Across the Curve

By Greg on Feb 20, 2009 | Reply

Can someone please explain to me how this is news?

Every bit of evidence for the last 6 months has irrefutably pointed to the major banks being insolvent. There was evidence before that– and plenty of people have said the banks were insolvent earlier… but as of say July 2008, there was no way to miss it.

Paulson and Bernanke were in denial — partly because their jobs sort of required them to deny, and partly because they are both idiots

But why are the rest of us in denial?

By Jenn on Feb 20, 2009 | Reply

The banks are insolvent, and we have all known this for months if not years. At some point, maybe Paul Volcker or someone with more than one brain cell will sit Geithner down and suggest something like what was done with Continental Illinois in the 1980s. That was far from perfect, but would be vastly superior to the denial plan of Paulson/Bernanke.

But if history is any guide, Geithner will find a way to mess this up. Investors may be pricing *that* into the market

By Elvira Jones on Feb 20, 2009 | Reply

Any chance someone could post article here – some sort of site host issue at source.

By cars on Feb 20, 2009 | Reply

Jenn, looks like Summers is running that show, not Geithner.

By Jenn on Feb 20, 2009 | Reply

cars — Geithner was and is the mouthpiece of the administration (which is pretty frightening). Summers has been pulling strings all along.

If you want to argue that the market is pricing in a fiasco from Summer AND Geithner, not just Geithner — so stipulated…

The only person that I keep hearing has been marginalized is Paul Volcker

By Bman on Feb 20, 2009 | Reply

we need to hear from a professional athlete or movie star – they seem to be the only ones that people listen to.

By texalope on Feb 20, 2009 | Reply

let’s let Rick Santelli run the country. A man with a heart

By David johnston on Feb 20, 2009 | Reply

Can you get us a quote on BAC and C bonds? What is the tipping point where it is clear that the markets thinks the common goes to zero? Also, what about AIG? Nobody is talking about them but they lose 15% every day now.

By Torp on Feb 20, 2009 | Reply

I believe most individuals are underestimating the effects of bank nationalization. If one simply follows the trail of recent events there is plenty of reasons for further market discounting…and the equity market continues to do so in a predictable manner.

The current administration and Congress in general has given us plenty of evidence that they are razor sharp focused in solving the mortgage crisis and in fixing the issue of lack of lending to businesses and individuals.

By nationalizing the banks, I strongly doubt that the government will quickly dispose of the toxic assets as they would run the risk of bringing other banks down. However, this possibility cannot be discounted as you may recall Geithner’s plan called for a “stress test”. One could argue that the intent was to anticipate the effects of nationalization followed by a quick liquidation of toxic assets and its impacts on other institutions.

On the other hand, the government may attempt to nationalize the big mammoths and use these institutions as new tools to expand lending and to further address the woes in the mortgage sector. This of course would be another recipe for disaster.

By Paul on Feb 20, 2009 | Reply

BofA market cap is at 20 Billion with stock price at 3.25. But they received 45 Billion in TARP money. Currently, if BofA had to, they cannot pay back the government. Is this another way of saying that BAC has already been nationalized.

The same story is true for Citi.
Citi TARP money received: 50 Billion
Citi market cap: 10 Billion

Other banks that received TARP money still has positive equity after accounting for TARP capital.

By Torp on Feb 20, 2009 | Reply

“Other banks that received TARP money still has positive equity after accounting for TARP capital.”

Positive equity does not mean much. What it matters is how much toxic waste these banks have in their balance sheet and to what extent it has been leveraged.

By John on Feb 21, 2009 | Reply

Families were outbidding each other on homes like the ponzi scheme it truly was.

They ramped up home prices over 200% with the intention of moving out every 2 years with another 50% profit.

Now that their scheme has backfired due to the banks realizing these people never really had an income, the government wants to deduct money out of our earnings so we can pay for their outrageously overpriced home mortgages.

The younger generation will not be able to acquire these homes at the current price levels unless they too receive a government bailout.

Incomes simply do not support current housing prices.

Why can’t the government call a spade a spade?

By Paul on Feb 22, 2009 | Reply

John is right. The country’s collective incomes probably does not support the aggregate value of all the houses in the United States — at 31% mortgage payment to income ratio. Or the entire countrie’s LTV is definitely above 100%. ( I did not do calculations, just speculating )

http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2009/GCB+February+2009+McCulley+Saving+Capitalistic+Banking.htm

After reading the above commentary and seeing how deeply and fundamentally ingrained government is in the banking model, it is very difficult to conclude that Citi and BofA is not already “nationalized.”

TARP money is on bank balance sheets as preferred capital.

New York Fed lends overnight money and provides wholesale funding to banks using Primary Dealer Credit Facility, Term Securities Lending, ABCP program, Money Market insurance, etc… and a whole series of other programs too numerous to list here.

FDIC insures retail deposits so average Joe doesn’t take away his money from the bank.

All these government tools and programs are supporting both the asset and liability side of the bank’s balance sheet. I don’t see how they are not “nationalized.” The government is already in every aspect of their business. And Geithner already has teams of “stress tester” at the banks seeing if those banks will survive or if they deserve further support.

The only reason government doesn’t talk about nationalization is because government doesn’t want to explicitly say they run the banks and also the government has no interest in making long term business decisions for the banks.

But it feels like the banks were nationalized all along, the only difference between now and 2 years ago is that the characteristics of nationalization are too obvious too ignore.