free. range from three. three. three. three volts to videos for your media project free radio guard teton song. good afternoon now welcome to capital account i'm lauren lyster here in washington d.c. and these are your headlines for march fifteenth two thousand and twelve bad news for underwater homeowners or closure of filings and bear brewery point to a rising tide and home seizures ahead according to those who track it that is why that's when a five billion dollars mortgage settlement between states and the banks may be to blame we'll tell you why and we'll look at what this means and banks may be stressed in the wake of the goldman sachs' greg smith bed there's certainly evidence they're doing damage control some of them should more of us be stressed though about the results and more importantly the methods behind the actual bank

stress tests we'll go in-depth with senior managing director of tangent capital partners christopher whalen and while we're on the greg smith fallout you chose to go on wall street there's no question about that. maybe but with wall street shedding jobs and squeezing out less in compensation is there less to lose could a whistleblowing actually become the next growth industry on wall street with the prospect of multimillion dollar payout from regulators that you never doubt will talk about it let's get to today's capital account. so a day later we are still seeing the fallout from the greg smith off that everyone is

talking about goldman sachs of course was what that was about they saw more than two billion dollars in the market value wiped out yesterday goldman also j.p. morgan reportedly fired off internal memos to employees post new york times piece and according to bloomberg an employee of bank of america's merrill lynch division said his team was told not to send copies of the articles to clients i don't know why that would matter i mean anyone can google but funny i wonder if they were told about mt to evey's new article in rolling stone which also came out yesterday about bank of america called too crooked to fail now failing marks from the press aside most of the big banks escaped them from the federal reserve this week fifteen of the nineteen biggest banks passed the fed stress test but neither the fed nor the banks appear to make the grade with our next guest christopher whalen senior managing director of tension capital partners author of inflated how money and debt built the american dream which you see right there and he's really going to break

down for us what the real deal is behind these stress test so first i really appreciate you being on the show welcome to capital account mr whalen my pleasure absolute so you know first broadly because we've heard this report of you know since earlier this week that fifteen of the nineteen banks passed the stress test for failed is part of this citi group sun trust ally and that life broadly how accurate are these tests and more importantly what do you what would you grade the method behind because i know you've been quite critical. well i own half a bank rating agency called institutional risk analytics and every quarter we run stress tests on every bank in the united states the first comment i would make is that you never meet mix economic prognostications projections of guesswork with financial analysis because the two are quite different when you're stressing a bank you ask if i have a big loss how much capital do i need it's a basic question the result of the input that causes that loss really doesn't

matter and so you know we don't use any metric assumptions in our work because it's quite irrelevant all we need to know is how risky is a business model and how much capital do you need to support it that's that's how you do financial analysis unfortunately the fed is run by economists and these people are always trying to justify their existence and to prove that they're relevant and even though most economics as we all know is speculative it has that it doesn't really have a foot down on the ground in the real world it's a good seed although the stuff of what if so i call you can say is that the fed is trying to justify their past decisions with respect to the big banks letting them pay dividends letting them move loan loss reserves back into income so they could make wall street happy and i just don't find the whole process very credible that's kind of the first point the second point is they're trying to convince us we don't have a problem with real estate in this country you were just talking about foreclosures we still have a very serious problem in the u.s.

and the fed seems to want to ignore it so they don't talk about litigation in the stress test and only one fifth of the losses that they generate in their scenario come from real estate which is crazy more than two thirds of the exposure in the banking system in this country comes from residential and commercial real estate now that's really good and it isn't right that's down at first one of the things you just touched upon is litigation and certainly we've heard about that litigation will be a liability when it comes to for example acquisitions when j.p. morgan at a higher bear stearns and bank of america country so ask how is this back there again and what would be the toll advocate that's not included given to the liability. oh it's an enormous liability and you know we're several years into this litigation so we're already past the motions to dismiss all of these issues have gone to trial now there's a mortgage insurance company called m.b.i.a. they're winning in fact i think they're going to beat america in court and

