Thursday, March 5, 2009

De-Facto Nationalization

De facto bank nationalization, here we come! By simply not having a plan ready, the White House and Tim Geithner have allowed the stock market to take control of the situation, and the stock market is destroying Wells Fargo (WFC) , JPMorgan Chase (JPM) , U.S. Bancorp (USB) and Bank of America (BAC) .

The relentless short-selling of these stocks is working. When you couple it with the skyrocketing default swaps, even on limited volume, you can pretty much push these stocks wherever you want. They are simple playthings.

Unfortunately, these companies are about trust, and you erode trust, trust in preferreds, trust in bonds, when you push their stocks down, which is what is happening. You don't stop eating Frosted Flakes if Kellogg (K) goes down. You will still take the drugs of Merck (MRK) if its stock gets hammered. The ratings agencies that rate their bonds are unlikely to take action against these companies.

But that's not the same with banks. If you cut the bank stocks in half, you cut the confidence of those who put money with these banks and, in some cases, have money in these banks.

By not getting control of the situation, by offering forbearance and a plan that allows government capital to be exchanged for a note to repay, at the same interest rate - we are allowing the stock market to dictate the situation. Why Geithner, of all people, who saw this same process occur under his watch with Lehman, doesn't see this, is incredible to me.

The stock market is also responding to what looks to be a sense that the mortgage plan will not help one in nine people because the qualifications are pretty onerous. It is a confusing plan and one that will not lend itself to instant success, and that is why I wanted the government to stop the charade and just offer 4% money to everyone who wanted it, and we could get through this.

Not happening...

So, with the stocks of the banks falling apart and therefore the banks falling apart, and General Motors (GM) and Ford (F) and Citigroup (C) changing hands at a buck and change (small change for Citi) we are just being pancaked here. And the Chinese aren't saving us as we thought.

Once again, every day the world's economy gets worse, and every day the market correctly reflects the deterioration.

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