Banks Hammered

by Larry Levin

The market opened lower due to the European banking news, sliced-n-diced traders for four hours, and then fell to new lows late in the day. When the smoke cleared we had a new President, and a Dow that closed below 8,000. The market thought we would also have our first nationalized bank before the close, but apparently that's being saved for another day. Odds are the bank to be nationalized will be Shitibank.

The sell-off started in the UK. Yesterday we saw Allied Irish bank shares down 62%, the Bank of Ireland fell 49%, and mortgage and insurance specialist Irish Life & Permanent dropped 41%. These shares plummeted because investors feared these firms would be accepting government money soon, which will severely dilute, if not completely flatten, common shareholders.

Although these are important banks to the region, the shocking story came from RBS - the Royal Bank of Scotland. The carnage started at RBS when it announced the worst loss ever by a UK company. This led to the fear that the government would take instant control of the company, again potentially hammering common shareholders to zero. RBS dropped 67% in one day.

Speaking to reporters yesterday about the situation, Prime Minister Gordon Brown said - "I am angry at the Royal Bank of Scotland and what has happened." RBS took "irresponsible risks," in investing in U.S. subprime mortgages and ABN Amro, he said.

What is truly scary; however, were the calls from the Parliament to seize the ENTIRE banking industry and force these banks to lend. For now, that idea has been rejected.

Sadly, politicians across the globe are incapable of learning from history - even recent history. After all, one could squarely blame a HUGE portion of today's banking crisis on government - the US government to be specific. None of today's problems could have happened without the Fed's irresponsible micro-mismanagement of interest rates, and the US government's backing of Fannie Mae and Freddie Mac.

And why did the government, specifically Barney Frank and Chris Dodd, so steadfastly refute all calls to reign in FNM and FRE? There are surely many answers such as; perhaps they truly believed they were right, they were paid enormous sums of money in political contributions, they were buying votes, they wanted to legislate housing for all - as if it were a human right - even if people couldn't afford the home, they knew what was best, it will never get out of control (and if it did they'd just blame the banks). No doubt there are more reasons, but that should suffice for now.

So here we have calls from the UK Parliament, and calls from the same dopes that caused the problem (the US Congress), to FORCE banks to lend. But banks are lending, if one can clear the newer more responsible lending standards. Do politicians want banks to go back to the outrageously irresponsible lending standards of a few years ago? Furthermore, there is far less demand for money as I wrote in The Velocity of Money yesterday. Can politicians force you to borrow? Should politicians force banks to lend to corporations with a dodgy balance sheet? Do they not see a problem here? HOW STUPID ARE THESE PEOPLE?

Of course the answers are NO, but when did that matter to a thought-challenged politician on either side of the pond? And without going back to the irresponsible gorging on debt, little will change.

Before the politicians force banks to lend, other help is coming. The Independent recently reported that the US Treasury may support UK banks with up to 100-billion Pounds, which is about $138-billion.

It's quite odd how the US Treasury keeps spending money that it doesn't have, especially when it doesn't even have the authorization to make such arrangements. All spending bills must originate in the House of Representatives.

But wait, there's more! In an effort to spike inflation in the UK, our friends across the pond are about to follow the Fed's lead (again) by eliminating some record keeping so that it can print currency without having to report it. The US Fed did away with reporting M3 a few years ago. Praise the obfuscation!

From the Independent:

The Bank of England will be able to print extra money without having legally to declare it under new plans which will heighten fears that the Government will secretly pump extra cash into the economy.

The Government is set to throw out the 165-year old law that obliges the Bank to publish a weekly account of its balance sheet - a move that will allow it theoretically to embark covertly on so-called quantitative easing. The Banking Bill, which is currently passing through Parliament, abolishes a key section of the law laid down by Robert Peel's Government in 1844 which originally granted the Bank the sole right to print UK money.

The ostensible reason for the reform, which means the Bank will not have to print details of its own accounts and the amount of notes and coins flowing through the UK economy, is to allow the Bank more power to overhaul troubled financial institutions in the future, under its Special Resolution Authority.

Back in the US, banks are still hemorrhaging cash. Shitibank traded below $3.00 today, and is certainly in need of more capital. It is about to sell its only asset that is making money, we taxpayers will be stuck with the rest. Today it announced that C is slashing the dividend to 1-cent. Umm, won't it cost Shitibank more money in overhead (employees & postage) to get this done than it will pay out at 1-cent/share? I nominate Shitibank for the first US bank to be nationalized.

But wait, there's more! Wells Fargo was down 23.8% today, as word spread that its cocky acquisition of bankrupt Wachovia aint digesting so well. Idiots! Even a high school dropout could have seen that Wachovia's $120-billion option ARM portfolio was as unstable as nitroglycerin. And now it's about to go boom. (Yeah, that experiment of giving huge failing banks money to buy other failing banks, which makes an even bigger failing bank, was a great success.)

But wait, there's more! Bank of America (BAC) was in the news again today, posting a 16.5% loss by the close. An analyst at Friedman, Billings, Ramsey says BAC will need at least ANOTHER $80-billion to stay solvent. Where will it get that kind of loot? Why the taxpayer of course.

In a nutshell, the US is backing foreign governments via loans from the Fed, possibly foreign banks via the Treasury, and certainly US banks. So the question today is: Who is backing the US? After all, we're dead broke.

Previous Day's Trading Room Results:

Trade Date: 1/16/09

E-Mini S&P Trades*
(before fees and commissions):


1) FT sell @ 11:30am at 820.25 = -2.25 (1 lot)

2) Many "good" trades were not filled.

3) Algorithm positions (4)...combined SofT and Algo total...-7.50

ZB (30 Year Bond) Trades*
(before fees and commissions):


1) No trades today.



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