A big bank CEO on
a mission to deceive the public doesn’t have to tell outright lies. He
can con people just as easily by using “perfectly legal” tricks, shams,
and accounting ruses.

First, I’ll give
you the big-picture facts. Then, I’ll show you how big U.S. banks are
painting lipstick on some of the fattest pigs ever raised.

Six of America’s Largest
Banks at Risk of Failure

As we have written here so often … as we documented in our recent white paper … as we showed in our presentation to the National Press Club … and as we explained again with new data in our follow-up press conference, the nation’s banking troubles are many times more severe than the authorities are admitting.

First, look at the megabanks: The authorities SAY that all
of the 14 largest banks have earned a “passing” grade in their
just-completed “stress tests.” But just six months ago, the authorities
swore that, without a massive injection of taxpayer funds, those same
banks would suffer a fatal meltdown.

Was the bad-debt
disease magically cured? Did the economy miraculously turn around? Not
quite. In fact, we have overwhelming evidence that the condition of the
nation’s banks has deteriorated massively since then.

How can our
trusted authorities be so blatantly deceptive and still keep their
jobs? Perhaps you should ask Fed Chairman Ben Bernanke. Not long ago,
for example, he declared that the total losses from the debt crisis
would not exceed $100 billion, while conveying the hope that most of
those losses could be soon written off. Also around that time, the
International Monetary Fund (IMF) estimated the losses would be $1
trillion, with only a small percentage written off.

The IMF’s latest estimate: $4 trillion in losses, with only one-third
of those written off so far. Bernanke’s error factor: He was 4,000
percent off the mark, in a world where 50 percent errors can be lethal.

Meanwhile, based
on fourth quarter Fed data, we find that, among the nation’s megabanks,
six are at risk of failure in our opinion (seven if you count Wachovia
and Wells Fargo as separate institutions).

• JPMorgan Chase
  is the nation’s largest, with $1.7 trillion in assets in its primary
  banking unit. It’s massively exposed to defaults by its trading
  partners in derivatives — to the tune of 382 percent (almost four
  times) its risk-based capital. Plus, since it holds HALF of ALL the
  derivatives in the U.S. banking industry, JPMorgan is at ground zero in the debt crisis.

• Citibank
  is the nation’s third largest, with assets of $1.2 trillion in its main
  banking unit. Its total credit exposure to derivatives is a bit lower
  than Morgan’s, at 278 percent, but still extremely high. Plus, it has
  other troubles, especially the surging default rates in its sprawling
  global portfolio of credit cards and other consumer loans. (More on
  these in a moment.)
  

   

• Wells Fargo and Wachovia
  now make up the nation’s fourth largest bank with combined assets of
  $1.17 trillion. But in the fourth quarter, they still reported
  separately, which is illuminating: Even without Wachovia’s troubled
  assets, TheStreet.com Ratings has downgraded Wells Fargo to a D+.
  Wachovia, meanwhile, got a D. This tells you that Wells Fargo wasn’t
  exactly the best merger partner, unless you believe in some bizarre
  math wherein adding two negatives somehow gives you a positive result.
  

   

• SunTrust,
  with $185 billion in assets, is getting hit hard by the collapse in the
  commercial real estate. Its Financial Strength Rating is D+.
  

   

• HSBC Bank USA
  has massive credit exposure to derivatives that’s even greater than
  Morgan’s: 550 percent of risk-based capital. We’re not looking at its
  larger foreign operations. But the U.S. numbers are ugly enough,
  meriting a rating of D+.
  

   

• Goldman Sachs,
  which reported for the first time as a commercial bank in the fourth
  quarter, seems to be taking the biggest risks of all in derivatives.
  Its total credit exposure is 1,056 percent of capital. Bottom line: It
  debuts as a bank with a rating of D, on par with Wachovia.

Regional banks:
Banking regulators have been largely mute regarding major regional
banks. But several are also at risk of failure, including Compass Bank
(Alabama), Fifth Third (Michigan), Huntington (Ohio), and E*Trade Bank
(Virginia). Primary reason: Massive losses in commercial real estate
loans.

