Banking Crisis More Dangerous Now Than Ever

No blog since Friday. Busy weekend followed by severely twisting my ankle yesterday left me in pain and unable to concentrate. A bit better today, so I will give it a go.

Cosmetic Changes Not Having the Usual Effect
You have seen the game before. A troubled company replaces the CEO or chairman (with a big fat severance deal) and pretend that things really have changed. As if ONE MAN could be responsible for the collective failure of an entire business institution. Sadly, this show is one of Wall Street's favorite plays, and usually is good for a nice stock price pop.

Today brought two such tricks, but without the pop. Wachovia Bank (WB) axed their CEO with a force out and Washington Mutual (WM) split the chairperson position from the CEO spot for their current title holder. Both stocks were flat to down today. While the financials were in the toilet for most of the day, the CEO shuffle was especially ineffective.

WB and WM are in rough shape. They are like a 3-13 NFL team, you would call them "in the rebuilding stage" as they try to regrow their operations. I think the whole "bottom is in for financial stocks" folks still do not get this fact; Even if (huge if) the worst was over as it relates to the losses and writedowns, this does not mean the stocks would then go straight back up. The financial engineering that gave us the mortgage debacle will not easily be replaced by another growth area for banks. Substantial pressure will be on the financial sector for the next 5 years easily. The bottom is in? Maybe, but if it is, it is here to stay for a long while.

Banking Crisis More Dangerous Now Than Ever
There is a general thought that the worst of the banking crisis occurred right at the BSC bailout and has improved to some degree since then. I disagree totally. Back then there was the hope that BSC was one bad apple, but the bunch was basically ok. There was optimism that the FED could save the day. There was a belief that the floor was put in for struggling banks. How is all that working out?

It seems that the entire financial industry is a mess. What is the difference between a busted BSC and Lehman Brothers right now? Nothing. No difference. If anyone wants to pull their trades and cash out of LEH it will collapse in one day.

The biggest problem was that the FED was limited in what they can do. I think the FED gambled that if they provided cash (through giving away their treasuries) that things would get better before they ran out of money. Time is almost up and nothing is any better. Market Ticker tackles this issue very well today with his parsing of a Bloomberg article. Key excerpt:

"The real nasty in that article though is here:
"The Fed is selling Treasury bills at the fastest pace since it was founded in 1913 to support bank- lending programs meant to boost confidence in financial markets. The Fed owns $34.3 billion of the securities, down from $267 billion, or 27 percent of the market, in December."
Uh, wait a second. Dr. Spinmeister, please stop and tell the truth.What truth? Try this. From $267 billion to $34.3 billion is a decrease of 88%. Yes, it was 27% of the market back then and is much less now, but the more important fact here is that The Fed has sold off 88% of its Treasury Securities and replaced them with garbage CDOs and other toilet paper from the banks! What happens when The Fed runs out of good collateral to sell?
Uh, gee, you think that day has basically arrived?"

Complete post: http://market-ticker.denninger.net/2008/06/mendacious-monday.html

The FED is about out of cash and time. By August they should be empty and will have to ask congress for more coin if they want to continue the bank giveaway. And what have they accomplished by destroying their balance sheet? Bought 6-8 months before a major market issue? Whoopity Doo!

Out of control is the phrase that comes to my mind when thinking about the last 6 months. Over reaction was followed by poor decisions, which was compounded by terrible policy. This summer is going to get right interesting by mid July into August. I can't wait!

Subprime Permeates Public Thought
The subprime debacle is fully enmeshed into the psyche of even casual observers. When the butt of jokes is about mortgage products, you know the issue is huge. Case in point, this LOL cat from today:

more cat pictures

Have a good night.