors or, for that matter, financial companies.

      After all, when financial chicanery is your number one industry, by definition it’s vital to the national defense….

      • BoxTurtle says:

        Hmm, linky? I wonder exactly what that provision says. I also wonder if this gives the international banks a pass on accurate reporting to the other countries they operate in.

        If I were a European regulator, I would take a dim view of America ordering a corporation in my country to hide material information.

        Boxturtle (Of course, those regulators have the same pressures ours do, they might let this one slide)

        • acquarius74 says:

          Is this what you’re looking for? This 2006 Article by Mike Ruppert at FTW entitled: The Abyss Awaits Excerpt:

          DEVELOPMENT NUMBER ONE – John Negroponte and the SEC

          In Godfather Government, published at FTW just days ago, Carolyn Baker described one of the most significant and ominous developments in the continuing devolution of American government into a pure organized crime operating system.

          Baker wrote:

          … Business Week Online has just reported that George W. Bush on May 5 [2006] signed a memo entitled “Assignment Of Function Relating To Granting Of Authority For Issuance Of Certain Directives: Memorandum For The Director Of National Intelligence.” In the document, Bush assigned intelligence czar, John Negroponte, the task of waiving Securities and Exchange Commission rules, established in 1934, pertaining to accounting disclosures by publicly traded companies. As a result of no longer needing to reveal financial information to shareholders in the name of national security, the cloning of Enron, having been in process for several years, is now complete. Instead of being required to disclose valid accounting ledgers, U.S. corporations have now been given carte blanche to maintain fiduciary legerdemain. I must ask: How can any sane human being persist in believing that a legitimate government exists in the United States?

          Let me describe exactly what this means more succinctly.

          The BusinessWeek article reported the following:

          Now, the White House’s top spymaster can cite national security to exempt businesses from reporting requirements.

          President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the federal register.

          Unbeknownst to almost all of Washington and the financial world, Bush and every other President since Jimmy Carter have had the authority to exempt companies working on certain top-secret defense projects from portions of the 1934 Securities Exchange Act. Administration officials told BusinessWeek that they believe this is the first time a President has ever delegated the authority to someone outside the Oval office. It couldn’t be immediately determined whether any company has received a waiver under this provision…

          The timing of this move is intriguing. On the same day the President signed the memo, Porter Goss resigned as director of the Central Intelligence Agency amid criticism of ineffectiveness and poor morale at the agency. Only six days later, on May 11, USA Today reported that the National Security Agency had obtained millions of calling records of ordinary citizens provided by three major US phone companies. Negroponte oversees both the CIA and the NSA in his role as the administration’s top intelligence official.

          FEW ANSWERS. White House spokeswoman Dana M. Perino said the timing of the May 5 Presidential memo had no significance…

          AUTHORITY GRANTED. William McLucas, the Securities & Exchange commission’s former enforcement chief, suggested that the ability to conceal financial information in the name of national security could lead some companies “to play fast and loose with their numbers.” McLucas, a partner at Wilmer Cutler Pickering Hale and Dorr in Washington added: “It could be that you have a bunch of books and records out there that no one knows about.”

          The memo Bush signed on May 5, which was published seven days later in the Federal Register, had the unrevealing title “Assignment of Function Relating to Granting of Authority for Issuance of Certain Directives: Memorandum for the Director of National Intelligence.” In the document, Bush addressed Negroponte saying: “I hereby assign to you the function of the President under section 13(b)(3)(A) of the Securities Exchange Act of 1934, as amended.”

          A trip to the statute books showed that the amended version of the 1934 act states that “with respect to matters concerning the national security of the United States, “the President or the head of an Executive Branch agency may exempt companies from certain legal obligations.” These obligations include keeping accurate “books, records, and accounts” and maintaining a system of internal accounting controls sufficient “to ensure the propriety of financial transactions and the preparation of financial statements in compliance with “generally accepted accounting principles.”

