As predicted in my brief piece on Friday, the bank stress test is indeed a joke, unless it was formulated to intentionally exacerbate the banking debacle. Even the so called extreme end of the parameters used to judge the banks’ abilities to stand up under pressure were well within the realm of reasonable possibility, so this was a test most of the banks were destined to fail.

The Treasury, still understaffed, is being manned by kids with crayons and coloring books whose homework is clearly above their pay grades.

The first piece of evidence supporting the above arrived this morning when Bank of America and Citigroup were informed that they’d have to raise additional capital and reserves in order to comply with the guidelines set forth, guidelines far less rigorous than would be required to insure a stable financial system.

Geithner, who made the stress test rather unstressful for his pals on the street (Wall, not Main), seems more of a mini-Paulson than a fresh face for change. While I understand that Obama wanted to preserve some continuity in his selection of a Treasury Secretary, he may well have done so at the expense of preserving the old boy network and their “heads I win, tails you lose” mentality.

They’re about to profit handsomely by, in effect, repurchasing the toxic assets they themselves created, which precipitated this money mess, for pennies on the dollar, with their risk backstopped by the government, AKA you and me, the taxpayers. We’re getting robbed, and then paying for the thieves’ defense.

It’s as if there’s a fourth branch of government, unencumbered by the checks and balances that the other three branches have to abide by. Let’s call it the rogue financial branch.

There’s got to be a Jack Bauer CPA type out there somewhere.

                          

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And it affects us all.

Let’s go through this using a rough layman’s analogy:

You bought 50 shares of General Electric stock at $30/share. Your original investment was $1,500.

GE’s stock price has gone down. For the sake of round numbers, let’s say it’s gone down to $20/share.

Your original investment is now worth, on paper, $1000. Your brokerage or 401K statement would say it’s worth $1000. If you had to show your assets to a car dealer or mortgage broker in order to get a loan, your GE stock would have that same current value of $1000. Pretty simple.

The financial institutions bought another kind of asset, not a stock like GE, but bonds, which turned out to be toxic, because they had sub-prime mortgages wrapped inside them like a cockroach in a burrito. Let’s say they bought, for argument’s sake, a million dollars worth of this asset, like you bought $1500 of yours.

To clarify, whether a stock or a bond, the principle of valuing an asset is the same.

Citigroup unloaded some of their sewage at 22 cents on the dollar. Their original million was dumped for $220,000. A loss of 78%.

However, the banks, hedge funds, and other players still holding the bag (in the form of the toxic paper) are currently allowed to value it at the price they originally paid. In the case of the Citi example, had they not thrown out the trash, they’d have their $220,000 worth of bonds valued on their books as being worth the original million they paid for them.

The Emperor’s new money.  The Emperor’s new balance sheet.

This is creating the illusion of solvency for many of these operators.  And this illusion is a large part of what’s holding the markets up.

Even more nauseating is that these are the assets that we, the American taxpayers, are, under the terms of the bailout, supposed to buy at prices closer to the fiction that is marked to market than what they’re actually now worth. This allows the banks to continue to operate rather than take the gut punch they’ve earned, while holding hostage the credit America has always needed to lubricate its financial.

The con men claim that if they’re not allowed to operate as if the bogus numbers were true, they’d shut down, and so would the national economy.

Times would be hard, probably very hard for a while, but maybe all of us, up and down the ladder, need a swift kick in the pants to get our heads out of the sand.

We’ve got what we’ve got, no more, no less.

Work your budget accordingly. Whether you’re a family, a company, or a nation.