Bank Endgame Finally in Sight

I went to put out my mail this morning and it was then I realized that I forgot to clear out the area of all the snow! I could just barely get the mail into the box. I apologise to my mail carrier, and I cleared the area before dinner so he will have a clear shot from now on. That is how much snow there is; 4-5 feet of it piled up near the mailbox!

Inauguration Day
Congratulations to Barrack Obama for his gracious assumption of the presidency. Kudos to former president Bush for the same. This was about as smooth a transition as you could have wanted, and given how trying the economic issues are there was no need for any drama.

Whatever your political stance it will be fun to see how the news gets reported now with a new president. Where the probable nationalization of banks like BAC and C would have a header like "Failure of Bush Administration to foresee bank crisis leads to bank nationalization" will instead have an Obama themed header like "Acting with insight and purpose, the Obama administration guarantees banking stability." Whether more upbeat coverage can do anything to help the markets remains to be seen.

Bank Endgame Finally in Sight
You know things are serious for the banking industry when even the most optimistic of CNBC speakers makes the analogy of the financial sector to the telecom sector of 1999-2000! Common wisdom has gone from the idea that banks needed some help before they resumed highly profitable businesses to the idea that the banks are insolvent and can no longer function as private entities. Welcome aboard the train they call the city of Insolvent, we have been waiting for you!

The terrible numbers coming out of the European banks (Royal Bank of Scotland, Barclays) are not unique to that continent. This truth set off a "run on the banks" in the US, at least in terms of their common stocks. Bank of America (BAC) and Citigroup (C) were especially hard hit. At the current stock price levels BAC and C will not be able to access any funding privately. The money needed to prop up these banks, and others, is now out of reach of even the most aggressive TARP 2.0 plans and the like.

A few nights back I stated that there was no reason at all to own banking shares as they are all candidates for zero on the low end and only treading water on the high end. The only option left now is complete nationalization of the banks. The confusion and desperation is running high, as this Yahoo Finance article shows:

AP
Stocks tumble on fresh worries about banks
Tuesday January 20, 6:09 pm ET
By Tim Paradis, AP Business Writer
Wall Street tumbles on concerns about banking sector; bank shares plunge; Dow falls 332
NEW YORK (AP) -- The dawn of the Obama presidency could not shake the stock market from its dejection over the rapidly deteriorating state of the banking industry.
Financial stocks, many of them falling by double digit percentages, led a huge drop on Wall Street Tuesday that left the major indexes down more than 4 percent and the Dow Jones industrials down 332 points. Although traders on the floor of the New York Stock Exchange paused to watch the inauguration ceremony and Obama's remarks, the transition of power didn't erase investors' intensifying concerns about struggling banks and their impact on the overall economy.
The market's angst, which began with multibillion dollar losses reported last week by Bank of America Corp. and Citigroup Inc., intensified after the Royal Bank of Scotland's forecast that its losses for 2008 could top $41.3 billion.
The collapse in bank stocks was swift: State Street Corp. plunged 59 percent, Citigroup fell 20 percent and Bank of America lost 29 percent. Royal Bank of Scotland fell 69 percent in New York trading.
"The reason we're having a panic drop is the fact that Europe is catching our cold, and we could have deeper and deeper problems that could require more and more money. And eventually the government is going to have to stop spending," said Keith Springer, president of Capital Financial Advisory Services. "It's a pretty dangerous situation to be in."

Mr. Springer seems to think insolvency is some kind of flu that is passed through sneezing, but terrible loans and bad debts are no act of nature, unless you count greed and poor decision making as a virus. Mr. Springer also is afraid governments may have to stop spending on banks and that is indeed scary. More article:

Investors are expecting Washington will be a central part of the economic recovery. But the first hours of the new administration did little to ease their concerns.
"At this stage, markets in general and bank investors specifically are really looking to government as the way out," said Jack Ablin, chief investment officer at Harris Private Bank. "Certainly, of just about all of inaugurations that I can recall today's event probably has the not only the symbolic importance but really tangible importance to the stock market."
Richard E. Cripps, chief market strategist for Stifel Nicolaus, said the market's decline was interrupted by Obama's inauguration speech but that the markets then continued to trade on the problems in the financial sector.
"There's just tremendous fear and uncertainty in the banking sector," Cripps said. "Even those closest to the issue, like executives and analysts, there's a feeling of tremendous uncertainty. They're not giving any positive guidance because they just don't know. Lacking that (certainty) we're left to our worst fears, and that's what you're looking at with bank stocks."

The fear is palpable. Bank management cannot even trot out the old "things will improve" line anymore. If the government is the only way out for the banks, we are in for a rough time.

Nationalization will probably wipe out any and all equity in the banks. Without a concrete plan in place it is impossible to know what a plan may look like. The rapid deterioration in the banking sector will demand a resolution before Valentine's Day in February. By then we should have a good idea at how ripped off the US taxpayer will become as a rescue plan will unload all the bad debt onto the public and save anything of worth for banking management and bond holders.

What a mess. While it is easy to blame bankers (they deserve it), the outgoing administration (no clue what was going on), and the FED and Treasury (no clue and ineffective to date) the real blame lies with the countless millions of people the world over that went crazy with credit and have bankrupted our country for the gain of granite countertops and Hummer SUV's. We can argue that credit never should have been as aggressively extended to the greater public, and certainly that is true, but keep in mind it was demand for credit that allowed for all the bad lending to happen. Banks cannot lend to nobody, and greedy "have it all now" borrower's need to shoulder the bulk of the blame. If there was a way to make those responsible for the debt crash to pay for the banks, it should be done. All of those that had nothing to do with it should be left alone.

One can dream.

Have a good night.