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  Mariner Kemper of UMB Financial, a regional bank, discusses “too big to fail” … he says “it’s not the size of the banks it’s their complexity…”  and  ”if banks are too big to fail they shouldn’t exist at all”…  (Bloomberg… running time = 4 minutes) Mr. Kemper epitomizes the type of bankers that we need more of… fewer CDS/CMO/ABS/ABCP/SIV/ARS type bankers… the global economy has blown up from excessive credit, opacity and complexity… I urge the Obama administration to steer our economy back toward a simplified financial system… it’s Mr. Kemper that speaks truth to power… enough Wall Street…  it’s Main Street calling… 

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Simon Johnson  is a professor at the M.I.T. Sloan School of Management and co-founder of the global crisis Web site BaselineScenario.  

~~~~ ”The big lesson is how the government will treat the financial system. Larry Summers has made it plain that the Obama administration will do what it takes to “support financial intermediation,” and sees this as a “critical node” to ensure an economic recovery. A Goldman Sachs report out this week (and the documents of this firm read increasingly like official policy statements) makes the point clearly — big banks will earn their way back to solvency through exercising their greater market power (Lehman and Bear Stearns are gone), government-subsidized debt (courtesy of the Federal Deposit Insurance Corporation), and various forms of implicit subsidy (through “legacy” loan removal programs).

The handling of the stress tests shows the administration prefers to adopt a “wait and see” policy toward banks. If the economy recovers, this will help the banks get back on their feet. If the economy doesn’t recover, more subsidies for banks will soon be in the mail.” ~~~~

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~~~~ May 8 (Bloomberg) — “Treasury Secretary Timothy Geithner is betting that U.S. banks can do something their Japanese counterparts were unable to accomplish in that country’s “lost decade” of the 1990s: earn their way out of trouble.

The stress-test results released yesterday by regulators found that the 19 largest banks face a $74.6 billion capital hole that may be filled mostly by private money. That compares with the hundreds of billions of dollars seen by outside analysts, including the International Monetary Fund, and takes into account banks’ projected earnings over the next two years..”~~~~

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From Institutional Risk Analytics… ~~~~ “We are gratified to see that Treasury Secretary Geithner and Fed Chairman Ben Bernanke take our suggestion of several weeks ago on CNBC not to allow the TARP banks to repay the government debt until they prove the ability to function in the debt markets without reliance upon a government guarantee.

Washington has indeed fixed the solvency problems of the large zombie banks — not with additional capital or stress tests, as many of us seem to think. Rather, the banks have been stabilized by turning them into GSEs via FDIC guarantees on their debt. Those banks which can end their dependence on federal guarantees will be the visible winners in the post stress test market, and valuations and spreads will reflect this divergence between zombies and viable private banks. 

Seen from this perspective, Chrysler, General Motors (NYSE:GM) and the large banks are GSEs rather than private companies,parestatales as they know them in Mexico. To talk about a rally in the equity of large US financials seems truly ridiculous, at least to us, especially true when you look at how the public sector subsidies being applied to the banks have distorted their financial statements. 

Maybe by the end of next year, when we know which banks can or cannot shed the need for government subsidies, then we can talk about investible equity in these GSEs. To that point, turning Bank of America (NYES:BAC), Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) into GSEs was just the first battle, Vol. II of the Lord of the Rings, to use another cinematic metaphor. Next comes dealing with the dysfunction in the non-bank market for securitization and financing, the real battle to save the US economy from a truly dreadful year-end 2009 and beyond. 

By the way, is it not remarkable that the FDIC has run dozens of resolutions and bank sales processes over the past 18 months without a single leak or breach of confidentiality of these sensitive transactions, including both the WaMu and Wachovia transactions? Yet the Fed and Treasury run a confidential stress test process via overt leaks the press!”~~~~

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From Floyd Norris in the New York Times… ~~~~” … The numbers that are most impressive — perhaps shocking should be the word — are the estimates of possible losses from differing categories of assets.

For corporate loans, we are told that State Street could suffer losses of 23 percent of its portfolio through 2010. Fifth Third and Capital One could also face losses of a tenth or more of their corporate loans.

For commercial real estate loans, the worst numbers are 45 percent losses for Morgan Stanley and losses of a third or more for both State Street and GMAC, a company that concluded, disastrously, that a good way to offset possible losses on auto loans was to get into mortgage lending. GMAC is also estimated to be facing substantial further losses in home mortgages.

In credit card loans, the numbers are amazing across the board. The best of these institutions with a credit card portfolio, Sun Trust, could lose 17 percent on those loans. The worst, KeyCorp, could lose 38 percent. GMAC, blessedly, is one of the banks without such a portfolio.

Those are not forecasts of the most likely outcome. The government certainly hopes that its negative prospect will not come to pass. But the figures do provide a commentary on just how out of control easy credit became. That is clearly an indictment of the managements that made the loans, and of the regulators that stood by as lending standards reached historic lows.

The government did not provide percentages for additional losses on securities owned by the banks, but it did give dollar estimates that added to $135 billion, most of that coming from the banks that have large investment banking operations — Bank of America, Citigroup, JPMorgan, Morgan Stanley and Goldman Sachs.” ~~~~