Jaws to the floor ladies and gentlemen, every bank in the free world is hemorrhaging market capitalization all over the place as they head for the door marked "nationalization."
What happened here? Was there another banking crisis that happened while we were all watching the Inauguration yesterday?
Not quite. This is more of a confluence of different factors. Kind of like we've got the "Dream Team" of bank-killers scattered to the four corners of the globe and they're all working in unison somehow.
In Ireland, it was a combination of shady executive dealings and the whisper of bank nationalization. That's all it took to encourage investors to cut-and-run, cutting the market capitalization of the remaining Irish banks by about half and escalating the need and the urgency of nationalization on the Emerald Isle.
For the UK, it was Gordon Brown's announcement of further nationalization plans and his adamant request that banks' balance sheets be more transparent. Shares of Barclay's, Lloyd's and HSBC promptly went cliff diving, hit the pavement, and started digging.
One can't help but wonder whether nationalization becomes a self-fulfilling prophecy when it involves wiping out the shareholders. It was a little more static with Fannie and Freddie last year; with stock prices only hitting rock bottom when nationalization was clearly inevitable. But lately, these banks seem eager to free-fall anytime a government representative even utters the word ‘nationalization.'
Meanwhile, On Our Side of the Pond...
No, it's not much better over here. But at least over here, the rapidly falling share prices are the banks' fault and not necessarily that of the government.
As we mentioned yesterday, Bank of America has received an extra US$20 Billion to "digest" (great word choice there) Merrill Lynch..., which they willingly bought with the last round of free taxpayer money. If you see a pattern there, then you're not alone.
And there's more news coming out of Citigroup than Washington D.C. After unsuccessfully seeking out new investors and rich Arab princes, apparently they'll be splitting their retail operations off from their riskier enterprises. The shareholders aren't buying it, we're not buying it, and even Bloomberg isn't buying it. One of their recent headlines explains how, "Citigroup's Pandit tries to Save the Little that's Left to Lose." A classic, that headline.
You see that "little" that Citigroup's got left to "lose"? That's your tax dollars hard at work. At this point that's really all they've got left, and probably not even too much of that.
No, no. Let's make no mistake. The time for action - the time to prevent failure - has come and gone. A long, long time ago. As a blogger from the London-based magazine The Economist put it, "These banks grew so large that their failure threatened the global financial system, and then proceeded to fail. To simply hand over the money necessary to return them to solvency would abuse the taxpayer's trust, reward bad behaviour, and send a terrible signal to other bad financial actors out there. Time to quit mucking around and make with the nationalisations."
I know, I know. There's a sting of socialism in that comment. Even - as Legal Counsel Bob Bauman has pointed out before - a tinge of the economic component of fascism in that kind of thinking. But we must do that which is necessary to avert disaster, yes?
"The banks here are bust, with total writedowns probably more than the entire market cap of the financial sector at this point," Investment Director Eric Roseman told me candidly yesterday, "So, yes, the government will follow UK's course and backstop all bad assets and eventually nationalize the entire group. This is inevitable. The losses won't stop until we segregate bad assets off bank balance sheets combined with near or total nationalization. The markets won't relent unless some bold action is taken now."
But of course, there's always an alternative (however untenable it may be)... "The alternative is to let bad banks fail," Eric said, "Then we have a full scale Depression and the financial system will regress back to the Dark Ages."
That sounds pretty untenable.
So the Endgame here is nationalization then?
Wrong, Wrong, Wrong.
The Endgame here is that this isn't actually the endgame. Nobody wins...at least not yet. Because the crisis has only just begun, and the failure of the global banking system is just the first chapter in a much larger story.
In a very French, Jean-Paul Sartre sort of way, the world is throwing us a big curveball, and we're not sure if anyone's really seeing it yet. And even if they're seeing it, it still probably hasn't sunk in.
As of September 2008, some 173 million iPods had been sold across the world. In 2000, there were roughly 168 million personal computers in the US, and the number is probably more like 200-250 million today. There are 9 million mobile homes in the US, approximately 102-130 million single-family homes, and countless million apartments.
Do you see what we're getting at here? There aren't many necessary - or even unnecessary - goods left for American consumers to consume! We are already saturated.
We're digging in a little deeper with our saturation survey lately, but one could safely assert that there's already a home, an mp3 player and a personal computer for every man, woman and child in the United States. And this isn't just backed-up inventory; consumers already own or have purchased the lion's share of these goodies/housing. So when Obama, Gordon Brown or anyone talks about freeing up the flow of credit, you just have to ask yourself "why?"
So that we can buy more iPods? More double cheeseburgers and speculative property? We've already got more "stuff" than we know what to do with, and the best possible plan that the twin-worlds of government and finance can come up with is to get, "back to normal?"
Well folks, the market has the same plan. And unlike bankers and the government, the market realizes that the last decade of hyper-charged consumption was anything but "normal."
So the endgame is that - regardless of what happens to the banks - we're coming up on a multi-year run of what amounts to terrible business for them. The collapse of the Baltic Dry Shipping Index is a bell-weather for evaporating demand of foreign goods, and the 4th quarter's collapse in retail sales signals the death of domestic consumption. The bottom line - and there's no two ways about it - is that America is embarking on a new trend toward greater savings, less spending and a lower demand for credit. Thanks in part to the ravenous consumption of years past.
And instead of a banking system where the forces of open-market competition have narrowed the field down to a handful of the most honest, efficient players out there (banks like Wells Fargo or BB&T), we'll be dragging along a government-sponsored "competition-free zone," composed of banks who were successful in the race to get "too big to fail."
Now we'd like to leave you with a question; if these banks built themselves toward inevitable failure during the boom - when the sun shined and anyone could make money - then how do you think they'll do during the bust?