eventually they're going to be standing in federal court in new york with a double digit billions of dollars judgment i think bank america needs to be restructured in bankruptcy the same goes with ally financial ally looks a lot like bear stearns in terms of the quality of the deals that they bought their risk cap unit is and solve it and i've been saying for a while we should put ally into bankruptcy and we should sell the auto business and the bank back to g.m. because they need it and then you liquidate cap and we're done unfortunately the obama administration does not want to go near any of this before the election so we are extending and pretending as we have been for some time interesting so you think that aspect of this is a little i want to get more into i don't really think you really because you said that the fed wants to ignore real estate and you point out that there's a thirteen trillion dollars balance sheet of the u.s. banking system that real estate is half of and yet the fed managed to keep real estate losses below one hundred fifty billion dollars in a stress scenario how advise would they don't want to look at real estate. well i

think you know the problem we faced in the us for several years is that the fed has kept rates low but about half of the u.s. residential population are not able to refinance even if they've been paying their mortgage on their own time the banks don't want the smaller older high coupon loans to prepay because they make more money on those than they do on loans that are written today if you look at fannie mae for example the bonds that they're selling to investors today are three s. three percent coupon more or less the old paper is five and a half and six percent coupons so the big banks failing may freddie mac. don't want those consumers to prepay and refinance this is a problem because housing is the major conduit for the feds monetary policy if you can't really liquefy these households and help them get a little bit of breathing room in terms of disposable income then we're not going to have a recovery meanwhile but you know by keeping interest rates low the fed is taking

a hundred billion dollars a quarter out of the hands of savers you know think about old people who did the right thing they say on monday and we're taken their income away so there's no recovery the latest radar is heavily but it's not as i believe me we know we talk about that answer a question of savers all the time but to your point about the impact of people not having more money and but it happened in the case where there is not a recovery or the economy goes in the other direction which banks are the most exposed to consumers and that way. well i think another issue that we saw with the stress test another interesting example is secondly in mortgages put a lot of people want to go to second mortgage during the boom especially on the east and west coast where prices moved a lot because they they couldn't do it with just a first mortgage they needed to borrow another ten percent say of the total value of the house the trouble is today many of these markets these houses are underwater on the first lien the first mortgage so the second is

a zero and yet if you look at the stress test the total losses they've come up with the new scenarios fifty billion dollars i could hear worlds fargo fifty billion dollars alone to get their portfolio somewhere close to fair value so you know again the assumptions in the fed's stress test are assumed to be running away from the real estate problem if you had a realistic number in there for a second lien exposure is for all of the top four types of experience and being more like two hundred fifty billion dollars well right everyone ever get with why did differently the point is they don't want to talk about real estate that's the real point the great ok and then also to i'm curious because there is some news that it has come out that foreclosures will be again began to tick up and there are decent signs of that and february and but one of the reasons it's given is because there was this deal being worked out between banks and state the twenty five billion dollar mortgage settlement and that kept banks from moving forward with a lot of these foreclosures and now that the deal is made ok i want to get your

take plenty of the spanish though that the analysis or the report is that because that deal is done banks are able to move forward on this backlog it looks like you don't buy that so maybe you could tell me why and if there is an element of that that it will have an impact i know it doesn't sound good for homeowners but the impact you know on banks. well part of the problem is that they'll take this personally but the media doesn't understand this subject matter they write about these settlements and frankly the settlement we just did is by far and away the smallest in terms of the financial hit to the banks the banks were dragging their feet on foreclosures because of a settlement they like the fact that there was an investigation because it let them delay here in new york we have a two year backlog for changing title that at the courthouse where they're selling a house or a foreclosure whatever it is the bank can't do anything until only have the judge say yes it's your property that's why new york state is so the banks were happy with the delay because for every dollar in real estate on what we call our you know

