Bank Functionally Bankrupt

The banks, that is.

XLF (the financial sector spyder) yesterday, down 16.5%.  That's impressive, but what's even more impressive is the loss in some of the components, to wit:

BAC, down 28.9%
Citigroup, down 20%
Goldman Sachs, down 18.9%
JP Morgan, down 20.7%
Morgan Stanley, down 15.9%
State Street, down 59% (!)
Wells Fargo, down 23.8%

Those are one day losses folks.  In one day anywhere from twenty percent to more than half of these firms was wiped out.  If you hold their stock, I hope you're prepared for what you see when you look online at your account.

Why did this happen?

Quite simply the market calls all bets.

Paulson, just last week, gave an interview in which he defended the TARP and said that they had "stabilized the financial system."

The market said in response:

Let me make this very clear - the market is saying very loudly that the common stocks of these firms are going to zero. They are all functionally bankrupt, right here, right now, with their current capital structure, and have been for months.


That's the market's pronouncement as of yesterday - and as you can probably surmise I agree with it, given that I've been calling for cramdowns of the debt structure in these firms as the proper means to resolve the excessive bad debt problem for more than a year. Such a move would inherently destroy all value in the common and preferred stock (at the same time it resolves the firm's - and the nation's - bad debt.)

The Market Ticker

Blogged with the Flock Browser