Rearranging the Deck Chairs on the Titanic
Jan 16, 2009
Posted by Jody Eisenman | Filed under Uncategorized
As has been rumored lately, once mighty B of A is getting a huge handout from the government, which essentially means you and me. Other than the $20 billion they already received under TARP, they are now getting an additional $25 billion plus almost $100 billion in loan guarantees. Of course, this is after B of A saved Merrill from bankruptcy a few months ago by buying them. B of A stock is now trading around $8.50, down from the mid 30s about three months ago. Citi isn’t doing much better. Upon announcing that they would sell their part of their brokerage unit to Morgan Stanley, as well as splitting into separate units, their stock closed below 4 yesterday. There is even talk of the government actually taking over Citi via nationalization. Whether this will actually happen or how it would happen logistically is hard to say. In the end, pretty much all the large banks are in lousy shape. Therefore, having one combine or take over another is sort of like rearranging the deck shares on the Titanic. Without government bailouts, many of these huge institutions would probably be bankrupt. I’m not sure why the government allowed financial institutions to leverage their balance sheets so heavily, but now we are all suffering the consequences.
Even with yesterday’s 250 point inter-day turnaround on the Dow, we are now down about 600 Dow points for 2009. One of the major problems is that companies consistently report lower earnings and more problems. Therefore, investors are never sure that each round of bad news is going to be the end. In all probability, it is going to get worse. An analyst from Societe Generale (Albert Edwards) said yesterday that the US economy seems likely to enter a depression. Although I think we are still oversold short term and could get a rally here (the Dow futures are up over 100 points pre market), the overall trend still seems negative to me.
