Private hands, public money

The U.S. Treasury Department, Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, and Office of Thrift Supervision issued an unusual joint statement this week assuring the public that the government ''stands firmly behind the banking system during this period of financial strain.''

The nation's top financial overlords also went out of their way to declare forthrightly that the government's ''capital assistance program'' comes with the ''strong presumption'' that ''banks should remain in private hands.''

As Jon Lovitz' famous ''liar'' character used to say on Saturday Night Live: ''Yeah, that's the ticket!''

The government's tepid assurances about the sanctity of the banking system presumably were designed to anesthetize the patient as our federal financial surgeons prepare to perform several life-saving amputations using a multi-trillion-dollar hack saw.

The Treasury Department, which has invested more than $200 billion since September in a spectacularly ineffective effort to prop up Citigroup and AIG, has dropped all pretense of simply ''standing behind'' these two dying, mismanaged behemoths. The government is now sitting on their chests, desperately performing CPR, as share prices for the twin basket cases rapidly head for penny-stock designation.

By the end of this week, it is widely anticipated that Treasury will convert the preferred shares it secured in Citigroup and AIG into common stock, effectively increasing the public's stake in both financial giants to at least 40 percent. Holding this stake below 50 percent will permit the government to avoid using the dreaded word -- nationalization -- while not quite giving it the power to fire the greedmeisters who have been running these fiscal conglomerates into the ground.

Yeah, that's the ticket!

The government also is preparing to conduct a ''stress test'' of the top 20 U.S. banks (each holding $100 billion or more in alleged assets), apparently to determine which of these illustrious institutions merit the AIG/Citi treatment.

According to the government's public explanation, these stress tests will measure how large banks would fare under extremely difficult financial conditions, such as high unemployment and negative growth for a prolonged period of time. The government tastefully did not specify what it means by ''prolonged period of time.'' We know this is strictly a hypothetical scenario, but, just in case, we'll ask the former Japanese finance minister to clarify this for us as soon as he sobers up.

The big banking honchos aren't buying the government's cover story. Acccording to today's Wall Street Journal, the large U.S. banks believe the stress tests are merely a prelude to the creation by the government of new capital requirements for financial institutions. The government denies this.

''Additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis,'' the federal regulators said, in their joint press release. ''Instead, it is available to provide a cushion against larger-than-expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers.''

Somewhere, Jon Lovitz is smiling.

On Thursday, the FDIC will perform a different kind of ''stress test'' on the American public when it releases its updated list of ''problem banks'' that are at risk of failure. FDIC's last tally totaled in the hundreds. Perhaps FDIC could save all of us some eye strain and simply release the much shorter list of banks that have a chance to stay alive in the current economic calamity.

The Obama administration is in the unenviable position of trying to execute a slow-motion nationalization of the banking system while assuring jittery bank shareholders and investors that it has no intention of nationalizing the banking system. And while it is performing this Kabuki break-dance, the government also is trying to figure out how to pay for the nationalization of the banking system.

A graph published in Friday's edition of the The New York Times illustrates the scope of the problem with stunning clarity.

During the past eight years, the core of the financial system was transferred from the traditional banking regime --- in which banks sold and administered mortgages and other loans directly to borrowers -- into an unregulated, shadow banking system in which the assets that backed most lending were bundled into exotic instruments generically called mortgage-backed securities.

The entire banking system became dependant on a robust market for these speculative instruments. The big-name banks were simply fronts -- they set up the loans, collected their fees and skimmed the lucrative froth off the speculative bubble -- but the real money behind the banks came from the shadowy market for mortgage-backed securities.

According to the Times' graph, the market for mortgage-backed securities peaked in 2006 at about $2.2 trillion. When the bottom dropped out last year, it collapsed to about $250 billion. In the frozen wasteland of this year's economy, thus far only about $2 billion in mortgage-backed securities have changed hands.

Which means there's a $2.2-trillion hole in the U.S. banking system where the money used to be.

The joint press release from the nation's financial overlords helpfully points out that ''a strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery.''

Yeah, that's the ticket!

It's raining Benjamins

Thanks to Uncle Sam, a 90-year-old in the hills of West Virginia soon will be able to use a new broadband connection to apply for a new job cleaning up one of the government's decaying nuclear weapons production sites.

This person will be able to use a special one-time $250 cash payment from Social Security to purchase a ticket on a new high-speed rail link, which will magically transport the elderly applicant to his job interview.

