Wednesday, February 04, 2009

Take Me to the River

Q: What do all these fine financial institutions have in common?

A: Common

C (Citigroup)
BAC (Bank of America)
FITB (Fifth Third Bancorp)
RBS (Royal Bank Scottland)
BCS (Barclays)
LYG (Lloyds)
IRE (Bank of Ireland)
CIT (CIT Group)
HBAN (Huntington Bancshares)
MI (Marshall & Ilsley)
RF (Regions Financial)
IBNK (Integra Bank Corporation)
STI (Suntrust)
SNV (Synovus Financial)
ETFC (E*trade)

The hatchet is dropping again and this time the number of institutions is larger and their (once) size greater. Some of these are too big to fail (so we've been repeatedly told), but perhaps they are really just too big to save.

If you read this column regularly you may know I don't really like to spell out what will happen next as much as I prefer to respond to what is going on now. It's a brand of momentum trading; identify the better trends and play them to continue. I try not to be smarter than the market. I try not to be smart at all; simply identifying and adding to what works and reducing what does not.

That said, I feel a bit now like ranting.

There are no simple solutions for the black hole (selected) list above. If we 'intervene' and nationalize the banks, it is going to be painful and dramatic and the market is likely to at least test lows and very likely break lower (sooner or later). If we instead 'rescue' the banks, and by that I mean that the larger of the uglies above keep their same signs above the door while the US and other governments take on toxic waste from their balance sheet bag of tricks (ala the Bad Bank solution), then I fear things will be ultimately much worse; even if there is an initial positive response in the markets.

One solution is perhaps more difficult in the short run (let them fail), but likely much better in the end. Throw these companies into the dumpster and garbage-pick the better scraps to sell to solvent institutions. The other solution is perhaps easier for politicians to sell now (the National Bank of Bad and Lonely) which allows this list to remain as entities (albeit with one leg tied behind their backs) while the governments take away their bad meat, hoping to sell it later to rotting vegetables.

If we go with the bad bank solution, I fear it's going to have deep and lengthy, ill ramifications; which risks destroying our own balance sheet, the currency and subsequent buying power. If 10 or 50 $Trillion becomes too much to bear, then we degrade our currency enough to make the debt more managable (something like that); or we can commence with a major war; or god knows what. We've already begun pushing (printing) an extraordinary amount of dollars into the system, with M1 and M2 measures having spiked through the roof. We're told it is the only thing that will save us (until we are told, no this is the only thing that will save us, ad infinitum).

It is common belief that the 1930's saw such a long and terrible depression because our government did not do enough to stave-off the deflationary pressures - that we failed to stimulate, thus making matters much worse. Well, generations from now could quite easily compare the strategy of getting out of the way to the strategy of getting in there and making the situation much, much worse.

Personally, I'm less fearful of the former.

No comments: