The Real Reason Bank Stocks Are Tanking

[babylonsister]

The Real Reason Bank Stocks Are Tanking

by William D. Cohan


William D. Cohan, a former senior-level M&A banker on Wall Street, is the author of The Last Tycoons: The Secret History of Lazard Freres & Co. Cohan's House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, will be published by Doubleday in 2009. He also writes for Fortune, ArtNews, The Financial Times, and The Washington Post.



As late as Friday, even as their stocks tanked, America’s banking leaders were still in denial. No wonder they have no credibility.

So why are our largest money-center banks—you know, the ones that are supposed to be the survivors of the financial crisis, like JPMorganChase, Citigroup, Bank of America, and Wells Fargo—in the process of a further, and possibly fatal, meltdown? Last week alone, Citigroup’s stock fell by one-third, JPMorgan’s fell 13 percent, and the shares of Bank of America and Wells Fargo each fell by 25 percent.

With apologies to economist Nouriel Roubini, the “Dr. Doom” of the financial crisis, the reason for the continuing collapse in the financial sector is not that the prospect of nationalization looms large for these money-center banks, although if that were to happen, shareholders would be wiped out in much the same fashion as those of AIG. Rather, the reason for the downward spiral is that, incredibly, some 20 months into the crisis, credibility is still the most acute problem facing the banks. We still don’t know the extent of the toxicity of the assets on their books and, in many cases but not all, we no longer trust the people who run these institutions to tell us the truth about the danger lurking therein. Until the trust in these institutions is restored, and soon, there can be no equity or franchise value, regardless of whether the government or the existing shareholders owns the equity.

It shameful that Bank of America chairman and CEO Ken Lewis has no capacity to admit that his decision to buy both Countrywide Financial and Merrill Lynch was beyond irresponsible.

And frankly, at the moment, why should we trust these erstwhile leaders? Some of these are the very men—would that a few women were in charge!—who got us into this mess in the first place. Not only should many of them been dismissed months ago, but they also seem unable to ’fess up to their collective roles in the disaster.

more...

http://www.thedailybeast.com/blogs-and-stories/2009-02-22/the-real-reason-bank-stocks-are-tanking/

[dkf]

1. Problem is, the truth could be worse than the speculation.

If speculation at the hint of the truth tanks everything, just think what the reality knowing how bad things are would be.

[snot]

3. If it weren't, they'd share it. Problem is, there can be no fair solution without the truth.

[dkf]

4. How can there be anything fair when the domino effect tanks

everyone?

[snot]

13. It doesn't tank everyone equally. The oligarchs are trying to rig it so that

we bail them out of their bad bets. They can afford the losses, and they should eat them as far as possible.

I realize it's all interconnected, but there are real choices to be made about who bears the brunt; and those who caused the mess should be first in line.

[Igel]

14. I'm unconvinced they know the truth.

Many of the derivatives are still going to be paid off, with interest. It could be known that many aren't going to be paid off in full, because the mortgage holders have already defaulted.

Until the houses foreclosed on are sold, what will the payoff be?

Until somebody chunks through all the foreclosures, nobody knows what the derivatives are worth--whether the highest-priority tranche or the lowest priority tranche.

Until the market bottoms out and some sort of stability is reached, there's no way to figure out any of it. Until then, mortgage payments are made and the money flows through the system. That's probably the best gauge, now, but it's an unreliable one.

However, in the absence of certainty and knowledge, the derivatives are all worth very little, by market valuation. Knowing they're probably undervalued is of no use, however, because the rules say to follow market valuation and, well, nobody knows how undervalued they are.

That's the truth. That they've said. Everything else is at least part fiction ... how large a part, alas, is a mystery.

[FreakinDJ]

2. Why “Restructure the loans, Keep the money Flowing” won’t work.

These banks are short selling 100K and more when a 50K write down and an honest fixed interest loan to the home owner would keep their cash flowing.

I know it looks better on their books when they sell the home for 100K less then what is owed on it because now they don’t have the larger risk. This is a “The Self-Propagating Self Destruction” of the banking system.