that they have on their balance sheet there's probably as much in process between default and when the bank actually takes legal possession of the property and they like the delay because it's kind of floating around out there in limbo nobody owns the house really but the banks still have to put it on their balance sheet and show it to investors so at the regulators this is the game they've been playing so all the banks like the way don't think that they're going to suddenly accelerate foreclosures there because of a settlement that's wrong ok so you think that that's an accurate and i thank you for clearing that up are you saying that you think i understand this stuff i actually had some i gather they were talking about that they were not under water and therefore. i got a clear about on the case ok great well i'm a list but look mortgage servicing is not something we talked about two years ago in the analyst community and if you were listening to the coffers call for the big banks they never talked about this yeah ok and continuing on with what you were saying about interest rates and you jibbering that up you mentioned and back on

save or is it something we talk about all the time what impact is there of course that interest rates had on banks. well it's starting to hurt them the fed pushed the cost of funds for the banking industry down from about one hundred twenty billion dollars a quarter for five years ago to on the twenty today so the entire industries cost of funds is only twenty billion dollars that's remarkable and what it's doing though it says yes that side of the banks reprice loans are paid off you know and in due course when the bank gets are cast back either they're going to lend somebody money at a lower rate remember the fame a three s. opposed to the thoughts in the sixes of say two thousand and six two thousand and seven but the other issue is that all of the other assets in the bank the repricing so the margins in the banks are getting compressed they're making less money at all make a prediction that i've been talking about this week goldman sachs morgan stanley all of these big broker dealers they're going to be in turbo trouble next year

because they're not earning anything on their inventory a big part of a profit for a broker dealer is just interest on securities lending the securities what we used to call repo this is not about zero rate environment there is no short term interbank lending so these institutions are dying morgan stanley for example is in terrible trouble they're laying people off they're pushing employees of vendors to try to lighten the load and i think as time goes on the fed is going to be forced to raise rates long before two thousand and fourteen ok interesting prediction i want to talk to you more about this i got to go to break quickly because we're going to have more with kristen program an author and senior managing director at tangent capital partners and still ahead here it's one of the newest additions to twitter already has fourteen thousand followers will give you our three cents on the federal reserve's latest attempt at transparency and try to keep it in the last ten hundred forty characters that that first your closing market every.

if you just put a picture of me when i was like nine years old i like to tell the truth. i confess i am a total get of friends that i loved. her. he was kind of the jester. i'm very proud of the role that al-jazeera has played. look. you know sometimes you see a story and it seems so. you think you understand it and then you glimpse something

else and you hear see some other part of it and realize that everything you thought you knew you don't know i'm sorry welcome to the big picture. see. what drives the world the fear mongering used by politicians who makes decisions to break through it's already been made who can you trust no one who is your own view with it global machinery see where are we heading state controlled capitalism is called satchels when nobody dares to ask we do our t. question more. all right welcome back you think banks are stressed in the wake of the bad press

from this goldman sachs. but bank of america piece or match that is nothing compared to the real stress that they maybe should have over what's not in this stress test and that maybe you should have to because these guys some of them too big to fail which means it's a problem for you christopher whalen is talking about all of this with us the senior managing director of chanting capital partners and author of inflated how money in the debt built the american dream and he's been crunching the numbers in these really breaking down for us what we need to be concerned about that's not in the media reports that are coming out about this so let's go back into this because one of the things we were talking about before the break is you were saying that zero percent interest rates are starting to hurt the big banks and crush the traditional business model so my question to you because we already went over how it's affecting savers which is just the normal folks in this economy so why is the fed keeping them at zero percent at this point. well the fed is populated with keynesian socialist economists who believe and have believed for half a century that they can make up some of the deficiencies in the u.s.

