Hugo Chavez calls this Nationalism and timid Obama says he’s against Nationalization of Banks, or did he just imply that by saying he wouldn’t?

This is complete insanity, bottom line the taxpayer is left holding the bag.

Bank Profits Appear Out of Thin Air

By ANDREW ROSS SORKIN Published: April 20, 2009

This is starting to feel like amateur hour for aspiring magicians.

Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be – presto! – better-than-expected numbers.

But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.

With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.

Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”

Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch‘s assets it acquired last quarter to prices that were higher than Merrill kept them.

“Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.

Investors reacted by throwing tomatoes. Bank of America’s stock plunged 24 percent, as did other bank stocks. They’ve had enough.

Why can’t anybody read the room here? After all the financial wizardry that got the country – actually, the world – into trouble, why don’t these bankers give their audience what it seems to crave? Perhaps a bit of simple math that could fit on the back of an envelope, with no asterisks and no fine print, might win cheers instead of jeers from the market.

What’s particularly puzzling is why the banks don’t just try to make some money the old-fashioned way. After all, earning it, if you could call it that, has never been easier with a business model sponsored by the federal government. That’s the one in which Uncle Sam and we taxpayers are offering the banks dirt-cheap money, which they can turn around and lend at much higher rates.

“If the federal government let me borrow money at zero percent interest, and then lend it out at 4 to 12 percent interest, even I could make a profit,” said Professor Finkelstein of the Tuck School. “And if a college professor can make money in banking in 2009, what should we expect from the highly paid C.E.O.’s that populate corner offices?”

But maybe now the banks are simply following the lead of Washington, which keeps trotting out the latest idea for shoring up the financial system.

The latest big idea is the so-called stress test that is being applied to the banks, with results expected at the end of this month.

This is playing to a tough crowd that long ago decided to stop suspending disbelief. If the stress test is done honestly, it is impossible to believe that some banks won’t fail. If no bank fails, then what’s the value of the stress test? To tell us everything is fine, when people know it’s not?

“I can’t think of a single, positive thing to say about the stress test concept – the process by which it will be carried out, or outcome it will produce, no matter what the outcome is,” Thomas K. Brown, an analyst at Bankstocks.com, wrote. “Nothing good can come of this and, under certain, non-far-fetched scenarios, it might end up making the banking system’s problems worse.”

The results of the stress test could lead to calls for capital for some of the banks. Citi is mentioned most often as a candidate for more help, but there could be others.

The expectation, before Monday at least, was that the government would pump new money into the banks that needed it most.

But that was before the government reached into its bag of tricks again. Now Treasury, instead of putting up new money, is considering swapping its preferred shares in these banks for common shares.

The benefit to the bank is that it will have more capital to meet its ratio requirements, and therefore won’t have to pay a 5 percent dividend to the government. In the case of Citi, that would save the bank hundreds of millions of dollars a year.

And – ta da! – it will miraculously stretch taxpayer dollars without spending a penny more.

The latest news on mergers and acquisitions can be found at nytimes.com/dealbook.

This article has been revised to reflect the following correction:

Correction: April 21, 2009
The DealBook column in Business Day on Tuesday misidentified a professor who was critical of bank accounting. He is Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth, not Steven Roth.

As the major commercial and investment banks and Hedge funds that participated with them were the beneficiaries of cash that fueled the twin housing and equity market bubbles that just popped last year.  There is a big mess to clean up.

The profits of these behemoth institutions grew on unbelievable volumes of transactions founded on a small base of actual physical assets, that were packaged sold, securitized and resold and banks and hedge funds took their transactions fees repeatedly reaping ever-larger profits, the balloon grew and grew.

The  CEO’s of these “too big to fail” companies were making mega-buck bonuses but what these oligarchs were able to accomplish through their lobbyists in concert with a majority of nonchalant congressmen was to dismantle years of policies put in place to protect America and by their repeal would unleash the Great Depression of 2009 upon America and the world.

Almost unnoticeable deregulation occurred over ten years to help fuel and turbo charger this financial disaster.  The fault lies with Capitol Hill for its quest to remain in power and the financial industries greed that requested and obtained the repeal of those regulations. There are several regulatory changes of note: the Insistence on free movement of capitol across borders; repeal of Depression-era regulations separating commercial and investment banking; major increases in the amount of leverage allowed to investment banks; no Securities and Exchange Commission’s enforcement; an international agreement to allow banks to measure their own riskiness; an intentional failure to consider a review of regulations so as to keep up with the tremendous pace of financial innovation.

The interrelationship between the financial institutions and government is alarming as one cannot survive without the other yet the political balance of power to get the economy headed toward recovery requires letting the free markets work.  Big banks are now in control of trillions of taxpayer dollars, and government can tell them to lend but government cannot make them lend.  Banks will not lend until they see some sign of recovery and that is choking off any sign of economic stimulus to the economy.  Coupled with that are the large losses banks have taken on their securities and loan portfolios, and the government does not want to publicly expose the degree insolvency.

April 19,Bloomberg reports, “the U.S. Treasury and financial regulators are clashing with each other over how to disclose results from the stress tests of 19 U.S. banks, with some officials concerned at potential damage to weaker institutions.  The 19 firms include Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., Goldman Sachs Group Inc., GMAC LLC and MetLife Inc. and other commercial, trust and regional banks. The Federal Reserve, OCC, Federal Deposit Insurance Corp. and Office of Thrift Supervision are using the tests to determine whether the 19 have enough capital to cover losses over the next two years should the economic downturn worsen.”

The Bloomberg report goes on to indicate that the economy has worsened since the Treasury announced the stress test in February, as unemployment has worsened and is projected to rise beyond the 7.6% used in the stress analysis.  As some banks have recently shown first quarter profits, the Treasury is concerned that when the report is released April 24th it will demonstrate that these banks will need an infusion of more cash which will erode confidence further.

To break the cycle of the interdependence of government and banks there needs to be a direct relationship of checks and balances.  This government report will identify the banks that cannot survive.  These banks should either raise private capitol or be taken over by the government as the Resolution Trust Corporation did in the 80′s with S&L’s , cut up the assets salvage what can be and sell off the assets to solvent institutions.  The bailouts and looting of the taxpayer must stop.

The big question is does Treasury Secretary Geithner and President Obama have the guts to do the right thing? Congress wants to cap executive pay while Obama wants to create FDR style stimulus when the economic patient is hemorrhaging.  Can the politicians that  fed on the trough of bank dollars and repealed the regulations that kept Americans safe reestablish those regulations, stop the political posturing and break up the too big to fail financial behemoths and restore the foundation of the banking system.  This is a big task for politicians and bureaucrats that allowed this fiasco to happen in the first place.

When the Treasury Secretary’s “stress test” report comes out showing that bank balance sheets are in bad shape it will cause further erosion of confidence in the performance of these institutions.  A fragile US economy, the hope of the world due to its buying power and worldwide confidence in its ability to withstand further deterioration, may cause the economic spiral to accelerate globally.  As government insolvency begins to spread across Europe, creditor nations take further hits, Asian, Latin American, and African economies dependent on the purchases of the west will give up hope of a change.

Without the confidence in the solvency of the west there will be nothing to stop the spiral toward world depression.  If that happens who will pay the debt congress and the Obama administration are saddling future generations of Americas with?