The Regulatori Sect Of The Cult Of Buoyancy
Examining "The Cult of Buoyancy," a dangerous following dedicated to the ceaseless, ignorance-based worship of upward pressure on all equities and other select securities in Western markets, is a new, but significant theme for finem respice. After almost thirty years of infiltration, indoctrination and integration, the Cult's connection to other prominent themes explored on finem respice, and, indeed, all of economics and finance, has spun an intricate and pervasive web with this sharp, dull gray threading woven coarsely into any market relevant enough to examine. These are the kind of jagged threads that might draw blood should you try to pull them bare-handed from the patchwork fabric they presently bind. But this, after a fashion, is less concerning than the realization that markets are not the most daunting institution "in the thrall" of the Cult of Buoyancy. This last distinction almost certainly now belongs to the financial regulatory apparatus of the United States.
As should be somewhat legendary today, on October 13th, Ben Bernanke, Sheila Bair, Henry Paulson, John Duganmet, Timothy Geithner, and Kevin Warsh, flanked by lawyers and staff, sat down with the heads of the largest banks in the country and unceremoniously announced that their institutions would be accepting an aggregate of $125 billion from the government in return for preferred shares that paid a 5% dividend and, further, that they would smile brightly in public about it. Apparently, only Richard Kocacevich, Chairman of Wells Fargo, offered up any real less-than-sycophantic commentary. In response to this bit of uppity (and highly unsportsmanlike) play by Kocacevich, Paulson "promised" that if Wells Fargo went it alone this time and somehow found itself in the position of needing capital later, "...the government wouldn't be so generous the second time around."1 The meeting had begun at 3:00 pm. It was over at 4:00 pm. Every term sheet was signed by 6:00 pm.2 The Treasury proudly touted its bold and unanimously accepted foray into bank ownership immediately:
While many banks have suffered significant losses during this period of market turmoil, many others have plenty of capital to get through this period, but are not positioned to lend as widely as is necessary to support our economy. Our goal is to see a wide array of healthy institutions sell preferred shares to the Treasury, and raise additional private capital, so that they can make more loans to businesses and consumers across the nation. At a time when events naturally make even the most daring investors more risk-averse, the needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.
Nine large financial institutions have already agreed to participate in this program. They have agreed to sell preferred shares to the US government, on the same terms that will be available to a broad array of small and medium-sized banks and thrifts across the nation. These are healthy institutions, and they have taken this step for the good of the U.S. economy. As these healthy institutions increase their capital base, they will be able to increase their funding to U.S. consumers and businesses. (Emphasis added).3
The absurd is made common. We capitalize banks because they are healthy. We partner them with government to highlight their strength. We do this to "restore confidence." We make these statements in the light of day confident either that the glaring contradiction will not be noticed, or that the juxtaposition of these two competing concepts will arouse nothing resembling alarm. That regulators would confidently expect this complacence is unsurprising. They have had three decades of experience telling them it would be so. It is, perhaps, a sign of the times that readers might need to be reminded that regulators almost certainly did not believe this spin. In fact, to the extent regulators feared that the "truth" (that banks were being capitalized because they were near collapse) might out, they pressed a wide swath of institutions in a single category to accept funds to avoid a sort of "negative bailout space" diagram of vulnerable institutions being sketched by the public.
That other untoward goings on like, say, forcing a deal that was popular with the Regulatori Sect at that moment or, maybe, actively withholding arguably material information from the market,4 would have occurred should, likewise, be no surprise.
It cannot, of course, be true both that a subset of the banks participating in the October 13th meeting were so vulnerable that they required cash injection and that the injections were made only to healthy institutions. In this instance, the Treasury is being less than truthful either about the purpose of the injection, or the rationale for the inclusion of a wide swath of institutions at the same time, or both. Any way you slice it, however, the Treasury is lying about something with this release.
Of course, what eventually resulted was more like a running of The Gauntlet for those banks foolish enough to buy Paulson's "We're all in this together" pitch (in other words, all of them) a development that should also serve as an enduring lesson illuminated by those institutions unwise enough to permit themselves to be browbeaten into accepting the government as a partner without first doing the math behind the calendar of executive power transfer. As for the operation of The Gauntlet this time, it would be a running with every member of the Senate, the House of Representatives and those of the Executive Branch in whose heads aspirations to high office would, on occasion, temptingly dance, gleefully wielding rattan canes and striping the backs of the nation's finance executives and their firms.
In the weeks and months thereafter, a series of additional programs are offered in a widespread, shotgun approach to economic patchwork alterations that would dominate the news, but the common theme would always be the disreputable and shameful template into which TARP banks were pressed before the public. Quite a contrast from the message telegraphed at the time (in prose nearly overflowing with the thick cohesion of patriotic solidarity), and despite the fact that it issued forth from the same mouths: "These are healthy institutions, and they have taken this step for the good of the U.S. economy,"5 No, somehow TARP recipients had transformed in this brief interim into shameful entities. Delinquents. Instead of the TARP propping all banks up, all banks are instead degraded by association with the TARP. Branded, as it were, with what has become the scarlet letter of bailout shame.
