Bad bank, bad bank, whatcha’ gonna do… when they come for you
Today's Financial News - Posted January 28, 2009
Washington is meddling with free markets once again. It has not even voted on Obama’s huge stimulus, but is already talking about a plan that could add another trillion dollars of taxpayer money to the list of bailout mistakes. Has Obama found the money tree?
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): The Democrats are in power and they are pouring more fertilizer on the nation’s money tree with each passing day. Congress is about to pick a trillion-dollar grapefruit from the imaginary shrub and already the calls for more bailout funding are taking root. But our leaders have already picked the branches bare. They only way to grow more money is to spread more, um, manure.
Unfortunately, Washington has more of the foul-smelling stuff than it will ever need.
Now that Obama’s $825 billion, $900 billion or trillion-dollar stimulus is almost certainly going to make it through Congress, Capitol Hill’s focus is turning away from stimulating the economy to saving it. Once again, the nation’s failing banks are at the forefront.
Now that it is blatantly clear that the $700 billion TARP was inadequate in both scope and management, Congress is feeling its way through the notion of a “bad bank.” We know who would run the pseudo-bank, Shelia Bair and her FDIC, but nobody has a clue what the dang thing will cost. That’s okay, though. It’s only money.
The left at its best
The same problem that got us into this financial debacle, egregious valuations of derivative investments, is the same thing hampering its solution. Nobody knows what how to price the bad assets. If we give the banks what the market is offering, we give them no help. If the government overpays, it merely switches the fiscal burden from one bank account to the other. And if we nationalize the banks, we might as well apply for European Union membership and trade our dollars for euros.
As the nation gets a grip on the full size of the banking-industry miscalculations, whether they were made on purpose or by accident is beyond argument, economists now believe total credit losses are somewhere in the neighborhood of $2.1 trillion. To date, the banking industry has only absorbed $975 billion. We are not even halfway done.
The fact that something needs to be done is obvious. Just look at the losses.
- Citigroup (NYSE:C) just reported a $8.3 billion loss
- Bank of America (NYSE:BAC) lost $1.8 billion
- Wells Fargo (NYSE:WFC) reported this morning it lost $2.83 billion
- Morgan Stanley (NYSE:MS) lost $2.2 billion
Whether the problem will be resolved with the creation of a national “bad debt” repository will be a subject for debate for a long time. My vote? These banks got us into this mess, let them get us out. If not, the competition will. If we are a free market in good times, we are a free market in bad times.
But a debate will make you no money. There is only one thing worth talking about and that is the huge trading opportunity Washington has created.
Just today, as rumors start to trickle down Capitol Hill, shares of the nation’s top banks are up big. As I write, Citi is up 16%. Bank of America is up 15%. Morgan Stanley is up 8%. And Wells Fargo is up by 20%.
Take advantage of it
I have no doubt, this notion of a bad bank will create the volatile market we saw during the days of the TARP creation.
The best indicator of volatility, the VIX is on the decline today. That means options spreads are narrowing. It gives savvy investors an opportunity to buy options at a discount.
My call for the day, SPDR (AMEX:SPY) February 86 Puts (SZCNH). The overall equities market is entirely too inflated and we will see a significant turnaround in the next week. Take a look at the trade and see if it works for you.
So the answer to the headline… Bad bank, bad bank, watcha’ gonna do?
You are going to make money off the government’s greed for votes and a yearning for a quick fix.
Next Article: Do the cruise lines need to be “bailed” out?
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