economy whether it's job creation or interest to me and in general by pushing interest rates down and they've done this in a most of step fashion going back to the eighty's when we first saw our growth slowing the fed pushed rates down you got a little bit of relief and then of course we saw a number of booms the tech boom dot com all of that and then housing thereafter so what you see is that there's a lack of real growth a lack of real job creation in u.s. economy and the fed is trying to compensate for this at the same time the federal government is completely out of control they are issuing debt just willy nilly again in that attempt to placate consumers and and stimulate short term growth but at the expense really of the long term stability of the economy so now words zero and you really can't go lower although some economists at the fed think we should just give money away and embrace what you know is chart alyssum essentially just

print money and create to me and but i think that slowly we're going to educate them and make them understand that banks aren't going to lend to viable customers unless they can make money so for example we were talking about the repo market if a bank a why should i lend money to paying p overnight whether i have collateral or not if the rate is zero yeah there's a supposed no point at so i think what we have to do is get the fed to let rates go up a little even though they're probably going to have to continue to support the market in terms of good invention but that way at least we can start to rebuild private credit activity because we don't have any right now right and i know everybody is facing the fed yeah and you know you said earlier today that you think that that's that's that's are basically to validate a bad policy that last thirty years at bradley house out. well it really thirty. as for the last couple years they allowed the banks to pay dividends very quickly after the crisis and you can understand why investors depend on the dividend income

you know almost as much as savers do your typical class of bank shareholders are pretty conservative saver type investors all of the large banks really attract speculative activity the other thing of course is that they allow the base and take reserves and put them back into income so today we have reserve levels in u.s. banks from surfer losses that are around the same level as two thousand and seven i think we could see defaults. or other types of problems in the economy this year or next in which case the base are going to put that money back again ok best rates are going to be very unhappy in fact if you see the large banks start to indicate that the faults are going up again you're going to see a stampede of the top four six names because everybody assumes everything's ok but remember we have zero interest rates so to talk about an economic recovery at this point when the fed has this extraordinary policy in place i think it's a little bit premature couldn't agree with you more you know and it took

a bump big point about the stress test my big question for you is you know in two thousand and eight before the financial crisis we saw banks and i slammed past press test with flying colors we saw fannie mae i.g.a. pass this test and then either fail or get bailed out by taxpayers if there was another thing or a crisis is there any reason to believe that that these kind of scenarios would be found again. well no i think you could have a crisis in the making with bank of america let me give you a scenario i think it's very possible that ally financials could have to file bankruptcy and restructure itself as i was saying before if that happens i think people are going to look at bank of america and realize that the two companies share very similar problems and they may force the issue there as well the administration is trying very hard to avoid that but you know when you think about the fact that bank of america is facing a hundred fifty plus billion dollars in viable claims from investors either for fraud to you know basically forcing the buy mortgages back they were defective in

some way and there's even talk now of rescission which means you investors are going to demand that bank of america buy back all the bonds that countrywide created in these deals over the years that's that's a disaster break america cannot pay that they don't have the cash they couldn't issue stock either so what i'm saying is i think eventually this plot is going to boil over and we're going to have to deal with it might you know the way the u.s. is the pseudo democracy we have the s. and l. crisis in the eighty's it took eight years to get the political stars in alignment so we could deal with that smaller crisis yeah i think the same thing's going to happen here for barack obama wins in november look for a lame duck session of congress to fix a few things you know with various laws and regulations and you may see a restructuring early in the second term of barack obama because he doesn't have to run again and yeah go clean up the mess deal with the problems sully auto business that allied back to general motors and finish that piece of work and then you know

america's forty percent of the u.s. mortgage market if you fix a head then we can start to see some credit growth and maybe start to turn things around and real estate there you go there's your plan and going back to the savings and loan crisis you know hey maybe if it really resembles that with ethan prosecutions for prague which has not happened for us and as i said no matter where edward brought obama's lead i'm all good good away it's too late on nothing for four years till a total bummer. but that's we're going to leave it there i appreciate the honesty that was christopher whalen operate senior management at canton capital partners.