Unfortunately, when he arrives at this radioactive job-creation venue, our friend from West Virginia will be informed that the government's new electronic database of all of the nation's health records indicates that he died three years ago.

Think we're making this stuff up? Guess you havenÕt read the fine print in the mammoth $787-billion economic recovery bill signed by President Obama this week.

The spending portion of the package -- not including billions in tax credits and other tax incentives -- totals more than $500 billion. The blizzard of spending is divided into four major categories: infrastructure/transportation, education, health and energy.

Before we detail the goodies, let's get the bad news out of the way: direct aid to the states to help plug their burgeoning state budget deficits was reduced to a minor subcategory totaled a paltry $8.8 billion.

If you think that is a large number, consider this: California currently is grappling with a $42-billion deficit. Perhaps the federal lawmakers assumed that the $44 billion they allocated in aid to local school districts and $86.6 billiion to defray state Medicaid costs will indirectly offset state budget deficits. We'll see.

HereÕs how the stimulus spending was allocated by Congress:

Education:
$44.3 billion -- aid to local school districts

$25.2 billion Ð funding for special education and No Child Left Behind

$15.6 billion Ð increase maximum Pell Grants from $500 to $5,300

$2 billion Ð Head Start

Energy:
$11 billion Ð construction of ''smart'' electricity grid

$5 billion Ð weatherization of existing dwellings

$6.4 billion Ð cleanup of nuclear weapons production sites

$6 billion Ð loans for renewable energy projects

$6.3 billion Ð clean energy/energy efficiency grants to states

$4.5 billion Ð converting federal buildings to energy efficiency

$2 billion Ð development of electric car batteries

Health:
$86.6 billion Ð state Medicaid costs

$24.7 billion Ð subsidize 65% of COBRA medical coverage payments for unemployed.

$10 billion Ð NIH and other health-related research projects

$19 billion Ð create electronic database of all health records

$1 billion Ð prevention/wellness programs

Transportation/infrastructure:
$27.5 billion Ð highway and bridge construction/repair

$8.4 billion Ð mass transit

$8 billion Ð high-speed rail

$1.3 billion Ð AMTRAK

$4.6 billion Ð Army Corps of Engineers projects

$4 billion Ð public housing

$6 billion Ð clean water/drinking water projects

$7.2 billion Ð broadband for rural areas

$4.2 billion Ð upgrade Defense Department facilities

In addition to the above, the Economic Recovery bill provides $40 billion in extended unemployment and food stamp benefits.

Last, but not least, is a $14.2 billion allocation to fund a one-time $250 cash payment to everyone receiving Social Security checks.

Haven't found the one-year supply of coffee and donuts for every American yet, but we're still looking.

Loose change

We knew it was a bad sign when Robert Rubin was standing behind Barack Obama when Obama introduced his team of economic wise men a few days after the presidential election.

Rubin, the champion of deregulation who served as Treasury Secretary under Bill Clinton, spent the past few years as the eminence grise of Citigroup. Under his stewardship, what was once the largest banking conglomerate gorged itself on toxic assets while Rubin collected more than $100 million in personal compensation.

Last month, with Citi still hemorrhaging despite an infusion of $45 billion from U.S. taxpayers, Rubin crawled away from the scene of the carnage. On his way out the door, he petulantly told the New York Post that anyone complaining about his compensation needs to understand that he had better offers elsewhere, but took less to play his role in the destruction of the U.S. banking system.

So it should come as no surprise that Rubin's protŽgŽ, the tax cheat Timothy Geithner, is as clueless as his mentor.

Geithner emerged in the aptly named Cash Room at the Treasury Department yesterday to unveil his long-awaited plan to rescue the banking system.

With the global financial system completely broken, many leading economists assumed that the new Treasury chief would announce a thinly disguised nationalization of the U.S. banking system. They assumed that Geithner would have no choice but to tell us that Uncle Sam would scoop up all the toxic assets and lock them in a federal vault until they regain a smidgeon of value, and that the government would take a majority ownership stake in all the large banks and recapitalize them. This would be very expensive -- say $3 trillion or so -- but it might work.

The conventional wisdom said that shareholders in the defunct banks would be told to shut up and accept a nickel for every dollar in worthless equity they hold. Some of us also fantasized that the boards of directors of the defunct banks would be removed and sent to undisclosed locations, where they would be subjected to enhanced interrogation techniques until they reveal what they did with the $400 billion in federal bucks they received last fall.

Well, this was all wishful thinking. Timmy the tax cheat thinks he has a better idea.