What a world.
What happened here? Was there another banking crisis that happened while we were all watching the Inauguration yesterday?
Not quite. This is more of a confluence of different factors. Kind of like we've got the "Dream Team" of bank-killers scattered to the four corners of the globe and they're all working in unison somehow.
In Ireland, it was a combination of shady executive dealings and the whisper of bank nationalization. That's all it took to encourage investors to cut-and-run, cutting the market capitalization of the remaining Irish banks by about half and escalating the need and the urgency of nationalization on the Emerald Isle.
For the UK, it was Gordon Brown's announcement of further nationalization plans and his adamant request that banks' balance sheets be more transparent. Shares of Barclay's, Lloyd's and HSBC promptly went cliff diving, hit the pavement, and started digging.
One can't help but wonder whether nationalization becomes a self-fulfilling prophecy when it involves wiping out the shareholders. It was a little more static with Fannie and Freddie last year; with stock prices only hitting rock bottom when nationalization was clearly inevitable. But lately, these banks seem eager to free-fall anytime a government representative even utters the word ‘nationalization.'
Meanwhile, On Our Side of the Pond...
No, it's not much better over here. But at least over here, the rapidly falling share prices are the banks' fault and not necessarily that of the government.
As we mentioned yesterday, Bank of America has received an extra US$20 Billion to "digest" (great word choice there) Merrill Lynch..., which they willingly bought with the last round of free taxpayer money. If you see a pattern there, then you're not alone.
And there's more news coming out of Citigroup than Washington D.C. After unsuccessfully seeking out new investors and rich Arab princes, apparently they'll be splitting their retail operations off from their riskier enterprises. The shareholders aren't buying it, we're not buying it, and even Bloomberg isn't buying it. One of their recent headlines explains how, "Citigroup's Pandit tries to Save the Little that's Left to Lose." A classic, that headline.
You see that "little" that Citigroup's got left to "lose"? That's your tax dollars hard at work. At this point that's really all they've got left, and probably not even too much of that.
No, no. Let's make no mistake. The time for action - the time to prevent failure - has come and gone. A long, long time ago. As a blogger from the London-based magazine The Economist put it, "These banks grew so large that their failure threatened the global financial system, and then proceeded to fail. To simply hand over the money necessary to return them to solvency would abuse the taxpayer's trust, reward bad behaviour, and send a terrible signal to other bad financial actors out there. Time to quit mucking around and make with the nationalisations."
I know, I know. There's a sting of socialism in that comment. Even - as Legal Counsel Bob Bauman has pointed out before - a tinge of the economic component of fascism in that kind of thinking. But we must do that which is necessary to avert disaster, yes?
"The banks here are bust, with total writedowns probably more than the entire market cap of the financial sector at this point," Investment Director Eric Roseman told me candidly yesterday, "So, yes, the government will follow UK's course and backstop all bad assets and eventually nationalize the entire group. This is inevitable. The losses won't stop until we segregate bad assets off bank balance sheets combined with near or total nationalization. The markets won't relent unless some bold action is taken now."
But of course, there's always an alternative (however untenable it may be)... "The alternative is to let bad banks fail," Eric said, "Then we have a full scale Depression and the financial system will regress back to the Dark Ages."
That sounds pretty untenable.
So the Endgame here is nationalization then?
Wrong, Wrong, Wrong.
The Endgame here is that this isn't actually the endgame. Nobody wins...at least not yet. Because the crisis has only just begun, and the failure of the global banking system is just the first chapter in a much larger story.
In a very French, Jean-Paul Sartre sort of way, the world is throwing us a big curveball, and we're not sure if anyone's really seeing it yet. And even if they're seeing it, it still probably hasn't sunk in.
As of September 2008, some 173 million iPods had been sold across the world. In 2000, there were roughly 168 million personal computers in the US, and the number is probably more like 200-250 million today. There are 9 million mobile homes in the US, approximately 102-130 million single-family homes, and countless million apartments.
Do you see what we're getting at here? There aren't many necessary - or even unnecessary - goods left for American consumers to consume! We are already saturated.
We're digging in a little deeper with our saturation survey lately, but one could safely assert that there's already a home, an mp3 player and a personal computer for every man, woman and child in the United States. And this isn't just backed-up inventory; consumers already own or have purchased the lion's share of these goodies/housing. So when Obama, Gordon Brown or anyone talks about freeing up the flow of credit, you just have to ask yourself "why?"
So that we can buy more iPods? More double cheeseburgers and speculative property? We've already got more "stuff" than we know what to do with, and the best possible plan that the twin-worlds of government and finance can come up with is to get, "back to normal?"
Well folks, the market has the same plan. And unlike bankers and the government, the market realizes that the last decade of hyper-charged consumption was anything but "normal."
So the endgame is that - regardless of what happens to the banks - we're coming up on a multi-year run of what amounts to terrible business for them. The collapse of the Baltic Dry Shipping Index is a bell-weather for evaporating demand of foreign goods, and the 4th quarter's collapse in retail sales signals the death of domestic consumption. The bottom line - and there's no two ways about it - is that America is embarking on a new trend toward greater savings, less spending and a lower demand for credit. Thanks in part to the ravenous consumption of years past.
And instead of a banking system where the forces of open-market competition have narrowed the field down to a handful of the most honest, efficient players out there (banks like Wells Fargo or BB&T), we'll be dragging along a government-sponsored "competition-free zone," composed of banks who were successful in the race to get "too big to fail."
Now we'd like to leave you with a question; if these banks built themselves toward inevitable failure during the boom - when the sun shined and anyone could make money - then how do you think they'll do during the bust?
What a world.
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