Top 10 at 10: The US$4 trln toxic debt problem; the giant fraud on US taxpayers; the Dubai lie

Here's my top 10 links from around the Internet at 10 am. I welcome your suggestions in the comments below. 1. The Americans are up to their old (Smoot Hawley) protectionist tricks again, launching an anti-dumping action against Chinese steel imports, Bloomberg reports. Perhaps China should call America's bluff and pledge not to fund the ballooning American budget deficit? American politicians speak with forked tongues on free trade all the time. Obama pledges not to make the mistakes of the past and then his officials, egged on by lobbyists, launch trade restrictions regularly. New Zealand should avoid being dragged into a 'Free Trade' Agreement with the United States and stick instead to the much fairer WTO processes. 2. Nouriel Roubini at RGE points to the recent reports that the IMF will revise its forecast of toxic debt to US$4 trillion and concludes the recent stock rally was unjustified. Here's a taste.

Banks are benefiting from close to zero borrowing costs; they are benefiting from a massive transfer of wealth from savers to borrowers given a dozen different government bailout and subsidy programs for the financial system; they are not properly provisioning/reserving for massive future loan losses; they are not properly marking down current losses from loans in delinquency; they are using the recent changes by FASB to mark to market to inflate the value of many assets; they are using a number of accounting tricks to minimize reported losses and maximize reported earnings; the Treasury is using a stress scenario for the stress tests that is not a true stress scenario but rather a benchmark of what the economy is likely to look like in 2009 and 2010; a true stress scenario would have considered a much more serious economic downturn.

3. This is compulsory reading from Christopher Whalen, an independent banking analyst at Institutional Risk Analytics (IRA). It's a few weeks old, but essentially says the Obama/Geithner/Bernanke approach to fixing the banks amounts to a massive transfer of wealth from taxpayers to bank bond and shareholders. He points out it is happening without any public debate and risks being politically unsustainable (ie tax revolt tea parties and riots). Here's a taste.

We see two issues facing Bernanke, Geithner and the Obama Administration when it comes to the cowardly "feed the zombies" approach articulated last week. First, it is not sustainable financially and must eventually be changed because of funding constraints. And two, the policy of subsidizing the bond holders of the largest banks is unworkable politically and must eventually also be changed to conform with domestic political reality. That's right, at some point the Obama Administration may need to choose between our foreign creditors and American voters.

The Bernanke/Geithner approach to not dealing with the financial crisis amounts to a hideous public subsidy of the global transactional class, a transfer of wealth from American taxpayers to the institutional investors who hold the bonds and derivative obligations tied to the zombie banks, AIG and the GSEs. All of these companies will require continuing cash subsidies if they are not resolved in bankruptcy.

Remember that the maximum probable loss ("MPL") shown in The IRA Bank Monitor for the top US banks with assets above $10 billion, also known as Economic Capital, is a cash number representing the amount of incremental capital the banks may require to absorb the losses from a 3-4 standard deviation economic slump, such as the one we have today. If you include the subsidy required for the GSEs and AIG, the US Treasury could face a collective funding requirement of US$4 trillion through the cycle. Do Ben Bernanke and Tim Geithner really believe that they can sell such a program to the Congress? To put it in perspective, the US$250 billion in the Obama Budget for additional TARP funds will not quite cover Citigroup.

4. I also strongly recommend these 3 videos. They are three chunks of a 30 minute interview on PBS with William Black, a former regulator from the Savings and Loan crisis of the 1980s. He describes the bailout as a fraud and Geithner as someone who has never done anything right. Frightening stuff from a very serious guy. Watch it if you want to understand the disaster unfolding for US taxpayers and the global financial markets.

5. Two more US banks were closed this week. One was the 'Cape Fear Bank' in North Carolina. I'm not kidding. A marketing nightmare from day one. 6. Barack Obama has pushed aside Paul Volcker as an adviser, the WSJ reports. A pity as this guy helped rescue the globe from stagflation in the late 1970s. 7. The protests are beginning in the United States, with nationwide rallies planned for Sunday. It is turning into an unholy alliance of the far left opposed to big bailouts for Wall Streeters and the far right opposed to massive government and deficits. Here's what they're proposing. It's something both the left and the right can get behind.

NATIONALIZE: Experts agree on the means -- Insolvent banks that are too big to fail must incur a temporary FDIC intervention - no more blank check taxpayer handouts. (see Krugman on nationalization) REORGANIZE: Current CEOs and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused. (see Simon Johnson on reorganizing) DECENTRALIZE: Banks must be broken up and sold back to the private market with strong, new regulatory and antitrust rules in place-- new banks, managed by new people. Any bank that's "too big to fail" means that it's too big for a free market to function. (see Mike Lux on decentralization)

8. Here's the real story behind Dubai, in this excellent piece from The Independent. 9. We may never know how stressed the US banks are. The US Federal Reserve has ordered the banks not to disclose the results of stress tests being conducted by the US government, Bloomberg reports. H/T Rolfe Winkler at Option ARMageddon. 10. The recession is not over, says Paul Krugman at the New York Times.