          FTW made a little trip to the statute books also. This is section 13(b)(3)(A) of the Securities Exchange Act:

          With respect to matters concerning the national security of the United States, no duty or liability under paragraph (2) of this subsection shall be imposed upon any person acting in cooperation with the head of any Federal department or agency responsible for such matters if such act in cooperation with such head of a department or agency was done upon the specific, written directive of the head of such department or agency pursuant to Presidential authority to issue such directives. Each directive issued under this paragraph shall set forth the specific facts and circumstances with respect to which the provisions of this paragraph are to be invoked. Each such directive shall, unless renewed in writing, expire one year after the date of issuance.

          This is Paragraph 2

          Every issuer which has a class of securities registered pursuant to section 12 and every issuer which is required to file reports pursuant to section 15(d) shall–

          A. Make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

          B. Devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that—

          i. transactions are executed in accordance with management’s general or specific authorization;

          ii. transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;

          iii. access to assets is permitted only in accordance with management’s general or specific authorization; and

          iv. the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences; and

          C. notwithstanding any other provision of law, pay the allocable share of such issuer of a reasonable annual accounting support fee or fees, determined in accordance with section 109 of the Sarbanes-Oxley Act of 2002.

          In other words, the Bush administration has not opened the barn door, it has burned down the barn. Delegating the authority to Negroponte provides Bush with plausible deniability and a scapegoat, if needed.

          How Do We Know If It’s Been Used?

          • ShotoJamf says:

            This is very nasty stuff.

            The deeper we go, the more corrupt it gets.

            Maybe we need a bulldozer instead of hearings. Just raze DC and start over again.

          • readerOfTeaLeaves says:

            … one of the most significant and ominous developments in the continuing devolution of American government into a pure organized crime operating system.

            Whoa.
            What. A. Catch.

            2006?!
            Eliot Spitzer’s OpEd on 14 Feb 2008, just before he was ‘outed, wrote about how the Bush administration used a law from the 1860s to preclude the states from bringing investigations and legal action against subprime lending — the Bush admin’s Office of the Comptroller of the Currency (OCC) brought up that 1860s rule in order to prevent states from going after subprime lenders. (Apparently, the OCC brought out that rule in 2004, which was about the time that the FBI was sounding the alarms about mortgage fraud, but all the agents were being put on ‘terrorism’ assignments.)

            And ’securitization’ was all about off-balance sheet accounting, as near as I can figure out. Definitely related to subprime lending.

            Finally, the intro to Kevin Phillips’ “Bad Money” (p. xxv, paperback) has a graph showing that the global derivatives market hit $615 Trillion in 2008. That was more than double its total in 2004.

            I hate to say it, but there’s an occasional commenter around these parts who uses the name ?Didier and who seems to wear a tin foil hat a foot thick. But reading this, it sure makes that commenter — who generally comes across like an alarmist conspiracy theorist — appear somewhat credible.

            It also implies that GWBush was not as stupid as he appeared to be.
            This certainly has the appearance of malice aforethought.

            • klynn says:

              Did you go to the Deep Capture website the other day? I know it is hard to get through, but once you work at it, there is some amazing information.

              • readerOfTeaLeaves says:

                Thx, yes, it is fascinating. And I’ve read some there, but not quite sure what to make of it. Sounds plausible, and what’s most interesting is that alternate versions of its themes seem to spring up weekly.

                Hmmmm… I should put up an Oxdown asking for great econ reads…
                My top two: “Bad Money” by Kevin Phillips and Nomi Prins’ “Other People’s Money”.

            • acquarius74 says:

              ROTL, I wear my collander at all times…just in case they’re right. hee,hee.

              It also implies that GWBush was not as stupid as he appeared to be.
              This certainly has the appearance of malice aforethought

              I don’t think it was Bush’s idea, more like Addington or Yoo or that Viet Dinh who was mastermind of the Patriot Act.

      • pajarito says:

        Obama is continuing his administration’s alarming reliance on secrecy in this matter as well as in the state secrets defense pioneered by BushCo. This is a complete reversal of his campaign rhetoric.

        So, the promise was good for the campaign, but really, we are all too noisy, ignorant, or complacent to actually be told what our his government is up to.

