top stories from our season are the u.n. arab league envoy to syria calls on the united nations was powerful poly to speak with one voice when it comes to syria moscow upscale finance peace mission to rail . sparing no expense around the exiled from the global banking system leaving oil prices soaring in western nations rushing to open emergency domestic reserves. in the controversial tradition of remembering s.s. veterans as heroes that been nationalist gather for the annual condemned by half of the population and see it as an inspiration for young neo nazis. i'm next in tonight's capital account show from washington d.c.

laura mr takes a look at how whistleblowing become a rising trend amid phony stress tests on wall street. 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 foreclosure filings in february 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 things 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. troll gone

wild here 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 know will talk about it let's get to today's capital account. so it's a 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 of 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 that about not to evey's new article in rolling stone which also came out yesterday about bank of america called to 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 but closure

absolute so you know first broadly because we've heard this report and you know since earlier this week that fifteen of the nineteen banks passed the stress test for failed at least part of it 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 community and states the first comment i would make is that you never meet mix economic prognostications projections 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 econometric 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 it doesn't really have a foot down on the ground in the real world it's you know the stuff of what the f. so i know 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 try 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 let's really get into this and break this 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 park sample acquisitions like j.p. morgan at bear stearns and bank of america with countrywide so at how is this factored in and what would be the toll advocate that's not included a copy of 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 of going to trial and there's a mortgage insurance company called m.b.i.a. they're winning and in fact i think they're going to beat the bank of 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 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 in the bankruptcy and we should sell the auto business and the bank back to g.m. because they need it and then you liquidate reza cap and we're done unfortunately the bottom of ministration does not want to go in your any of this before the election so we are extending and pretending as we have been for something interesting so you think that in africa this is a little bit of an i want to get more into it a realistic view 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 and why would they not 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 is

temporary and slow 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 a 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 to major conduit for the feds monetary policy if you can't really profile these households and help them get a little bit of breathing room in terms of disposable income that we're not going to have 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 they were taken their income away so there's no recovery believe. me it's not as i believe me we know we talk about finance of our passion and favors 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 tests another interesting example is secondly in mortgages 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 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 loss that they come up with in their scenarios fifty billion dollars i could hear code 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 second lien exposures for all that say the top four tops the experience would be more like two hundred fifty billion dollars well i didn't ever get a. why did the point is they don't want to talk about real estate that's a real point to give me ok and then also to i'm curious because there is some news that if it has come out that foreclosures will be again began to tick up and there were already some signs of that and february and but one of the reasons that's given is because there was this deal being worked out between banks and states the twenty five billion dollars mortgage settlement and that kept banks from that in florida with a lot of these foreclosures and now that the deal is made eight ok i want to get your take let me just finish though that the analysis or the report is that because that deal is done now 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 they 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 they don't 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 weren't dragging their feet on foreclosures because of a settlement they like the fact that there was an investigation because a lot of delay here in new york we have a two year backlog for changing title ten at the courthouse where they're selling a house or foreclosure or whatever it is a bank can't do anything until late have the judge say yes it's your property that's what new york state is so the banks were happy with the delay because for every dollar in real estate oh and 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 to delay because it's kind of floating around out there in limbo and nobody owns the house really but the banks don't 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 they would think that they're going to suddenly accelerate foreclosures now because of the settlement that's wrong i think 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 i gather they were talking about that they will not under his watch are going to take back if i got a clear about on the case ok great well i'm mortgage servicing is not something we talked about two years ago in the analyst community if 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 to bring that up you mentioned and act on savers that's something we talk about all the time let me back to that interest rate had on bank. 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 or quarter four or five years ago ten to twenty today so the entire industries cost of funds is only twenty billion dollars so it's remarkable what it's doing though it says yes that side of the banks reprice loans are paid off you know and in due course of the bank it sort of cash back either they're going to lend somebody money at a lower rate remember the painting may three is 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 they could 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 terrible 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 or what we

used to call repo there's none of that well fed 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've got to go to break quickly because we're going to have more with christopher whalen author and senior managing director it can take 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 that's on the federal reserve latest attempt at transparency and try to keep it in the last ten hundred forty characters at that first or closing market every.