Pelosi was the first 1 to say “We need to stop the Short-Sales” during the debate of the TARP funds. Too bad she didn’t stand fast and insure that measure was included into the bill

[no_hypocrisy]

5. How is confidence restrored to the point of true credibility?

The Board of Directors replaced by the shareholders?
The CEO and corporate officers replaced?
More than symbolic punishment and rigid new policies enacted and monitored?

[glitch]

9. d) All of the above. nt

[underpants]

6. There is a culture of secrecy and "element of surprise" ingrained in that world

The "advantage" that not letting anyone into your world provides.

We have seen this with the Bush administration ("we will move so fast that by the time everyone figures out what we did we will be on to the next move"-as was said back in 2000) to the banks to Mike Krzyzewski to Bill Belichick (NE Patriots coach). As the success of the two sports coaches listed there attests it is a great advantage to have but what usually underminds it is a stable capable plan. This isn't football or basketball no matter how the captains of industry wish it to be this is real life AND now, with the banks, it is directly part of the public interest. Sorry buds, you gotta open up the books.

[PurityOfEssence]

12. That is a sin against the sacred concept of private enterprise

and that's why we're going to see only scant and cursory revelations. It is more important that the cult of economic dominance and personal attainment remain unchecked than it is for our intricate and fairly wonderful world to endure. It is worth the utter collapse of everything to keep economic power private and virtually unregulated.

These people are playing for keeps, and always have been. Our President does not question the premise of the NECESSITY of unfettered corporatism. I believe his heart is in the right place, but whether he's simply misguided or his hands are tied, it doesn't really matter. As Sancho Panza says: "whether the rock hits the pitcher or the pitcher hits the rock, it's going to be very bad for the pitcher." We are the pitcher.

One doesn't have to even read between the lines when hearing the constant reminders of the unquestionable need for private enterprise to be the engine for everything, as was heard in the press conference; it's obvious that the reckless concept that private enterprise, with only the fewest of oversights, is the ONLY option to even explore.

We will patch the system, sweep the true guilt under the rug, plead necessity and fight the very concept of regulation even while putting some anemic safeguards in place.

The problem is the premise, and that premise is that the business of money systems is, above all, one to maximize profits at all costs, instead of what its real purpose is: an orderly, predictable and trustworthy method of providing exchange and credit. Banking is supposed to be about providing an abstract quantifier for goods and services, not a big game of three-card monte. Well, to ME it is; it isn't that way for Robert Rubin or any of the charlatans at hand, and they are in firm control and will remain so.

This country has drifted so very far to the right that someone like me, a fairly moderate capitalist, is shockingly more to the left of our President and even a surprising number of the people on a supposedly lefty board like this.

Beyond any moral pronouncements, this system is simply not sustainable, yet that is precisely what our President, Summers, Geithner, et Al. are hell-bent to do. They will buttress and sustain the house of cards and hide the truly guilty from any real justice. It is a fundamental misunderstanding or culpability or both. It is extremely serious, and they're blinded by their hubris, ideology and personal involvement in the sham.

[natrat]

7. they plan on taking over the world and this is how they are doing it-there's your truth

[Historic NY]

8. I keep wondering if I should just pull all my money out of Chase ..

and put it in the Credit Union. I have to go there tomorrow CD is due.

[Alcibiades]

15. And that's part of the irony here

For years, the bank lobby has worked Congress hard to keep very strict investment, lending and reserve regulations on credit unions. Now, these very same regulations that the banks thought would hamper the credit unions' ability to compete have also meant that they did not invest in any of the worthless crap banks apparently poured their money into.

It is the very worst national banks, mortgage and credit card issuers who have been screwing their customers most systematically who are the worst off. The same ones who got Congress to rewrite the bankruptcy laws to their benefit now want a bailout, but no nationalization. Fuck them.

[rrneck]

10. Our largest

export is debt and our greatest efforts in national R&D focus on risk management (read: accountability avoidance). Those assholes don't know how to do anything else.

[yurbud]

11. I was disappointed when Obama put DLCers in cabinet, but the neoliberal Milton Friedman types

were beyond the pale.

That was like putting Michael Jackson in charge of a daycare center, and we're all the kids who will get reamed, killed, then buried under the merry-go-round.