      • readerOfTeaLeaves says:

        You may want to check out the latest “Frontline” documentary called ‘Black Money’. BAE was mentioned, although I’m not imputting any linkages to either bank discussed here.

      • Professor Foland says:

        Apparently it’s in the 1934 Act that created the SEC. From commenter NorkaWest at CalculatedRisk:

        Section 13(b)(3)(A) of the Securities Exchange Act of 1934:

        “With respect to matters concerning the national security of the United States, no duty or liability under paragraph (2) of this subsection shall be imposed upon any person acting in cooperation with the head of any Federal department or agency responsible for such matters if such act in cooperation with such head of a department or agency was done upon the specific, written directive of the head of such department or agency pursuant to Presidential authority to issue such directives. Each directive issued under this paragraph shall set forth the specific facts and circumstances with respect to which the provisions of this paragraph are to be invoked. Each such directive shall, unless renewed in writing, expire one year after the date of issuance.”

        Also provided is a link to the whole act.

  2. BoxTurtle says:

    I guess I’m shocked that it’s even LEGAL to fail to disclose something to material to the balance sheets. I’m sure it’s against FASB, the rules for 401K filing, and it likely violates other financial regulations as well. Is it fraud? Dunno.

    I read the story and it looks like it was a request rather than an order. A request that Citi and BofA will be happy to comply with.

    Boxturtle (I agree with EW, if I’m a stockholder I’m talking to my lawyer)

  3. earlofhuntingdon says:

    Where’s the SEC in all this?

    Even with so much news about financial mismanagement and government bail-outs, people are still buying and selling shares in financial services companies. Failure to disclose material information or disclosing false information would seem a big problem. (Admittedly, the new FASB rule that authorizes managers to unrealistically value their loans is some cover, but it seems a small fig leaf.)

    Thousands of investors may legitimately feel deceived by glowing false reports or material omissions. Will Congress immunize companies from such disclosure wrongs the way it immunized telecoms from liability for aiding and abetting Mr. Bush’s serial felonies? Or will it close the courts to investors by claiming national security or state secrets [sic] are involved?

    • readerOfTeaLeaves says:

      This just up at TPM, from a link claiming that 4 – 6 people (all holdovers from Bu$hCo) are making the TARP decisions: Wow, the page does not like this web link… So I will put it in plain text for anyone to copy/paste into a browser window:
      http://realtime.sunlightprojec…../04/10/who’s-manning-the-tarp-desk/

      Anyone know whether this is, in fact, the case?
      (Excuse me while I just pick my jaw up off the floor… could take awhile after the crash landing….)

    • ShotoJamf says:

      “(Admittedly, the new FASB rule that authorizes managers to unrealistically value their loans is some cover, but it seems a small fig leaf.)”

      SEC should trump any pronouncements made by the FASB. My first thought was, “These are public companies. How can they get away without making these disclosures.” More questions for the congressional hearings that (so far, at least), have not been held.

      We must demand hearings.

  4. selise says:

    Where’s the SEC in all this?

    might be a clue: from the la times

    While the SEC is incompetent, the securities industry’s self-policing organization, the Financial Industry Regulatory Authority, is “very corrupt,” Markopolos charged. That organization was headed until December by Mary Schapiro, President Barack Obama’s new SEC chief.

  5. klynn says:

    Then there is this:

    At year end 2008, Bank of America’s total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank’s was 278 percent; JPMorgan Chase’s, 382 percent; and HSBC America’s, 550 percent, according to the Comptroller of the Currency (OCC). In addition, in the fourth quarter, Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital. Although the banking authorities have not defined how much exposure is considered excessive, Weiss believes that, as a rule, bank exposure to any single risk category should be limited to 25 percent of capital. Goldman Sachs has exceeded that limit by a factor of 42 to 1.

  6. prostratedragon says:

    [Hum, repeating a page to earlofhuntingdon: I left you something at the end of masaccio’s midday post, about what the bond raters did.]

  7. jo6pac says:

    But that’s OK in thier reality. I think I read were GE 150 to 1. If any still owns stock sell it on Monday and put what little you get in can.
    jo6pac
    The race to the bottom continues.

