"all the bad news is out"
I'd like to make a slight amendment there, if I may:
"all the bad news is out that they're going to confess to this quarter"
Just because some cats got out of the bag doesn't mean that everybody is now telling the unvarnished truth about their financial condition. Citi is a perfect example -- with the inferred blessing of the so-called authorities, the financials have elected to continue to hide their impairments behind subjective valuation techniques, with the intent of reeling out a few billion in asset write-offs every 90 days against their current P&Ls until their balance sheets eventually reflect the truth somewhere a long ways down the road. It's the Japanese experience all over again.
This means that a good portion of the assets on bank balance sheets aren't actually earning anything, or even capable of earning anything because those assets were long ago dispatched to money heaven despite being "temporarily" still on the books. The largest problem with such a deleveraging strategy is that it's pretty hard to loan money out when a good portion of your reserves are fictitious, even in a fractional banking system.
The banks could instead recapitalize themselves by selling new equity to replace the wad they lost, but investors won't give it to them (not in size, anyway) until they can be sure that there aren't any more bodies buried in the backyard to come back and retroactively wipe those new investments out. Therefore, the only way that substantial recapitalization of the banks is going to occur is under either (a) if the government gives it to them (i.e. allows the banks to dump their losses on the taxpayer, and by that I mean dumping even more than they already have), or (b) after the books of the large financials have been purged of all garbage. Unfortunately, the prospect of (b) occurring anytime soon doesn't look very likely, and it's not politically expedient to go full throttle with (a) until at least after the fall election and change in administration.
Since the full measure of past mortgage and other losses has still not been taken, this "don't ask, don't tell" charade about who is or isn't solvent will continue. Therefore, the financials will at best meander around the battlefield as walking wounded instead of being killed off outright -- some may die anyway for lack of being able to stick it out in the lending business with no capital to lend. While time wastes away, the lack of collective bank strength will continue to be transmitted through the rest of the economy in the form of diminished access to capital, even for high-grade borrowers. Everything slows down, and everybody hurts. And since Americans have no savings to fall back on like the Japanese did in the 1990s, the average American is going to hurt -- a lot -- and that's without a crash occurring and/or gasoline going to $10, either of which would be additionally devastating.
Equity market values are being propped here by every trick imaginable in order to hold up at least the nominal value of those assets lest Mom & Pop Investor/Voter get really scared and start to dump their mutual funds. As such, share owners should prepare to become slowly boiled frogs -- since "down" appears to have been outlawed for now, it looks like we'll be going sideways (i.e. nowhere) for a while |
