The Season of Endless Losses

Doesn't it seem like the bank losses just keep coming out of nowhere? In the past, didn't banks just swallow hard, take the equity beating and move on? What's going on here? Well, it's different this time and the so-called Shadow Banking System is why. PIMCO's Bill Gross wrote about it way back in December 2007 in his monthly Investment Outlook, when he wrote that we were witnessing nothing less than a breakdown of a modern banking system that had become exceedingly complex. The piece was an interesting read back then, it is a stunning read now. Flash forward to the current day, where Forbes has a commentary written by NYU-Stern Professors Viral V. Acharya and Philipp Schnabel warning us to expect the shadow banking losses to keep coming. They cite the recent RBS ($41B) and State Street ($10B) losses as examples of losses that seem to come from out of the blue but are largely the product of off-balance sheet vehicles which were set up to arbitrage regulation. The commentary is adapted from a soon to be published book called Restoring Financial Stability: How to Repair a Failed System....A quick tour around the news outlets:

• Today's Wall Street Journal contains several good Op-Ed pieces as the stimulus debate continues. Former Vice Chairman of the Federal reserve Board Alan S. Blinder presents his economic wish list, former U.S. House Majority Leader Dick Armey thinks Washington could use less Keynes and more Hayek, and the inimitable George Soros thinks we can do better than a "Bad Bank".
• Early Madoff critic Harry Markopolos testifies at a Congressional hearing today. His written testimony has been released here. It's more blistering criticism of substandard performance by regulatory and enforcement bodies.
• Continuing yesterday's thread on "Bonus Outrage", early details today of a $500,000 cap on executive pay at TARP banks proposed by the Obama Administration. Also, check out Thomas Frank's WSJ opinion piece about the Wall Street bonus system.