Bank to the Future

For reasons that escape some of the most sophisticated financial analysts, the government is seemingly praying that with enough “stimulation,” the big banks will find the capital they need to recover in the private sector. But since no one in the private sector has evinced the slightest inclination to help those “too big to fail behemoths,” the Obama administration is still side-stepping the “n” word (“nationalization”) with assurances like: "the strong presumption of the Capital Assistance Program is that banks should remain in private hands."

Yet on February 23th, as the feds began a massive drill-down examination of the 20 largest banks (politely called the “stress test”), a process that could take weeks and will undoubtedly lead to many unpleasant surprises, the government is beginning to show signs that it too understands that more than incented private capital is necessary.

From the February 23 theDeal.com: “A joint statement from Treasury, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Reserve released [Feb. 23^rd] said: ‘[w]e reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments. ... Should [the stress test] assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government.’

“The ‘temporary’ buffer will come in the form of convertible preferred shares and are intended to act as a ‘cushion against larger than expected future losses, should they occur due to a more severe economic environment.’ The government's preferred shares from prior TARP investments will also be eligible to be exchanged for the mandatory, convertible preferred shares.” In English? The government will sequentially add more money to the pot, but if we have to go all the way, we (the government) are not letting these big boys fail.

Stocks plunged in morning trading on the 23d at the very notion that there is a stimulus formula that could make skittish investors jump off the fence and shore up a problematic financial sector. The February 23^rd L.A. Times quoted Joe Saluzzi, a partner at Themis Trading in Chatham, N.J. on Wall Street’s clear “no confidence” vote: “Investors… simply see no incentive to buy, with the economy still sinking and no sense that the banking system’s deep troubles will be resolved any time soon -- despite the government's latest attempt to boost confidence.”

The main focus of the business press is the Bank of America, made worse by the government’s shoving a very sick Merrill Lynch down the bank’s throat last year… and Citigroup. As share prices in the financial sector reflect investor discomfort at both the likelihood of finding out exactly how bad the hidden and toxic assets are on the books of these (and many more) banks and the perceived inadequate level of government intervention that most economists now believe is necessary to save the banking process itself.

Don’t expect an easy credit market any time soon…. The clock ticks, businesses fail, unemployment rises and homes fall into foreclosure. We are nowhere near bottom, and waiting for “sequential” action from the government should simply prolong the pain. A 7,000 Dow may look really good in a few months, if the government doesn’t recognize the futility of “stimulating the private” sector to do what investors have clearly said they will not do!

I’m Peter Dekom, and I approve this message.