Looking back, there was a subtler mandate also introduced before this reversal. The Joint Treasury, Federal Reserve, FDIC statement hints at it here:
We are pleased to announce that nine major financial institutions have already agreed to participate in both the capital purchase program and the FDIC guarantee program. We appreciate that these healthy institutions are taking these steps to strengthen their own positions and to enhance the overall performance of the U.S. economy. By participating in these programs, these institutions, along with thousands of others to come, will have enhanced capacity to perform their vital function of lending to U.S. consumers and businesses and promoting economic growth. They have also committed to continued aggressive actions to prevent unnecessary foreclosures and preserve homeownership. (Emphasis added).6
That this prose actually made it into the prose of a Treasury release, albeit a subtle passage, can only be suggestive of the prominence it must have taken in any agreement or discussions in private. Even in the public statement it is clear: Those not willing to accept the largess (and attached strings) of the government are, it would be suggested, financially ill. Those who might have issues with the strings will, therefore, be relegated to the ranks of the implicitly financially infirm. This is a nice stick with which to impose by proxy one's pet foreclosure policy and continue to humidify the "American Dream of Homeownership," lest it dry up and blow away like dust.
The abuse, fueled via select comments by no less than the President of the United States and a number of members of Congress, eventually hits a populist crescendo. Matters reach a point where public officials were so taken with the ease of onanistic press coverage that they increasingly resorted to baser and more sensationalistic tactics to fuel the fire. It can probably be said that the trend peaked with Senator Charles Grassley suggesting, not once but twice, that financial executives should consider suicide.
One of the things you do is, you either go out and commit suicide, or you go before the American public and you take a very deep bow and you say, "It’s all my fault and I’m sorry and I’m going to straighten it out." Or you might resign....7
The first thing that would make me feel a little bit better towards them if they’d follow the Japanese model and come before the American people and take that deep bow and say I’m sorry, and then either do one of two things — resign, or go commit suicide.8
Of course, in the fullness of time, as firms and their leaders grew weary of running The Gauntlet on a daily basis, they sought to return the government's funds. And here, the process-of-elimination argument returns. Permitting institutions able to return funds to actually do so would expose quite clearly those firms actually unable to do so. This can not be permitted.
It will be noticed by even the thickest of observers that the authorities authoring these releases are engaged in what, in the most generous of interpretations, can fairly be called a revisionist treatment of the facts and motivations underlying the realities of the time. Less generous observers could almost certainly be forgiven for labeling them "obfuscating." Or worse.
In this connection, take a mental step or two back and consider the larger import of these events. The Treasury, the FDIC, and the Fed are engaged in, in the most charitable estimation, deceptive marketing practices. This is to be expected from the self-serving press releases and constantly buoying force of earnings feeds flowing from the many appendages of the institutional investor relations organism, but for a regulator, presumably independent and dedicated to the free flow of accurate information to the marketplace, and charged by statute and regulation to this objective as well as the prompt and effective disposition of troubled institutions, this is intensely alarming behavior.
Vague genetic relatives of this obfuscation charge, in the extremely rare instances in which they are made, are generally met with the counter-argument that regulators are fighting a battle to "restore confidence." The obvious followup question, "Should any of these institutions actually enjoy even a semblance of investor confidence?" is never asked.
One wonders if, rather than become merely another part of the Regulatori Sect of the Cult of Buoyancy, the Securities and Exchange Commission might be better served by actually fulfilling its mandate to "protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."9 To do otherwise threatens not just to mutilate any illusion of independence the Commission presently has the good fortune to enjoy, but, further, to relegate it to an even triter cocktail party joke than even Harry Markopolis imagined for it.
If these institutions are not presently able to survive the collision between the realities of their financial condition and the market, perhaps they should not be traded on public exchanges. We do not, after all, permit cardboard hulled oil tankers to navigate sensitive waterways after dusting them with metallic colored paint.
It is a very dangerous trap into which these wayward regulators have fallen, and a very damaging complacency of unquestioning acceptance into which investors have bought.
This will end in tears.
- 1. Damian Paletta, et. al., "At Moment of Truth, U.S. Forced Big Bankers to Blink," The Wall Street Journal (October 15, 2008).
- 2. Ibid.
- 3. Henry M. Paulson, Jr. "Statement on Actions to Protect the U.S. Economy," The United States Treasury (October 14, 2008).
- 4. "Mr. Lewis, testifying under oath before New York's attorney general in February, told prosecutors that he believed Messrs. Paulson and Bernanke were instructing him to keep silent about deepening financial difficulties at Merrill, the struggling brokerage giant. As part of his testimony, a transcript of which was reviewed by The Wall Street Journal, Mr. Lewis said the government wanted him to keep quiet while the two sides negotiated government funding to help BofA absorb Merrill and its huge losses." Liz Rappaport "Lewis Testifies U.S. Urged Silence on Deal," The Wall Street Journal (April 23, 2009).
- 5. Ibid.
- 6. The Press Room, "Joint Statement by Treasury, Federal Reserve and FDIC," The United States Treasury (October 14, 2008).
- 7. Alison Fitzgerald, "Grassley Says Obama Team’s Vetting of Nominees 'Too Rushed'," Bloomberg (February 6, 2009).
- 8. Martin Kady II, "Grassley on AIG execs: Quit or suicide," Politico (March 16, 2009).
- 9. Office of Public Affairs "The Investor's Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation," The United States Securities and Exchange Commission (December 17, 2008). A quote by William O. Douglas, former Chairman of the SEC and Supreme Court Justice adorning the outside of the Chairman's office reading "We have got brokers' advocates; we have got Exchange advocates; we have got investment banker advocates; and WE are the investors' advocate," punctuates the particularly distinct role of the SEC.