Bank Nationalization is Inevitable...Brace For It.

Bank Nationalization is Inevitable-

As we roll out of the first quarter earnings season, the earnings are obviously bad, downright horrible. However, I sense the market is not that fixated on earnings or lack there of. Investors are more worried about the future of the US Financial System. There have been many ideas thrown about since President Obama took office and Tim Geithner took over for a glaringly incompetent Hank Paulson, but one thing is as inevitable as another late season collapse by my beloved New York Mets.

NATIONALIZATION

Its happening, get used to it! The questions to ask are the following:

How will the Market react? Answer: What do you think? Badly!

Will there be a Market? Answer: Of Course - Life Goes On.

What happens to the banks? Answer: Equity Holders get wiped out, debt holders will fight/litigate for the assets of the banks if there are any left.

Is your money safe? Answer: Of Course - This is America - Not Putin's Russia!

Where is the Market Going? Answer: Sideways to down for the rest of the year. There are two important factors we still have to deal with after we get a resolution to the Banking Crisis.

1-Housing - When does it stabilize? Answer: Not until 1st Qtr 2010 at the earliest. Foreclosures have to stop. Bottom Line. In most areas of the country, the foreclosure price is setting the market price, this is causing devastating pain to the housing market.

2-Jobs- When do the job losses end, or more importantly when will employers start to add jobs? Answer: Not until we start to get positive GDP revisions, which don't look promising until 4th Qtr 2009 at the earliest. Remember the last recession,(2001-2003) it took 18 months for jobs to come back into the economy after positive revisions to GDP. So look forward to sometime in 2011 for this to materialize.

What should people do? Answer: Stay in Cash

But before anything can be settled the Treasury has to figure out a way to stop these Financial Institutions from going under and rebuild Tax Payer Confidence.

So what's going on at the Treasury? My take....

Well....lets just say, like a bad report card you have to give your parents, you procrastinate to the point of exhaustion. You are stressed and overwhelmed with the bad news. You are afraid of letting down your parents, and worried sick about what they will think. In the end, showing your "bad marks" to the boss really is in a word "Inevitable". Why waste valuable time when you can get an early start on next semester? This is what Investors/General Public (Parents) are waiting for and Bank Executives/Treasury (Students with Bad Report Cards) are stalling on.

Just get it over with. Like a Band Aid, Tim Geithner needs to take swift action, and quickly create only one Financial Institution. We have all heard - Good Bank/Bad Bank. Is there really a Good Bank in America? I don't think so. Just create One Bad Bank - The Troubled Asset Bank (TAB) - like the bad cola, dump all of the toxic hard to price securities into this institution, which will be owned by the Tax Payer, and serviced by the Treasury. Finally let the existing financial institutions service loans, mortgages, and deposits, so their customers (US Tax Payers as well as others) can have no further disruption in their lives.

Anyway here we go..

TAB Banks

JP Morgan (JPM)- The best institution around, except their derivative exposure (not enough reserves, not enough mark downs) is scary and unaccounted for. Washington Mutual is a total disaster, and one of the biggest culprits of the sub prime debacle. The jury is still out on this take under by JPM. Huge exposure to Manhattan Commercial and Residential Real Estate (Next Shoe to Drop) as well as HELOC, Credit Card Receivables, and Auto Loans have yet to be realized, but what they have is a Retail/Institutional Banking Network that cant be minimized. Jamie Dimon used to be a positive, no longer as he will be forced to cut the dividend and start to rebuild equity and reserves. I only say that JPM gets partially nationalized in the sense of that mammoth exposure to CDS and other exotic toxic derivatives they currently have no idea how to manage or price. From the guys who brought you the overrated, overused, and misunderstood VAR Model (Value At Risk), they cant even properly price or manage their own risk.

State Street (STT)- Huge mark to market losses, Moody's downgrade, and more visible losses for the future mask overall strength in their trust and custodial business. This used to be a premier institution, now its just another place to get a pay check if you still can.

Bank Of NY Mellon(BK)- Losses continue to mount in trading book and more losses to come. Do they have the equity to cover these marks? Trust Business is a bright spot, like kissing your sister, but does it get you excited?

Bank Of America (BAC)- Hmmmm.....What can you say? My bank for the last 10 years or so. Used to be a bank you can trust, but Ken Lewis has destroyed that trust with horrible due diligence in Merrill and Countrywide Deals. Pre Merrill, BAC losses were manageable, but post Merrill they are catastrophic. New BAC doesn't have the equity (even with TARP) to cover Merrill's future losses and BAC pre-existing loan book hasn't taken enough reserves to cover losses. There is no reason to be an equity or even a debt holder in BAC. Ken Lewis needs to be shown the door and return the keys to that $10 Million Condo in Time Warner Center to which from where he negotiated that Merrill merger from.
BTW- Why cut the dividend to .04 annually? Why not eliminate it completely? This alone is a disgrace.

