U.S. Regulators Issue Joint Statement. Markets Tank.

As reported here in yesterday's blog, US regulators took the unusual step of issuing a joint statement to ensure the investing public knows they will be stress testing banks. President Obama is looking to clear up the stench around U.S. banks by subjecting them to reviews and trying to revive liquidity in the market for their toxic assets. The Wall Street Journal thinks the joint statement bothered the equity markets. Stress testing will begin tomorrow for 20 of the largest banks to determine which ones will need government capital injections to survive. The potential downside of "opening the kimono" in this way is that bringing banks' problems into the public spotlight is that it could intensify investor concerns rather than quell them. Citigroup continues to be the big bank "guinea pig", as officials struggle with how much more aid they can or should provide the behemoth as the nationalization debate continues to rage and shareholders worry about being completely wiped out. Former FDIC Chairman William Isaac joins the chorus against nationalization in this WSJ Op-Ed piece. Isaac was responsible for nationalizing Continental Illinois Bank in the 1980s, so he knows of which he speaks. The NYT's Eric Dash reports that at least a partial nationalization seems inevitable for Citigroup. A third injection would give the U.S. 40% ownership in Citi and likely the ability to exert more influence over the bank. Across the pond, the UK's experience with RBS which has led to a 68% ownership stake in the Scottish bank is being looked upon as a sort of model. Key management has been replaced and the the government seems to be controlling lending and strategic decisions. A key question being asked in all of this is "what's the exit strategy"?

And now for the links:

• A story on regulating the Shadow Banks in breakingviews. Political momentum for regulating these entities seems to be gaining steam in advance of April's G-20 meetings in London. Thekey question will be, "what is appropriate oversight?"
  
• PIMCO's Bill Gross thinks nationalization would be a huge mistake in his latest Investment Outlook. Gross says that if you think letting Lehman fail was a mistake, just watch what nationalizing Citi and BofA would do...
  
• What exactly is nationalization? The WSJ has a helpful primer.
  
• "Black Swan" author Nassim Nicholas Taleb says that the current banking crisis will be harder to end than the Great Depression. Taleb goes so far as to say that, for him, the real "black swan" event would be for the markets to emerge unscathed and return to normalcy.
• Here's one way to manage risk: Amex is paying potential deadbeats to go away.
• Morgan Stanley is closing its Chicago prime brokerage unit.
• Geithner's "bad bank" plan may need to provide low-cost financing to distressed asset investors.
• NPR's Jim Zaroli walks us through a bank stress test.
• Is there a dangerous bubble brewing in investment grade corporate bonds? At least one analyst thinks so.
• S&P thinks proposed Basel changes will cut risk taking.
  

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.

PIMCO's Gross: Stop the decline in asset prices

At GlobalRiskJobs we always look forward to the first of the month when PIMCO's Bill Gross publishes his monthly Investment Outlook. So, it was a great treat to receive his February piece a few days early. The manager of the World's Biggest Bond Fund (WBBF) says policy makers must stop declines in asset prices in 2009 to revive the economy and curb rising unemployment. While realizing that you can't bailout everybody, Gross points to commercial real estate and the retail sector as two segments that must stabilize before confidence returns. Gross also suggests that TARP's focus on the banks is important but too one-dimesional. He also urges the government to address the so-called "shadow banking system" where deleveraging has continued to weigh on home prices.