I am constantly amazed at the willingness of some very smart people on Wall Street to follow the herd, even over the proverbial cliff. How can we believe in rational markets when so many investors are sticking their heads in the sand? The people buying bank stocks on “value” fall into this camp, IMHO. More on this lemming phenomenon in our comment next week.
In a client comment today, we said the following:
“To us, four questions must be asked of any name before you can really embrace a long-term bull view of particular financials:
1) what is your plan for repatriating SPEs by year-end 2009 and the post-repatriation TCE ratios? In the case of WFC, that means a potential increase in total assets of nearly 80%;
2) what are your plans and timeframe to reverse repo transactions with the FRBNY? What is the M2M adjustment on this collateral?
3) When are you ending participation in the FDIC debt guarantee program? What is the blended cost of funds projected for bank?
4) What is the peak level loss rate for the bank and how much TCE must be on hand to repay TARP and stay in good graces with regulators? That is, is 5-6% TCE enough?”
Martha White writes a very nice summary of #1 in, of all places, Slate today under the title “Holy Sheet: Why we have all just woken up to what goes on banks’ books”
She quotes your blogger in a good summary of the mess:
“The FASB’s new edict isn’t without risks: Institutional Risk Analytics speculated in a recent client newsletter that the ruling could lead to another capital deficit for the big banks, which could spark a scramble for more money to shore up their reserve bases when the FASB ruling kicks in at the start of next year.”
1) Did the government stress tests for the big banks take into account the repatriation of OBS assets at the end of 2009 under FAS 140?
2) Did your salesperson from XYZ broker dealer tell you about the FAS 140 issue before letting you in on the opportunity to buy WFC or BAC new issue equity? What a deal.
3) Did you make a mistake by going long financials this week?
A: LOL.We’ll find out.
Another fine operation by Tim Geithner and Ben Bernanke.