Geithner says he plans to give up to $1 trillion to private investors known to speculate in distressed assets -- in common Wall Street parlance, these characters are referred to as ''vultures''-- and then have them purchase the toxic assets from all the wounded banks.

The new whiz kid at Treasury was short on details, but here's what it sounds like: The vultures will privately negotiate with the banking executives who destroyed the financial system, so that they can all privately set a value on the toxic assets and make sure that everyone participating in this scheme continues to pad their secret bank accounts in the Cayman Islands. When the big deal is ready to be consummated, Uncle Sam will deliver a bunch of suitcases filled with $1-trillion in crispy new Franklins. The swap probably will take place in an abandoned warehouse in Hoboken.

The only thing missing from this brilliant plan is an announcement that Bernie Madoff will serve as a mediator if the bank frauds and the vultures canÕt agree on the vigorish for this mega-transaction.

So it is now obvious that official Washington still has not had the epiphany that has swept across the rest of America Ð that the real problem is not the banks, but the crooked bankers who have been running them and their fellow masters of the universe who run the government outposts that are supposed to regulate the financial system.

The bank frauds continue to thumb their noses at us as they loot the federal treasury. Over the weekend, two of our largest banking welfare cases, Bank of America and Wells Fargo, used taxpayer dollars to purchase full-page ads in American newspapers to lecture the American people about the importance of letting them do what they know best.

The Wells Fargo ad complained that all this fussiness about bad bank behavior had forced it to cancel its annual ÒrecognitionÓ junkets to Las Vegas for its top executives. Wells Fargo wanted all of us to know how important these trips to Vegas are and how stupid we are for making an issue of them.

Memo to President Obama: It might be prudent to rethink your decision to close the infamous facility at Guantanamo.

When the common folk get angry enough to grab their pitchforks and torches and round up all the greedmeisters that have destroyed our economy, they are going to need someplace to put them.

Hall of shame

A few weeks ago, they packed up the famous monuments at old Yankee Stadium, loaded them into a large truck, and moved them to the new Yankee Stadium across the street.

We're not sure why it was necessary to use a truck to carry the monuments a few yards to their new resting place in the outfield of the new $1-billion ballpark. Perhaps the Steinbrenner dynasty was concerned that some evildoers might attempt to steal the crown jewels of the Yankee legacy. Well, they can rest easy, the monuments are safe.

Unfortunately for them -- and the rest of us -- it's two outs in the bottom of the ninth for everything these monuments ever stood for. And not just in the Bronx.

The belated admission from the Yankees' $275-million third baseman that yes, in fact, he partook in the festival of artificial enhancement that has plagued our national pastime for more than a decade is sickening but not shocking. Perhaps it is sickening because it is no longer shocking.

In this winter of our discontent, it seems we have all but exhausted the supply of outrage in America.

Let's face it, it's hard to get worked up about a juiced ballplayer when you have seen an entire economic system collapse in an orgy of uninhibited greed and then watched the perpetrators reward themselves with obscene bonuses financed by the taxpayers who bailed them out.

The damage to baseball's century-old record book can be repaired with a few dollops of whiteout. Fixing the banking system? Well, that will probably take trillions. Timmy Geithner will let us know as soon as he finishes correcting his latest income tax filing.

A-Rod's brainless decision a few years ago to risk a sure place in the pantheon of baseball greats for an extra 10 feet on his home-run swing and a bundle of cash also seems rather trivial compared to the amoral calculations of those who chose to throw out four hundred years of civilized law and torture individuals deemed to be enemy combatants in a borderless war without rules.

Now batting clean-up in the good old U.S.A., shame, shame and more shame.

There's been a lot of talk about character lately, and a few minor adjustments have been made in the national moral compass to try to nudge things in the right direction.

The bank frauds have been told to limit themselves to a measly $500,000 in compensation if they want billions more in federal largesse.

The torturers have been told to stop torturing people while we figure out how to make the really bad guys who were tortured disappear without giving them a trial at which the evidence would be thrown out because they were tortured.

A-Rod has helpfully suggested that anyone fretting about whether he should be admitted to baseball's shrine at Cooperstown should simply subtract the three years he jacked himself up on steroids and consider the rest of his body of work.

Feel better?

A long time ago, when there was only one Yankee Stadium, somebody told us something important about character.

When Lou Gehrig summoned the strength to walk to a microphone at Yankee Stadium on July 4, 1939, he knew he would soon lose his fight for life. He told us not to feel sorry for him.

Gehrig understood that when the final score is tallied, it doesn't really matter whether you've won or lost, or how many runs you've scored, or how much you were paid, or how many cheers you heard along the way.

