More Prospective on Yesterday’s Financial Debacle
Jan 21, 2009
Posted by Jody Eisenman | Filed under Uncategorized
After posting in the middle of the day, the bank stocks continued to fall into oblivion. What was particularly worrisome was that the supposed “strong” banks like JP Morgan, Wells Fargo and Goldman Sachs got taken apart as badly as the supposed “weak” ones like Citi and Bank of America. As readers of this blog know, I have been talking about the problems in this industry for months. What happened today to cause this sell off? Here’s my take:
1. The UK banks are actually in worse shape than their US counterparts. On Monday, the UK government announced a bailout that will severely dilute all equity shareholders. As such, bellwether UK banks like Lloyd’s, Royal Bank of Scotland and Barclay’s have 80-90% of their respective values over the past year, with the losses accelerating over the last 2 days. There is some fear that the same thing could happen to the US banks as well.
2. Investors are finally waking up to the fact that extreme leverage that banks have used may have caused problems that are close to insurmountable. I discussed this last week.
3. There is very little confidence in the reporting by bank’s executive officers. As every quarter seems to find new and unexpected problems, no one really trusts much of what these executives say. At this point, people are really starting to expect the worst case scenarios. Unfortunately, these scenarios could end with stock investors losing a great portion of their equity due to severe dilution.
4. The first round of $350 billion in TARP money has led to little increase in lending, little accountability, and lower stock prices. At this point, the recession is really starting kick in, and we now have a new Democratic administration. There is now very little appetite in either congress or among the American people for continuing a process without helping home and business owners as well. As such, the “gravy train” of cheap money from the government may very well be coming to an end. At this point, further bailouts may very well be accompanied by massive dilution due to government ownership.
5. The government has virtually run out of interest rate options. They have dropped Fed Funds to a target of zero to 25 basis points. They can’t go lower than zero!
I do not know how this will all turn out. However, it is clear that investors have very little confidence that things will improve for the financial sector anytime soon.
January 22nd, 2009 at 2:46 am
Prospective or perspective?