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The Crisis is Over?

You're Kidding, right?

By Ian Cooper
Sunday, April 12th, 2009

Just like Jim Cramer's early "end of depression" call, we're just barely escaping the disaster we've come to know and love as Wall Street.

But of course the crisis isn't over (just ask Meredith Whitney).

Still, if the "geniuses" of Wall Street want to draw this "end of crisis" conclusion from Wells Fargo's preliminary numbers, that's just great. We can then stop the bailouts, stop flooding the market with cheap money, and leave banks to live or die. Sounds great to me.

But if you want reality, listen to Meredith Whitney, whom we remain big fans of.

Whitney just reiterated her bearish position on the financial sector and the overall economy. And while some are forecasting recovery in 2009 or 2010, she (and we) believe that banks have still not "properly reserved against greater than expected losses in home prices."

But if you believe the crisis is soon to be over, or over, you'll love this piece from Time magazine.

More Quickly Than It Began, The Banking Crisis Is Over

Investors find it disconcerting to see the stocks in the huge financial institutions that are at the foundation of the global capital system trading up and down 25% a day, and, in some cases trading in the pennies. Banks became the visible and ugly wound that reminded Wall St. each day that it had torn down what it spent decades building, which was a money-making machine driven by leverage and the cleverest synthetic financial instruments the world has ever seen.

But, the great banking crisis of 2008 is over. It began last September 15 when Lehman Brothers filed for bankruptcy and bottomed when Citigroup (C) traded below $1 last month. Most analysts believe that mortgage-backed securities which included packages of subprime home loans failed when mortgage default rates went up and housing prices raced down. That is only partially true. Banks made a tremendous series of ill-advised loans to private equity firms, hedge funds, commercial real estate holders, and the average man with a credit card balance which he cannot pay.

When people look back on the near-collapse of the banking system they may say that the Congress and Henry Paulson threw enough money into the path of the oncoming failure of the credit system to slow it down so that the government could properly go through the process of guaranteeing parts of the balance sheets of firms including Citigroup (C) and Bank of America (BAC). The initial TARP may also have provided time for the new Administration to put together its widely hailed bank "stress test" program meant to determine which of the big financial institutions have dysentery and which do not. Finally, the hundreds of billions of dollars that went into the largest banks late last year allowed Secretary Geithner to produce his public/private partnership to buy toxic assets off of bank balance sheets.

All of those plans, no matter how well-intentioned they may seem, are unnecessary now. Wells Fargo (WFC) indicated that it made about $3 billion in the first quarter of the year and declared its buyout of the deeply troubled Wachovia to be a success. Wells Fargo (WFC) said that the low cost of money from the government combined with a surging demand for mortgages was all the medicine that it required.

Banks stocks reacted to the news, which took the markets completely by surprise, by driving up Wells Fargo's stock by 32%. Bank of America (BAC) shares jumped 35%.

Oddly absent from the discussion of how well Wells Fargo did is why the government was in the midst of testing bank balance sheets at all. The experts at the Treasury had been thrown off the scent and consequently had missed the fact that there was not need to test what is already working well. The same holds true for the Geithner plan to take toxic assets off bank balance sheets. It is academic now. What banks are earning from the difference between the cost of capital and the income from lending is now great enough for the banking system to be self-sustaining again.

What will happen at this point is that bank stocks will not go up much more, but they will not dive sharply down either. There is enough evidence in comments from the CEOs of Citi and B of A and in the Wells Fargo earnings to show that the idea that banks are insolvent and probably in need of nationalization is no longer part of the consideration of how the problems with the system will be settled.

It is equally safe to say that the large American banks are works in progress which are, in most ways, still dilapidated. Treasury Department analysts may not have the IQs of the PhDs who created mortgage-backed securities, but they did not do their detective work blindly when they insisted that bank balance sheets and loan portfolios needed close examination. It is also true that the private capital firms which plan to buy toxic assets using taxpayer money were not enticed into the new program based on an illusion. The banking system is still terribly weak and there is almost no one with an in-depth knowledge of the credit market tapestry who does not believe that there are hundreds of billions of Confederate dollars being held in the vaults of the major banks.

The banking crisis may be over, but what is left is a reclamation job that will probably take years to complete, will still have a taxpayer price tag of over $1 trillion, and will leave America's largest financial firms as institutions of modest power and a regulated scope which will prevent them from looking anything like what they did two years ago.


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