The run on the banks

There's an old joke about a woman who walks into a kosher butcher shop and asks the butcher for a chicken.

"I want a fresh chicken," she says.

"All the chickens are fresh, Mrs. Goldberg," the butcher tells her.

"No, I want a very fresh chicken" the woman insists. "Let me see what you have."

So the butcher puts a chicken on the counter and the woman looks carefully at it. She turns it over. She feels the joints. She peers into the cavity. She lifts the wings and sniffs underneath them.

"Mrs. Goldberg," the butcher says wearily, "Could you pass such a test?"

That joke was brought to mind by the Treasury Secretary's plan to subject the nation's largest banks to "a comprehensive stress test."

"A key component of the Capital Assistance Program is a forward looking comprehensive 'stress test' that requires an assessment of whether major financial institutions have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected," the Financial Stability Plan Fact Sheet declares. "All banking institutions with assets in excess of $100 billion will be required to participate in the coordinated supervisory review process and comprehensive stress test."

These guys at Treasury could teach al-Qaeda a few things about terrorism.

If you own stock in a financial institution, the Treasury Secretary can wipe you out with the stroke of a pen. Maybe today, maybe tomorrow, whenever he feels like it.

Any bank can be made to look insolvent with a "forward looking" stress test based on hypothetical events.

Everything depends on the assumptions. Assume that real estate values decline 20 percent over the next two years. Assume that 50 percent of Americans stop paying their credit card bills. Assume that Barack Obama's Kenyan birth certificate turns up and the U.S. Supreme Court declares John McCain President of the United States.

Assumptions are fiction. They're useful for planning, but the Treasury Department isn't using them for planning. They're using them for a back-door nationalization of the banks.

"A financial institution that has undergone a comprehensive 'stress test' will have access to a Treasury provided 'capital buffer' to help absorb losses and serve as a bridge to receiving increased private capital," the fact sheet says.

Obviously, a financial institution that has flunked the Treasury's "stress test" will have no choice but to accept the "capital buffer."

And once the financial institution accepts the "capital buffer," the feds move in like the Yankees at Tara.

The fact sheet says the government will "require recipients of exceptional assistance or capital buffer assistance to show how every dollar of capital they receive is enabling them to preserve or generate new lending compared to what would have been possible without government capital assistance."

For starters, "All recipients of assistance must submit a plan for how they intend to use that capital to preserve and strengthen their lending capacity."

Furthermore, "Firms must detail in monthly reports submitted to the Treasury Department their lending broken out by category, showing how many new loans they provided to businesses and consumers and how many asset-backed and mortgage-backed securities they purchased, accompanied by a description of the lending environment in the communities and markets they serve."

And, "All recipients of capital investments under the new initiatives announced today will be required to commit to participate in mortgage foreclosure mitigation programs."

A cynic might wonder why anybody would continue making mortgage payments if the banks are prohibited from foreclosing on them, but as Treasury Secretary Geithner explained to the Senate Banking Committee, this is no time to worry about details.

It might be a good time to worry that a "stress test" of major financial institutions will panic the country into a run on all the banks.

This is very alarmist language they're using. A "stress test" calls up images of heart attacks, sirens, paramedics, emergency open-heart surgery, sudden death.

Surely there must be some fusty accounting term that would be a better choice. Even "audit" is less scary than "stress test."

It's apparent that lawmakers are hearing a lot of complaints. They seem to think they'll get re-elected if they can just go home, point to a business or homeowner and say, "I forced the evil, selfish banks to forgive old debts and make new loans and now the community is saved, thanks to me."

But they're operating at right angles to reality. Nothing is going to get better in this economy until the government stops terrorizing investors.

Treasury Secretary Geithner's plan describes the "capital buffer" as "a bridge to receiving increased private capital." But what kind of masochist would invest in a bank when the government is pressuring the bank to make loans to bad credit risks, while prohibiting the bank from foreclosing on people who stop making payments on their loans?

Who would want to own stock in a bank when the value of the investment can be instantly wiped out with just a few tweaks to the Treasury Department's entirely arbitrary "stress test?"

Who is going to reassure the public that their bank deposits are safe when headlines in every newspaper report that the Treasury Department is "stress-testing" all the banks to see if they're insolvent, and, by the way, the U.S. government's FDIC program will never have enough money to cover all the deposits in all the banks simultaneously?

Who's going to pay the overtime for police departments across the country when a nationwide run on the banks threatens to turn violent?

Details, details.

We probably would have been better off if the bankers had walked out on Hank Paulson last October and refused to take his lousy TARP money, or his phone calls.

Ronald Reagan could have told them, as he once told somebody else, "When you get in bed with the government, you're going to get more than a good night's sleep."


Copyright 2009

Editor's note: You might be interested in this post from October, 2008: "Hank Paulson's casting call."

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