well. technology innovation all the developments around. the future are. all right welcome back you think banks are stressed in the wake of the bad press from this goldman sachs bed and the bank of america piece or match that is nothing compared to the real stress that they maybe should out 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 i mean that's a problem for you christopher whalen is talking about all of this with as you senior managing director of tangent capital partners an author of inflated a money in the debt built the american dream and he's been crunching the numbers and he's really breaking down for us that 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 great 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 and it's economy so why is that that 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 just 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 gross 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 housing thereafter so what you see is that there's a lack of real growth the lack of real job creation in the 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 charged with some essentially just print money and create the me and but i think that you know 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 republic if on bank a why should i lend money to paint the overnight whether i have collateral or not if the rate is zero yeah there's just there's no point yet 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 intervention but that way at least we can start to rebuild private credit activity because we don't have any right now right now everybody is facing the fed yeah and you know you said earlier today that you think that the stress tests are basically can validate that that's going to last thirty years really house out. well it really thirty years but the last couple years they allowed the banks to pay dividends very quickly after the crisis and you could understand why investors depend on the dividend income you know almost as much as savers to 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 to take reserves and put them back in 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 the faults you know other types of problems in the economy this year and next in which case the banks are going to put that money back again ok festers are going to be very unhappy in fact if you see the large banks start to indicate that befalls are going up again you're going to see a stampede of the top four six names because everybody assumes that 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 yeah i can agree with you more you know and it took a big point about the stress test my good question for you is you know in two thousand and eight before the financial crisis we saw banks and i slammed past stress test with flying colors we saw fannie. mae bats stress tests and then either

fail or get bailed out by taxpayers if there was another financial crisis is there any reason to believe that that these kind of scenarios would be counted 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 pat but you know when you think about the fact that bank of america is facing one hundred fifty plus billion dollars in viable claims from investors either for fraud. you know basically for some of the buying mortgages back that were defective in some way and there's even talk now for citizen which means the 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 bank 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 pots 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 of 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 then you may see a restructuring early in the second term of barack obama because he doesn't have to run again and again go clean up the mess didn't deal with the problems suddenly auto business that allied back to general motors and finish that piece of work and then you know bake america's forty percent of the u.s. mortgage market if you fix the head then we can start to see some credit growth and

maybe start to turn things around and realize that 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 fraud which has not happened on this anti-christ i know that it already for barack obama's lead and all the good away it's too late on nothing for four years taillight total bummer i'm with you there but that's we're going to leave it there i appreciate the honesty that was christopher whalen author and theoretically at campaign capital partners. all right time now for loose change we're going to break it down with dimitri and shannon on the story that we've 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 is. you know 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 compensation being low on wall street logo are ok relative and also with wall street shedding jobs and are 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 was so close were flocking to blow the whistle because of incentives from regulators as a part of dr frank that basically said that they can get a cut out of any settlements that result from their tips so hey is whistleblowing the next. growth strategy. i think it is and i think you know what i think if there's anything we've learned from wall street it's that they will stop at nothing

to make a profit and if anything we need a far far too far if you want to go for wall street make it profitable for these guys to come forward though i mean there are so many ways that they could float futures for. litigation on wall street with the firms bid up the price and try to get some of the upside they'll hang themselves yes a great idea i think they should do it it should make a profit you know just to be a little bit of a you know throw in 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 if i assume 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 to that effect i'm going to watch that as a good prediction probably a movie if not in hollywood 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 and on a memo to employees after word sounding like they were doing damage control j.p. morgan actually did as well. the real question 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 at this is lloyd blankfein actually talking about why goldman attracts the cream of the crop can we get people who are really interested in. doing something. that they think is good for the for the public if you go to any place room the world is people did you do something more can shoot your money you have to live there which is yes i was there will you cause that. ok i think that those thoughts really show who's the bigger. you cause the crisis so yeah it's our fault jamie dimon but anyway i'm going to

glassdoor dot com blankfein has the better groove rating on wall street as judged by his own words a whopping ninety four percent and you know this really goes to something that i've noticed and to financial crisis the difference in the way that blankfein and jamie dimon have managed their p.r. jamie dimon you see 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 were most pissed off at there were protesters with that they wanted his head on a platter i don't know and really i mean this obviously isn't about him but he's kind of gone to not center stage and jamie dimon is stayed right there so i think in p.r. words look like it's one or more business work but he knows he's basically because i think i'm going to i'm going to step back from the from the right one way. to make money but then we've got

a problem. in the room so he needs the press it's the same problem john gotti have you have a good time magazine you have to be mr or mr so the same problems every time has to be out there and it's going to it's going down 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 at 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 we can bring them up essential jeffrey limits of the federal reserve is now on twitter at i'm sorry i can't cut i need to see i'm asking the federal reserve is now on twitter. word is they'll be able to inflate their tweets to two hundred eighty characters who also wait and see or have had a funny one thanks to the federal reserve arrival the value of all tweets will collapse like ninety eight percent in a few years someone else said the tweet that from twitter from jekyll island at a reserve we love that's it for now thanks for our show don't forget to follow me

on thanks for watching our show don't forget to call me on twitter at lauren lyster give us feedback at youtube dot com slash capital accounting for everyone here thanks so much for watching and have a great night. it .

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