The Bumbling "Bad Bank" Blunder

Good Evening Folks!

Hold on tight tomorrow folks! We have the makings of a bloody day in the markets given the news that hit afterhours.

The market was somehow able to shrug off all of the bad news today and close up around 1.5%. this was despite the horrific news that came out of the auto industry. Car sales among the big three dropped 40-50% in December versus the previous year. If this isn't a depression like print I don't know what is.

Another thing I noticed the last couple days is we are starting to see some serious divergences in price action regarding the different sectors of the market. More on this later.

Lets get to the after hours news. It appears the "Bad bank" idea is once again beginning to fall apart:

"The Obama administration is still struggling with the details of a bad bank concept that is expected to be part of a package of industry and consumer measures to be unveiled next week, according to a source familiar with the situation.

What’s more, new rules on executive pay and loan transparency for firms participating in the government bailout that will be announced this week may not be as tough as originally thought, the source said.

“They’re still trying to solve the bad bank [pricing] thing,” the industry source said. “It’s not ready for prime time.”

When asked if that could lead to a delay in next week’s announcement, the source said, “Anything they roll out would seem hollow without a bad bank concept.”

Representatives of the Obama administration and the financial services industry capped three days of talks on the bad bank idea and other measures to ease the credit crunch Sunday, following speculation Friday that the pricing issue had become a major hurdle.

Another source—this one on Capitol Hill—didn’t believe a decision had been made as of Tuesday.
The bad bank concept—namely a government entity to buy, hold and eventually sell bad, or toxic assets, from financial firms to help clean up their balances sheets and spur new lending—has attracted growing support since Federal Reserve Chairman Ben Bernanke proposed it in a major speech three weeks ago.

Nevertheless, it has been dogged by debate and doubt over how to price the assets, which some estimate could total $1.5 trillion to $2 trillion and which fall into two broad categories—non-performing and illiquid.

Sen. Charles Schumer (D-NY), a senior member of the Senate Banking Committee, Tuesday joined the skeptics, telling CNBC the bad bank approach would be "hugely expensive" and added he prefers government guarantees of such assets.

Rep. Brad Sherman (D.Calif.), a ranking member of the House Financial Services Committee who opposed the original TARP plan, is adamantly opposed to anything but capital injections, which he says give the government its best potential return on investment through preferred stock and warrants.

“I’m trying to get people to say we don’t buy toxic assets, we buy preferred stock," said Sherman. “With the ring fence or bad bank you know what you’re paying but would anyone know the value of what you are receiving?” Sherman has made his position known to Treasury Secretary Timothy Geithner."

My Take:

I find it so convenient that this news was released at 4:01 pm. Crooks! Can you say nightmare? The plunging price action in Bank of America said it all today as this bad bank concept appears to have come to a standstill.

The bottom line here folks is the government is out of options. If Obama attempts to pull off the bad bank, the bond market is going to send yields through the roof. We don't have $1-2 trillion dollars thats needed to repair their balance sheets. Hell, we don't have the $1 trillion for the stimulus thats about to be approved! Come to think of it: We haven't had the money to pay for any of these bailouts! There is a point at which this all has to stop folks. If it doesn't, the bond market will stop it for us. The 10 year soared once again today by the way. Higher yields will destroy whats left of the housing market and our economy as the cost of money dramatically increases.

If the government can't afford to do the bad bank, these pathetic zombies are all going to go bankrupt because they are all insolvent. The only other options we have in preventing this is to:
A) Continue to throw taxpayer money into these black holes and get no return on our money.

Or:

B) Nationalize them for a few years by grabbing shares of preferred stock which then wipes out the common shareholders.

Talk about being between a rock and a hard place! There are no good options here ladies and gentleman. I think the "black hole" option is off the table IMO. The taxpayers are getting restless and are tired of bailing out a bunch of criminals. Washington senses this. Obama is no dummy and he realizes he needs the nations support in order to be successful. The common shareholders are all in trouble as a result in my view.

I say this because when its all said and done, the government will realize that the only way to restore confidence in our capital markets is by throwing out the banking criminals that got us into this mess. Once they are cleaned up via nationalization, we can then sell them back to private equity in a couple years. Only then will we be able to begin the healing process.

The government must understand that the credibility of the current Wall St regime has been completely shot. No one wants to lend or do business with these crooks. Too many Americans have suffered as a result of their actions. The ONLY answer to curing this crisis is to remove the heads of these banks who created and executed the greatest economic fraud on the history of the world.

My Mortgage

I recommend that everyone takes a few minutes to watch this clip from Mr Mortgage on CNBC today. The financial bearish bloggers are finally starting to get their props after being right when it comes to this meltdown.

The take home message from this clip is foreclosures(REO's) are way under reported by the banks. The pigmen are sitting on most them versus putting the REO's on the MLS for sale at a huge loss. This is a clever way by the banks of hiding the reality of how bad this nightmare really is. The real inventory of unsold homes could be 20-21 months versus the 12.9 months thats currently being reported according to Mr. Mortgage.

Whats even more frightening here is that these foreclosures are mainly Alt-A and prime loans. Suprime is actually finally "contained". How ironic is that! Prime borrowers aren't supposed to foreclosed on folks! This is how "loose" the lending standards got at the peak of the bubble. Stay the hell away from housing. Prices will be free falling for years.

Bottom Line:

Disney and Electronic Arts both had big misses after hours which further damaged confidence following the "bad bank" news. The ADP jobs number tomorrow could be a huge market mover. If the ADP is really bad we could see a real ugly market tomorrow.

I made some trades today. I picked up some FAZ and also added some more SGP March PUTS. I also picked up a little more SRS for a short term hold. The reason I picked these up was because I hated the price action on the big banks as the market soared today. BofA and Citi were both down. BofA was down almost 12%. I also grabbed some Q's calls as a hedge. Tech has been acting well and it had another good day today.

My hunch here on shorting the financials was that the "bad bank" had hit a snag. I grabbed some commercial names because if the banks don't get bailed out, then commercial has no chance whatsever of getting a handout.

We will have many answers to our questions over the next few weeks as the Treasury rolls out their recovery plan. If I see some nice profits tomorrow I might take some of the shorts down.

One thing to take note of here in terms of divergences. The market is moving higher but the financials are not participating. Is this a trend or just a anomaly? Time will tell but its on my radar screen.

Stay Tuned!