Smaller banks:
On its “Problem List,” the FDIC reports only 252 institutions with
assets of $159 billion. In contrast, our list of at-risk institutions
includes 1,816 banks and thrifts with $4.67 trillion in assets. That’s
seven times the number of institutions and 29 times more assets at risk
than the FDIC admits.

What Explains the Huge Gap Between
Official Declarations and Our Analysis?

We all use essentially the same data. And conceptually, the analytical approach is also similar.

The primary
difference is that the regulators have an agenda: Instead of protecting
the people from bank failures, they’re trying harder than ever to
protect failed banks from the people. Specifically …

• They have
  forever hidden the names of the banks on the FDIC’s “Problem List,”
  making it almost impossible for average consumers to get prior warnings
  of troubles.
  

   

• They
  have never disclosed their own official ratings of the banks — the
  CAMELS ratings — making it difficult for the public to find safe
  institutions they can trust.
  

   

• They have religiously underestimated — or understated — the depth and breadth of the debt crisis.
  

   

• And as
  I explained a moment ago, they have rigged their recent stress tests to
  give passing grades to all of the nation’s 14 largest banks, sending
  the false signal that even the most dangerous among them are somehow
  “safe.”

Legal Cover-Ups, Flim-Flam and Sham
In the Big Bank’s “Glowing”
First-Quarter Earnings Reports

Wall Street is
aglow with the latest “better-than-expected” earnings reports by major
banks. But take one look below the surface, and you’ll see three of the
most egregious accounting gimmicks in recent history.

Gimmick #1. Toxic asset cover-up.
In their infinite wisdom, global banking regulators have now agreed to
let banks cover up their toxic assets by booking them at fluffy-high
values, bearing little resemblance to actual market prices. Like magic,
the bad assets are suddenly worth more, as hundreds of billions in
losses are defined away.

Gimmick #2. Reserve flim-flam.
Every quarter, banks are required to estimate their losses and decide
how much to set aside in loss reserves. If they deliberately guess too
much in one quarter and too little in the next, they can shove all
their bad earnings into earlier P&Ls and make future P&Ls look
rosy by comparison.

Gimmick #3. The great debt sham.
Consider this scenario: A financially distressed real estate developer
owes the bank $4 million. His revenues have plunged. He’s lost a
fortune in his properties. And he’s on the brink of bankruptcy.

Therefore, in the
secondary market, traders recognize that loans like his are worth, say,
only half their face value, or about $2 million. So far, a very common
situation, right?

But now imagine
this: He walks into the bank one morning and claims that he really owes
only $2 million. Why? Because, in theory, he says, he could buy back
his own loan for that price, thereby reducing his debt in half.

In practice, of
course, that’s a pipedream. If he actually had the cash to buy back his
own loans on the market, then he wouldn’t be financially distressed in
the first place. And if he weren’t financially distressed, his loans
wouldn’t be selling on the market for half price.

The reality is
that he can’t buy back his own debt and never will. And even if he
could someday, he will still be on the hook for the full $4 million
unless and until he files for bankruptcy and the bankruptcy judge
decides otherwise.

That’s why the government would never
let real estate developers — or hardly anyone else, for that matter —
mark down the debts on their books and still stay in business. But
guess what? The government lets banks do precisely that!

It’s the ultimate
double standard: The banks get away with inflating their toxic assets.
But at the same time, they’re allowed to mark to market their own debts, which happen to be trading at huge discounts on the open market precisely because of their toxic assets.

Accountants call it a “credit value adjustment.” I call it cheating.

Finding all of this hard to believe? Then consider …

How Citigroup Mobilized ALL THREE of These
Gimmicks to Create One of the Greatest Accounting
Shams of All Time in Its First-Quarter Earnings Report

I’m outraged. But I’m glad to see that someone besides us is speaking out:

• Meredith
  Whitney, one of the few no-nonsense analysts in the industry, says that
  the banks’ latest reports are, in essence, “a great whitewash.”
  