  8. siri says:

    ya know, and GREAT POST btw, Marcy, but my thinking as I was OUT and supporting Obama after he won the primaries, was “He may not have a lot of experience, but he’s SMART, he and speaks properly (BIG whew! after the last 8 years of embarrassment and shame) and he’ll CHOOSE THE RIGHT PEOPLE TO HELP HIM!!!!”

    after being made a total moran [sic] for being so excited about Pelosi in 2006, i wonder if i’ll EVER learn in this big game of “poohlitics”……..

    i seem to me to be the “eternal niaeffe”.

  9. goldstandard says:

    Want the truth about Wells Fargo?

    Take a look at what the analysts are not talking about on TV. The most recent audited financial statement for WF covers up to Dec 31st in the 2008 year end report: https://www.wellsfargo.com/pdf/press/4q08pr.pdf On page 23 of this report, the bank outlines the loan exposure carried on its books, including $18.25 billion in CDO’s and over $51.7 billion in mortgage backed securities. There is also more than $100 billion in commercial real estate exposure, and a whopping $227.35 billion in consumer mortgages and credit card debt. Less than 2.5% has beenm reserved for loan losses to cover these liabilities (otherwise known as ‘assets’ on the balance sheet).

    Now to put all of that into context, economists know that consumer debt levels are currently at all time highs. They also know that bankruptcy levels are rapidly climbing, both at the corporate and consumer level. They know that a record number of home mortgages are underwater, meaning that they are worth less than the value that is still owed. We know that unemployment continues to escalate month after month, ie. The bottom is NOT in. Lets put it all together…

    People who lose their jobs lose their ability to repay loans. This is underlined by the data reported in the Biz section of USA Today on Monday, April 6th, where a record 4.2% of consumer loans are now at least 30 days delinquent and an ADDITIONAL 4% were already in default. These people often turn to credit cards as a source of cash to make ends meet. So the fact that unemployment has risen sharply since the last financial statement was issued by WF would suggest that the situation is in fact worse than it was just 4 months ago. And recall that loss provisions of less than 2.5% have been reserved against loan writeoffs, well below the average for the country of at least 8% in trouble, and probably this number will get worse since job losses continue to accelerate. Yet WF manages to pre-announce earnings of more than $3 billion… How can this be?

  10. bobschacht says:

    Well, since this thread has been revived by promoting it to the FDL Front Page, this might be an appropriate place to mention Rachel Maddow’s segment on the economy featuring the NPR Economy guys, who are going to appear on Meet The Press this weekend.

    One of them mentioned that his favorite graph showed Household Debt as a % of Gross National Product, IIRC. He said that it reached 100% in 2007– and that the only previous time it hit that high: 1929.

    They were talking at the beginning about the segment about Debt, which turned quickly to Household debt as critically.

    So, remember what President Bush told us to do right after 9/11 in 2001?
    Didn’t he suggest that we just “go shopping”?
    And wow, did we ever respond: Six years later, Household Debt hits record levels.
    Ah, another way in which the path to economic ruin was paved by George W. Bush.

    Bob in HI

  11. MarkH says:

    Household debt hadn’t yet driven us over the cliff, though many people were going bankrupt from health care costs. No, what hit us was higher gasoline and food prices and then job losses due to the crisis which kicked in because of the housing boom & bust.

    You can say households weren’t strong enough to withstand the impact of the crisis, but I don’t think you can say household debt started the crisis.

    Of course, household debt and general weakness has been brought on by 30+ years of Republicans utilizing bad economic theory and stupid ideology.

  12. acquarius74 says:

    To all who responded to my comment at #19, sorry to have added to the stinking pile; it was surely big enough already. I had to take care of my taxes – $119.12 in the hole. Being just one of the little people, they’d attach my pathetic bank account.

    I never thought I could laugh about the bail-out, but I’m sitting here
    gasping for breath. Scroll down until you find the Paulson story.

    • acquarius74 says:

      Forgot to give credit to bluebutterfly for the link to the story ridiculing Paulson at my #35.

  13. Synoia says:

    The stress test have really bad results, or they’d be announced. The delay is to fix the results so the results are not bad.

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