Bad Bank/Worse Bank

Hello Everyone!

Ok, its time to post now that I have calmed down after reading about the "good bank/bad bank" proposal that supposedly is about to be unveiled next week. Before I get into this, I wanted to highlight how bad the news was that came out today:

- Consumer confidence falls to a record low.

- Case Shiller reports the biggest drop in housing prices on record(-18%)

- GE faces the risk of losing their Aaa rating from Moody's

- Companies continue to shred workers

I find it amazing that Wall St can continue to gobble up stocks despite the news flow above. You would think that after reading such news, the bankers would be running to the nearest bridge and jumping into the Hudson river "US Airways" style.

As bad as the news was above, it pales in comparison to what was announced after hours. CNBC is reporting that the Treasury is preparing to take the bad assets off of the banks balance sheet and place them into a "bad bank" on the taxpayers I mean errrr...the Fed's balance sheet:

"The Obama administration is close to deciding on a plan to purchase bad—or non-performing and illiquid—assets from banks, according to industry sources. The plan could be announced early next week.

The so-called "bad bank" plan, would address the key problem of how to price the assets by using a model-pricing mechanism.

The model would take account of the government's ability to hold onto assets, even to maturity, and pay for the them with cheap funding. Result: the government might end up paying more than current market prices for the securities.

On the other hand, if the government paid less than the value at which the asset is carried on the bank's books, the bank would issue common equity to the government.

In previous Troubled Asset Relief Program deals, banks issued preferred equity to the federal government. But the conclusion is growing within government circles, sources say, that preferred equity is not sufficient to make the banks healthy.

Clearly, the idea of a "bad bank" is gaining momentum. On Capitol Hill today, Senate Banking Chairman Chris Dodd said he was aware the idea is under discussion and "it makes some sense to me."

In the developing bad bank plan, it's unclear how the government would pay for assets. There has been discussion of a "certificate of net worth" in which the government gives the banks a piece of paper that essentially can be applied to capital levels. But sources could not confirm that funding mechanism for the plan or what role existing TARP money or the Fed would play in funding the so-called bad bank."

My Take:

Lets be clear here folks. We all know how the government plans on paying for these assets. Can you say taxpayer dollars?

This development is infuriating. The bank stocks are soaring after hours because there is absolutely zero mentioning of nationalization in this press release.

Folks, this program cannot work if the current banking management teams are kept in place and the banks aren't nationalized. The banking crisis was resoloved in the early '90's because we played hard ball and took their insolvent asses over.

The reason it won't work without nationalization is the banks will simply refuse to sell the assets at the price the government wants to pay because it will torpedo their balance sheets. This game was played in Japan without nationalization and it went NOWHERE. It turned into a giant stalemate. Bill Seidman explains why in this video.

Bill(FDIC Chairman at the time) was heavily involved with the successful resolution of the last banking crisis so his opinion should be highly regarded.

Some questions and thoughts from an angry taxpayer(Me!):

Why does the taxpayer continue to get pummeled as this crisis deepens? If we need to create a "bad bank" then nationalize the banks and do it the right way. If the current cast of characters on Wall St are allowed to wipe their balance sheets clean without any penalty then what will they have learned? What type of message does this send? If I was a greedy banker I might say to myself "Yahoo! We got away with it! Lets lay low and then do it again!"

I read that the banking lobbyists are heavily involved in the negotiations of this solution...No s**t really? I would be too if I were them. Wouldn't you take a deal from the government that involved them wiping away all of your debts? Talk about a no brainer.

Another thought I have here is if the pigmen are allowed to get away with this massive fraud and stay in power: Who is ever going to trust doing business with them again? How is investor confidence restored when the robbers are allowed run away with all of the money and then leave us with the bill to clean up the mess? I hate to be crude but this is like getting f**ked in the a** twice!

Bottom Line:

I am rapidly losing confidence in the current administration's ability to handle this mess. I see no "Change" in Washington. All I see is more of the same corrupt behaviour that plagued the last administration.

Wake up Obama! You only have one shot to clean this mess up. Choosing a tax cheat from the previous Fed that was directly involved with the failed policy of the 2008 collapse as your Treasury Secretary was bad enough. This resolution is worse! I pray that this "good bank/bad bank" report is not completely accurate. You need to do the right thing here.

Obama is not off to a good start. I was shocked when I read his administration started throwing daggers at China claiming that they manipulated their currency. Uhhh...This isn't too smart considering China is the largest buyer of treasuries! Geez...Are you trying to create a bond market dislocation?

On top of that, Obama's stimulus package was filled with infrastucture building that forces companies to use steel thats made in the USA only. This is the exact type of protectionism that threw us into a depression!

If you plan on bringing real "change" to Wall St and Washington: FIRE THE FRAUDULENT BANKERS THAT CREATED THIS MESS AND TAKE OVER THE BANKS IF NEED BE! Create transparency and mark these assets down to where they belong which is most likely pennies on the dollar.

Lets take a reality check here. No one will ever want to own these assets. Holding them on the taxpayers balance sheet is pointless. Lets call a spade a spade and take the hit and mark them to pennies on the dollar. Lets be honest: Who will ever want a subprime sandwhich that's sliced and diced with packages of both good and bad loans? Selling these assets would be similiar to selling a Fillet Mignon that's stuffed with dog doo. Last I saw there wasn't much of a market for this kinda steak!

Congratulations to the financial innovation wizards of Wall St! They were somehow able to invent assets that cost millions of dollars and turn them into something that's almostcompletely worthless.

Trading:

Let the financials run on the news here folks. It will create a nice shorting opportunity. I think its going to be a quick pop. Sweden's banks popped 20% on the news when they were saved in 1992 before the equity holders were wiped out.

In the long run I still think these banks are toast. They feds may attempt this sticksave but its not going to work. Once the banks and the feds cannot agree on the pricing of the banks toxic assets, expect the government to take them over and finally begin to start cleaning up this financial fiasco. Lets hope we don't go bankrupt in the process.

Our banks are insolvent folks and the last I saw 0+0=0.