SunTrust (STI)- This bank needs to die soon. A horrible tragic mistake of a financial institution. One of the worst loan/mortgage books concentrated in the worst parts (Georgia/Florida) of the country, and they are still making bad loans! Their traders don't know how to trade, their brokers/salespeople sell the wrong products to the wrong clientele forcing losses that they cant manage on their balance sheet, and the CEO is oblivious. The dividend is a joke, its only there for cosmetic purposes, like lipstick on a 14 year old...who are you trying to kid? This one probably files for bankruptcy protection by the end of the month. One word describes SunTrust - TOAST!

Wells Fargo (WFC)- What possessed Wells to ever even consider buying Wachovia? What were they thinking? Were they even thinking? Wachovia was WAMU's little brother, it did everything big brother did - even worse Wells Fargo bought Golden West in this mugging. You remember GW? They invented the ARM Mortgage. The Pay Option Mortgage that pretty much nailed Wachovia's coffin. Wells Fargo took huge losses in its last earnings report, took even bigger reserves, but not enough to cover $50 to 60 Billion in expected Mortgage losses, mostly from Wachovia. Bad Days are coming to Wells Fargo, which means bad days for the US Taxpayer. Why have a dividend this high when you took $4 billion reserve charge just to get Wachovia in line with your internal metrics? Again, are these guys even thinking? This bank is mathematically a goner.

US Bancorp (USB)- Once a great mid country bank. Conservative loan portfolio and even more risk averse management made this bank the one to own for a long time. Memories are wonderful. That's why they call them memories. Reserve build up is troubling considering the credit worthiness of its clientele. USB like every other financial institution is going through a cyclical downturn in credit. Rising employment/credit card charge offs/foreclosures have hit the country like Cocaine in the 70's. The dividend is not safe. How can it be?

PNC Financial (PNC)- This one actually is troubling in the sense that its not down that big. Their earnings report was a disaster.Every metric poor, why hasn't the stock been taken down? Nice looking girl with ugly parents? I don't get it. But look at it this way, they are going through the same cyclical challenges that USB is going through, yet USB which has better credit quality, better balance sheet has seen its stock tank worse then PNC. I think its a matter of time till the losses become unmanageable. Why buy National City (NCC). That foot print stinks. Can we all get over Big is Better? Is it really? Don't answer that! Anyway they took 1 billion in reserve provisions, relatively speaking not that huge a number, but they have less equity on their balance sheets then other rivals, thus making that figure large compared to their rivals. Most worrisome, Wall Street is still in love with PNC, but again that pretty girl with the ugly parents? Do you trust her? Is she really that pretty on closer inspection. Like Seinfeld's Festivus Episode, PNC looks great in bad lighting, in a clearer brighter environment, look to run and run fast.

Citigroup C- We finally come to Citi. My former employer. The grand daddy of them all. Once a highly respected and prestigious place to work, now just the worst financial institution that ever existed. Once they had traders/employees (ME) who cared about trading, understood risk, respected their elders, listened to their peers, and learned their craft in the most obsessive way. Those days are like " The Boys Of Summer" long gone. These guys practically invented the modern banking system, then subsequently they destroyed it. So basically they are Vishnu and Shiva put together. What do you expect from the people who gave the inept NY METS (Sadly, part of my soul) $400 Million to put Citi Field moniker on the new stadium? Really $400 Million? That's pretty expensive lipstick to put on any pig. Is that going to make David Wright or as my dad says David "Wrong" get one hit in a big spot? I digress, forgive me, but lets just say the best thing that can happen to Citi is nationalization. This company doesn't have the right to have common shareholders no less debt shareholders. This place was brought down by two Princes - Chuck and Alwaleed. Chuck had no clue how to run the place, no clue about risk management, in fact George Costanza knew more about Risk Management then Chucky. The single worst executive decision ever to be made period, is when Sandy Weill gave the keys to the kingdom to Chuck Prince. It was all over but the crying. Thus brings us to Alwaleed. Is this guy really a Prince? Can we check this out? Is this the same Prince who was the largest single shareholder, who kept drinking Chucky's Cool Aid? Who didn't want to cut the dividend even though Citi was hemorrhaging cash every single day? Who cares about the employees, shareholders, and pensioners, when I need to get paid first. You can go on and on and it won't make any more sense. What's Coughlin's Law? Oh Yeah...Bury the Dead...they tend to stink up the joint.

Out of all the companies mentioned, Citigroup, Bank Of America, and Wells Fargo most probably will be nationalized, with State Street, BONY, PNC, USB being rolled up into one institution that is guaranteed by the government. The real wild card is JP Morgan. Too big to fail? Too scary to fail? I can't tell you even with 18 years experience in capital markets what's going to happen there. Just the notion of government intervention pertaining to their derivative exposure will wreck the global markets. You don't want to go there - believe me.

Even today, Obama has capped executive compensation to 500K/Yr. This is a pre-curser to a much larger news story that is inevitably going to happen.