What Will Happen To the Banks This Week?
Feb 8, 2009
Posted by Jody Eisenman | Filed under Uncategorized
As the government frantically ponders its’ options, the question on everyone’s mind on Wall Street is future on the banking industry. Here is an article from Yahoo Finance that sums up the situation:
http://biz.yahoo.com/ap/090207/banks_on_the_brink.html?.v=2
The government has now taken over 9 banks this year, including three this weekend. There can be little doubt that many more will follow. The entire banking system, thanks to the incredible leverage of their balance sheets, needs a comprehensive solution pronto. According to Nouriel Roubini, the banks are under capitalized by somewhere between 1 and 1.4 trillion dollars. According to analysts at Goldman Sachs, it would take 4 trillion to clean up all the problem loans. According to the CIA’s World Fact Book, The total US Gross Domestic Product (GDP) was estimated at $14.58 trillion for 2008. Therefore, if the Goldman analysts are correct, we are talking about spending over 25% of the GDP on a comprehensive bailout. Now, bear in mind that the current deficit will exceed $11 trillion this year. Thus, if the government spends another $4 trillion (presumably by borrowing), it would seem that the total national deficit could actually exceed our GDP! Also, bear in mind that interest rates are incredibly low for treasuries right now. Should rates increase, it would cost the US much more to service this debt. I view this situation as precarious. Right now, there are only five countries in the world whose debt exceeds GDP (Zimbabwe, Lebanon, Japan, Jamaica and Italy).
Treasury Secretary Geithner will be unveiling his plan for the banks on Monday. Although we are still not sure of all the details, it is expected that the banks will be forced to supply some sort of mortgage relief to distressed homeowners. It is still not clear whether the government will buy the toxic assets from the banks, and if so, at what price. As I have stated earlier, I believe that if the government does decide to purchase assets, it will be at some sort of compromise price between the original value and the current mark to market value. President Obama is hoping that this initiative, combined with his stimulus package (which passed the senate on Friday) will uplift the economy. Good luck.
Perhaps in response to these planned initiatives, the market rose solidly the last 2 days. For the month of February, we are up about 3% on the DJIA, and almost 8% for NASDAQ. The money center banks traded up 15% off their lows on Thursday morning. Of course, the way these stocks trade, they could be up or down a similar amount on any trading day. If you are going to trade, use stop losses.
