Wednesday, March 11, 2009

The Big Banks Show Life

Citibank closed Monday at $ 1.05 per share. On the same day, Citi's Chairman, Viktor Pandit announced that Citi would earn $ 1.50 per share in the first quarter of 2009. That's just in the first quarter. Does that sound strange to you?

A similar set of facts exists at Bank of America. Their earnings are superstrong this quarter, well in excess of their market capitalization.

What about the other banks? Jamie Dimon of JP Morgan said today that January and February were the best months in JPM's history in the bond markets. They are expecting very good earnings first quarter of 2009.

I thought the financial system was collapsing and needed all that TARP money. How can these banks be failing yet have huge operating earnings? Easy. Create a regulatory bureacracy with completely absurd accounting rules and then give those accounting rules the ability to shut down a business. That is basically what has happened to the US commercial banking system. C and BAC do not need bailout money. The whole idea of the government's cash infusion was to rebuild the balance sheets that had been savaged by arbitrary and stupid accounting rules. C and BAC have plenty of cash and don't need any help from the government.

What the banks need is relief from the government, not help. Anytime the government puts cash in a bank or an insurance company it just guarantees that no private capital will show any further interest in the company and the company's stock drifts toward zero.

How to handle a bank that may truly be in trouble (not arbitrarily put in trouble by non-sensical accounting rules)? Do a controlled bankruptcy by forcing bondholders to trade in their bonds for new bonds that are worth less than their original bonds with the balance made up of toxic assets (from the bank's balance sheet) which are now distributed directly to the bondholders in exchange for the part of the original bond value that is surrendered.

This solution, posed in the above paragraph, forces stock and bond holders to bear the brunt of the so-called "bad assets" of the commercial banking system and enables the banks to emerge healthy and gung ho. Equity and bondholders suffer, but they should suffer. They didn't do their homework. They bought stock and bonds in a company they probably should not have.

Leave the poor taxpayer alone. He/she should not pick up the tab. The tab should be borne by those who made the bad decisions.

Anyway, the commercial banks are showing life and may well triumph over government...the jury is out. Hopefully, the better banks will quickly pay off the TARP money and tell Obama and the Congress to get a life.