by William K. Black, New Economic Perspectives
One of the great lies of the financial industry is that it is the engine of Main Street’s growth. Giving the finance industry an enormous share of total business profits was supposed to super charge Main Street’s growth. It has never delivered on this promise. The truth is the opposite. The efficiency condition for a middleman like finance is that its size and profits should be minimized. Finance’s fraud epidemics blew up the world economy and devastated Main Street. Finance is a parasite that saps Main Street. The latest example of this comes in a New York Times article about European bank’s bad loans.
The article contains this distressing sentence:
“Since 2010, European regulators have sponsored two comprehensive stress tests, both of which were discredited after banks failed soon after each was completed.”
Yes, just as stress tests for Fannie, Freddie, AIG, the big three Icelandic banks, the Irish banks, and Lehman failed to predict those failures. Gosh, it’s almost like stress tests were PR exercises involving no reliable review of asset quality or liabilities.
“[Mr. Bastian noted] that in the March BlackRock report, nonperforming loans in Greece were estimated at 28 percent.
Now, he says, ‘we are way beyond that level and have passed above the 34 percent threshold, totaling approximately 75 to 77 billion euros.’”
To put those figures about the risking level of nonperforming loans during Greece’s “recovery” in perspective, a few percent default rate will normally cause a bank to fail if it is not bailed out. The nonperforming loans in Greece are very likely to default.
The NYT article does not mention a critical factor – international accounting remain an open invitation for bank CEOs to lead accounting control frauds because they are being interpreted (insanely) to ban banks from setting aside allowances for bad loans prior to default. This failure to establish loss reserves adequate to the risk of the bank’s loans means that bank losses on nonperforming loans will be particularly severe.