Insolvent Banks … Again!

One of the pieces of information making the rounds on the internet this weekend was the commentary from the New York Times DealBook Blog here: Bank Capital Problems. They cite a report from CreditSights that allows us to get to the bottom of the big bank solvency question.

Let me repeat the numbers. Estimated credit losses yet to be taken are as follows: Wells Fargo, $119 billion; BofA, $99 billion; JPMorgan Chase, $124 billion; Citi, $101 billion; Goldman Sachs: $47 billion; Morgan Stanley, $34 billion. Now focus on just the first four there. The combined problem assets yet to be charged off, and therefore yet to turn up as a loss against capital is a hefty $443 billion. Nasty!

Now let’s take a look at today’s market capitalization, i.e. what have the current shareholders have as value in those same top four banks: Wells Fargo, $66.6 billion; BofA, $27.9 billion; JPMorgan Chase, $92.2 billion; Citi, $19 billion; for a combined total of $205.7 billion. Even more nasty! And don’t forget these figures probably are a little inflated by the market’s assumption that the administration doesn’t want to buy the banks out, but that it may well be forced into action. Some wise guys on the street are calling this the “Geithner Put”. [as in ‘put option’]. The real market value ex the ‘put’ is likely to be somewhat less.

These banks are all toast.

This data completely destroys any notion that the big banks can survive without the elimination of the current shareholder’s claim to ownership. Any credible injection of capital, by which I mean enough to solve the credit issues of each bank, will be far larger than the value the stock market places on the entire worth of that same bank. Therefore the instant the government forks over sufficient cash it effectively owns the place. The only remaining point seems to be whether the administration has the stomach for recognizing this reality and consequently demands to replace the current shareholders with its own equity stake. In other words will it nationalize? Or will it attempt a fudge and seek private capital and then take a more junior position such as preferred stock. No one seems to think there is a private capital appetite for injecting cash into these banks. At least not yet. So the fudge looks like a non-starter.

The punditry is now beating the nationalization drum more openly than before. With the irony being that it is the die hard capitalist right wingers like Senator Graham who are now its loudest proponents, while Democrats like Senator Schumer are far more cautious. In a sense this is not as perverted as it might appear: bankruptcy and reorganization are constant and normal components of a capitalist economy. In the absence of a private market solution to a reorganization, and in the circumstances where it is obvious that reorganization is now required, it is equally obvious that it is the government that has to force the issue. So here is an example of where the right wing and the left wing of politics can advocate the same policy.

Who knew that nationalization of our largest banks could be the best opportunity for some of that Obama bipartisanship I have been decrying?

Sweet!