The Banks Aren't Out of the Woods

12/28/2009 9:23 am EST


Michael Shulman

Editor, Short-Side Trader

Michael Shulman, editor of ChangeWave Shorts, says most of the big banks may have repaid their TARP bailout money, but some of them remain vulnerable to new crises.

With the repayment of most of the [Troubled Asset Relief Program] funds by the major banks, they are supposedly "free" to reinvent themselves (again) as great capitalist institutions. They can innovatively hire as they want to push themselves and the American economy forward.

Yeah, right!

The banks are mostly free to pay excessive salaries and bonuses in the face of ongoing grim economic and political realities. They'll ignore shareholders and avoid what they see as the stigma of having TARP funds.

They are also free to fail; only if they do this time around, there will be no happy ending.

  • You can argue that Goldman Sachs Group (NYSE: GS) and Morgan Stanley (NYSE: MS) were in a position to repay the funds; and with more difficulty, the same is true for Bank of America (NYSE: BAC)—although I think BAC is a slow-motion train wreck.
  • Wells Fargo (NYSE: WFC) getting the green light to repay—in effect, the government is saying that they have enough capital—is a joke.
  • Citigroup (NYSE: C) being allowed to repay is a tragedy in the making.

Forget the formal capital ratios and all the other accounting and tax-relief nonsense the government has thrown the banks’ way. The major banks are terribly undercapitalized, and if accounting rules in effect before the crisis were in effect today and off-balance- sheet assets were out on the balance sheets, the large banks as a group would be insolvent.

And now, the Treasury has basically freed the irresponsible children and said, go raise money by selling shares and fly or fail—sort of.

Sort of, because Citigroup won't be able to completely repay TARP funds, the banks are still borrowing short term with FDIC backing, Bank of America still has $118 billion in assets guaranteed by the government on its balance sheet (Citi having $300 billion in similar guarantees), and the government owns 7.7 billion shares of Citi.

But, they are free to go out and run into the kind of trouble that could easily require more TARP money next year—and, if and when that happens, it is lights out for the bank in question. A bank so troubled will be broken up. And Citi and Wells have lots of parts that can be sold off in a breakup.

What does this mean for us?

Keep some powder dry to put new money to work next year on the short side of major banks.

We'll have a lot of hay to make thanks to the greed and arrogance of the banks and the mismanagement of the government bailout. And make money we will!

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