all right time now for loose change going to break it down with dimitri and shannon on the story that we just can't let go it's too good we have more on the goldman sachs greg smith fallout we've heard some say that a former goldman executive will no longer have a place on wall street because he came out with this take a listen. here's. who you close in terms of wall street there's no question about that. but as zero hedge posed in a post today that really caught our eye you know with that compensation being low on wall street lower ok relative and also with wall street shedding jobs and seeing layoffs hey you know whistleblowers maybe have an incentive to come forward there's not so much to lose and with there was another story saying that will supporters were flocking to blow the whistle because of incentives for regulators is a part of dodd frank that basically said that they can get a cut out of any settlements that result from their tips so hey is whistle blowing

the next. growth strategy. i think it is and i think you know i think if there's a thing we've learned from wall street it's that they will stop at nothing to make a profit and if anything we need far far far fewer of us to wall street and make it profitable for these guys to come forward i mean there are so many ways that they can float futures for. almost look at firms bid up the price and try to get some of the upside go hang themselves yes a great idea i think that they should do or the should make a profit you know just to be a little bit of a you know throw a pot of water on our fire that none of these whistleblowers have resulted in payouts yet according to the article that i heard so i mean you're really betting on a crime if you're a very it's a long term investment and it's pretty high risk considering you don't know if this is ever going to go anywhere sam what do you think is a better position to be in a banker or maybe someone who's going to going to take a risk on blowing the whistle i think specifically. probably if they're

from some sort of book or something. i'm going to watch that as a good prediction probably a movie if not in hollywood maybe a made for t.v. one i think you're right there sticking to this let's move on because one on the fallout goldman sachs sent out a memo to employees after word sounding like they were doing damage control j.p. morgan actually did as well. the room question though is who comes out on top when it comes to the court of public opinion lloyd blankfein or jamie diamond first let's take a look and this is lloyd blankfein actually talking about why goldman attracts the cream of the crop if we get people who are really interested in doing something. that they think is good for the for the public to go to any place ruin the world as people did you do still be more can shoot your money if the league was there which says yes i was there

will you cause the crisis. ok well i think that those thoughts really show who's the bigger. you cause the crisis oh yeah it's our fault jamie dimon but anyway according to glassdoor dot com blankfein has the best approval rating on wall street as judged by his own work as a whopping ninety four percent and you know this really gets to something that i've noticed since the financial crisis the difference in the way that blankfein and jamie dimon have managed their p.r. jamie dimon you see it everywhere talking he's on interviews all the time he has no shame about the things that he says whether it's true that media or investors or whatever or behind closed doors that leaks out where lloyd blankfein everyone hated him at the peak of the financial crisis fallout you know he was on the hill every week and he was the person that people most pissed off there were protesters with that they wanted his head on a platter i don't know i really. i mean this obviously is an exception but he's kind of gone to not center stage and jamie dimon is stayed right there so i think in p.r. words it's one of the good from the sort of he knows he's basically he's. going

to i'm going to. do my thing to make money but then gum is the problem he's got a huge ego his ego doesn't fit the room so he needs the press because it's the same problem john gotti how do you have a good time magazine you have to be mr. so the same problems everybody has to be out there and it's going to yeah and really quickly speaking of p.r. the fed is trying their hand at p.r. via twitter maybe we can just throw up a couple of our favorite tweets that the federal reserve because of course this is the best thing about them being on twitter is the fodder it gives everybody to say what he thinks on twitter because right now not essentially said the federal reserve is now on twitter at i'm sorry i can't read his kind i need to see it must mean the federal reserve is now a twitter out. word is they'll be able to inflate their tweets to two hundred eighty characters who also weighed in zero had a funny one thanks to the federal reserve arrival the value of all tweets look lags by ninety eight percent in

a few years someone else said the tweet that from the twitter of jackal island at a reserve we love that that for now thanks for our show don't forget to follow me on thanks for watching our show don't forget to follow me on twitter at lauren lyster give us feedback at youtube dot com slash capital accounted for everyone here thanks so much for watching and have a great night. down the official g.o.p. convention joined from the one called touch from the only choose dumpster. lights on the. radio. cheesemonger.

russian streets now in the palm of your. question on the call to you george.