The only thing any of us takes with them is what we carry inside, and whether we are comfortable with the choices we have made. If, in the end, you have managed to hold on to what is real and true and good, then you can say you are ''the luckiest person on the face of the Earth.''

The Pride of the Yankees knew that character is not something you can pack up in a box and ship to your next venue, like a bag full of bats and balls, or a slab of granite. It is not something you can fix with a lame mea culpa and a promise to do better next time.

You either have it or you don't. And when you toss it away, it is going, going, gone.

Does your dog bite?

Official Washington -- and, no doubt, thousands of victims of Ponzi mastermind Bernie Madoff's $50-billion investment ripoff-- were mesmerized this week as fraud investigator Harry Markopolos told Congress how he spent nine years blowing the whistle on Madoff to the Securities and Exchange Commission.

Despite a mountain of evidence provided by Markopolos to the SEC's Boston Regional Office -- repeatedly, and increasingly in greater detail, during 2000-2008 -- the SEC did not even bother to investigate Madoff.

''Nothing was done,'' Markopolos told the House Special Committee on Finance. ''There was an abject failure by the regulatory agencies we entrust as our watchdogs.''

Among the mind-boggling revelations from Markopolos in his testimony:

-- Working with a team that included financial risk managers of several major hedge funds, an investigative journalist, and a former U.S. Army airborne ranger infantry officer with intelligence-gathering experience, Markopolos (who himself is a Special Forces veteran) determined as early as June 2005 that Madoff's Ponzi scheme was beginning to unravel and that Bernie was intensifying his efforts to lure in new victims to keep the scheme going.

-- Investigative journalist Micheal Ocrant actually infiltrated Madoff's operation for Markopolos' team.

-- SEC lawyers prevented the SEC's trading and portfolio management experts from initiating any investigation of Madoff. ''My experiences with SEC officials lead me to conclude that the SEC securities lawyers if only through their investigative ineptitude and financial illiteracy colluded to maintain large frauds such as the one to which Madoff later confessed,'' Markopolos testified.

-- Madoff marketed a ''split-strike'' stock purchase and conversion strategy to his clients that was deliberately so complicated even market professionals would have trouble keeping track of all the moving parts. ''[Madoff] knew most [of his clients] wouldn't understand it and would be embarrassed to admit their ignorance, so he would have less questions to answer.''

-- Despite the complexity of his offerings, Bernie's stock performance charts were unsophisticated and easily identified as bogus when analyzed by experts. Markopolos says it only took him four hours to prove mathematically that Madoff was a fraud. ''Madoff's math never made sense, his performance charts were clearly deceiving, and his return stream never resembled any known financial instrument or strategy.''

-- Madoff's ''results'' were so outlandish they were ''equivalent to a major league baseball player batting .966 and no one suspecting that this player was cheating.''

-- Madoff played ''hard to get'' and exuded an air of exclusivity (sometimes demanding an initial investment of at least $20 million from new clients) as a lure to unsuspecting rich investors. Several European royal families invested heavily in his Ponzi scheme.

-- Markopolos diagrammed Madoff's Ponzi operation on a whiteboard at a meeting in October 2005 with Mike Garrity, Branch Chief of the SEC's Boston Regional Office. Garrity forwarded the information to the SEC's New York office, which had jurisdiction over Madoff, but the New York SEC office refused to initiate an investigation.

-- Markopolos offered his dossier on Madoff to an investigative reporter at The Wall Street Journal's Washington bureau in 2006, but the newspaper's senior editors apparently did not give the reporter approval to pursue the story.

Markopolos also offered a theory regarding why Bernie turned himself in on December 11, 2008.

The fraud investigator believes that after the financial credit markets completely froze last fall, several major funds that had provided steady streams of investment capital to Madoff asked him to liquefy their assets and redeem them. Madoff's fictional ''strategy'' of investing in highly liquid, blue-chip stocks made him appear to be the most reliable money man to turn to for converting investments into instant cash.

In other words, with the financial system collapsing around them, investment fund managers quickly turned to the most trusted investor they knew -- a man with a golden reputation, a financial genius they had entrusted with untold billions for years.

Surely, this courtly guru who moved so easily through the world's elite portals, this mensch with the Midas touch, could end their fiscal nightmare. All it would take, they thought, was one wave of Bernie's hand and a frozen glacier of assets would instantly transform into a bubbling, life-saving gusher of liquidity.

Then they watched in horror as the man who never was dropped a dime on himself.