EPIC FAIL

We all know that the financials really have the entire planet by the family jewels. Most economies around the world depend on revolving free flow of credit.

Even with all of the TARP money pumped into the banks, all of the government programs deemed at stabilizing the credit system. FASB and Congress endorsing accounting fraud with regards to mark to market accounting. PPIP. Stress Tests. The roughly billions of new stock issued by the banks to reflate operations. The one thing that is lost on everyone is that the US Economy along with the credit system is like a shark needing to constantly swim around pumping oxygen into its gills. The way the system is set up, its needs fresh credit every year to survive. The banks need consumer spending and credit to expand every year. If not, the current way the banks are set up, they fail. There is little room for error here even with all that has been done.

Currently the banks are not doing business because the consumer is tapped out. The consumers that aren't tapped out cant get loans because the banks don't want to lend. The banks are not lending despite what ever the Treasury is telling you. Why should they lend anyway? Its bad business, and they do much better parking their reserves with the Fed, and let their HFT trading programs run up high beta stocks. So there is no lending going on what so ever. How are the banks going to earn their way out?

The dirty little secret here is that the Treasury is aggressively monetizing Wall Street Bank debt while the smaller banks and consumer die.

OK. let me just say the banks are doing the right thing by not lending, they should be conserving capital to offset other credit issues they have. The losses in credit card, auto loans, bad loans, HELOC need to be offset. So either the existing loan book improves (not happening), or they start to lend more (not happening), they sink to the bottom of the ocean like Jaws.

Another reason is that more and more are failing at an astonishing rate this year alone.

www.bloomberg.com/apps/news?pid=20601087&sid=aTTT9jivRIWE

Defaults and foreclosures are gaining more and more momentum. With home mortgage foreclosure rates remaining very high and getting worse, and with the bulk of the commercial real estate defaults yet to come, the failure rate of banks is likely to increase further in the next nine to twelve months, not decline. The situation will be compounded if commercial and industrial (C&I) loans also default at higher rates because of a weak or non-existent recovery.

We need the mother of all economic recoveries here to prevent disaster. Meandering through will not do it. A return to 3% GDP growth may not do it. We need a couple of years at 4-5% GDP growth to have any chance that some of these banks can earn their way out of trouble.

I don't think that type of economic growth can be realized. It certainly is not going to happen if commercial bank credit and consumer spending growth doesn't expand drastically and quickly.

The FDIC will have to clean up the bank seizure mess, but they like the consumer is also almost tapped out, of course they can ask /FED/Congress/Treasury. They are currently on the hook for some $8T in insured deposits, but they only have some $41B in reserves. Anyway you look at it, the FDIC is bankrupt.

I have not even gone into the new FASB mark to market regulations that will make loans even more toxic on bank balance sheets.

All of this spells doom for most US Banks. The only way to avert this is more obscene government spending to pump up GDP growth to the 4-5% area. Without a strong recovery led by consumers, this economy will go back into a serious recession in 2010, and this time we may not come out of it before 2012. In the meantime, there will be massive carnage with regards to Regional and local banks, more foreclosures, more personal bankruptcies, and more credit defaults.