   

• Jack T. Ciesielski, publisher of an accounting advisory service, calls it “junk income.”
  

   

• And Saturday’s New York Times,
  picking up from their research, lays out precisely how Citigroup has
  transformed a massive loss into what appears to be a fat profit …

First,
Citigroup deployed the Toxic Asset Cover-Up. By inflating the value of
the bad assets on its books, it was able to beef up its after-tax
profits by $413 million.

Second,
Citigroup used the Reserve Flim-Flam gimmick: By (a) shoving most of
its bad-debt losses into last year’s fourth quarter and (b) greatly
understating its likely losses in the first quarter, the bank legally
rigged its books to look like it had made major improvements. Even
assuming no further deterioration in its loan portfolio, I estimate
this gimmick alone bloated profits by at least another $1 billion.

Third, Citigroup went all out
with the Great Debt Sham, marking down its own debt and creating an
additional $2.7 billion in purely bogus profits from this maneuver
alone.

So here’s Citigroup’s true math for the first quarter:

And all this despite the fact that Citigroup’s loan portfolios actually deteriorated further in the first quarter. Based on its Q1 2009 Quarterly Financial Data Supplement, we find that:

1. Net credit
   losses in Citi’s global credit card business surged from $1.67 billion
   at year-end 2008 to $1.94 billion by March 31. And compared to March
   2008, they surged by a whopping 56 percent! (Page 9 of its data
   supplement.)
   

    

2. Foretelling future
   credit card losses, the delinquency rate (90+ days past due) on those
   credit cards jumped from 2.62 percent at year-end to 3.16 percent on
   March 31 (page 10).
   

    

3. Credit
   losses on consumer banking operations jumped from $3.442 billion on
   December 31 to $3.786 billion on March 31. And compared to the
   year-earlier period, they surged 66 percent (page 12).

By almost every measure, Citigroup’s first-quarter numbers are worse than they were just three months earlier and far worse than they were 12 months before.

My forecast:
Citigroup’s effort last week to twist this into an “improvement” will
go down in history as one of the greatest banking deceptions of all
time.

But Citigroup is
not the only one. Nearly all other major banks are suffering similar
surges in their credit losses and delinquency rates. Nearly all are
using at least one of the same gimmicks to bloat their first-quarter
profits. And every single one is destined to see massive new losses,
driving their shares to new lows and the banking system as a whole into
a far more severe crisis.

Bottom line:
Rather than the private-public partnership the government has called
for to address the nation’s banking woes, we see little more than
private-public collusion to hide the truth from the public, paper over the problems and, ultimately, sink the banks into an even deeper hole.

My Recommendations

In my book, The Ultimate Depression Survival Guide, I give you very detailed, step-by-step instructions on what to do immediately. Here’s a quick summary:

Step 1. Get
away from risky stocks. Use the recent stock market rally as a selling
opportunity — your second chance to get out of danger before it’s too
late.

Step 2. Get
out of sinking real estate. If there’s a temporary improvement in the
market, grab it to sell the properties you’ve been wanting to sell all
along.

Step 3. Raise
as much cash as you possibly can — not only by selling stocks and real
estate, but also by cutting expenses and selling other things you own.

Step 4. Make
sure you keep your cash in one of the safe banks on the list we provide
on the book’s resource page. Or better yet, follow my instructions on
how to buy Treasury bills. They’re safer than any bank, with no limit
on the Treasury’s direct guarantee.

Step 5. For
assets you cannot sell, buy protection using exchange-traded funds that
are designed to go UP when stocks fall. The more the market goes down,
the more you make; and those profits can offset any losses you suffer
in the stocks or real estate that you cannot sell.

Step 6. Later,
get ready for the big bottom in nearly all markets. That’s when you
should be able to lock in relatively safe interest rates of 10 percent
or more for years to come … buy shares in our country’s best companies
for pennies on the dollar … buy a dream home in a great location that’s
practically being given away.

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