Bailout Folly

Special thanks to Charles Hugh Smith
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Let's review where the biggest banks are today;

CitiGroup

CitiGroup alone, over the last six months, has received government guarantees for toxic assets of over $300 Billion, yet the entire market cap of Citi is less than $6 Billion.

Best case scenario might get bids of 30 cents on the dollar for these toxic assets. That leaves $210 Billion in losses, and Citigroup is bankrupt 34 times over.

Citi - Market Cap = $6 Billion
$300 Billion x .30 = $90 Billion
$300 Billion - $90 Billion = $210 Billion

Citi currently has losses of $210 Billion at today's market price. That is best case scenario!

$210 Billion divided by $6 Billion (Market Cap) = Citi is bankrupt by more than 34 times!

210 divided by 6 = 35 - 1 ($6 Billion market cap) = 34

The more likely scenario is this:

300 divided by 6 = 50 - 1 ($6 Billion market cap) = 49

Citi is bankrupt 49 times over. This does not include what many expect, that due to FASB accounting rules, Citi may have off shore accounts hiding Trillions in toxic assets which the market is unaware of.

Citi cannot and will not survive this. Every dime extended them will be a 100% loss.


Bank of America

BAC has $120 Billion in level 3 assets currently guaranteed by the US Treasury.

These toxic holdings might get 30 cents on the dollar if God grants BAC a miracle. If he/she doesn't, these toxic holdings will get $0. This does not include the $1.5 - 2 Trillion fallout yet to be realized from the bad loans made by Countrywide being held by Fannie and Freddie.

BAC - Market cap = $20 Billion.
$120 Billion x .30 = $36 Billion
$120 Billion - $36 Billion = $84 Billion

BAC currently has losses of $84 Billion at today's market price. That is best case scenario! It will get worse as every month, and every foreclosure, goes by.

$84 Billion divided by $20 Billion (Market Cap) = BAC is bankrupt by more than 4 times! This does not include the fallout that WILL occur over the next two years from Countrywide originations through Fannie and Freddie.


Wells Fargo

Market Cap - $36.5 Billion

Oct. 2008 - $ 25 Billion TARP monies received.

238% increase of defaults in California in 2008.

$24 Billion in subprime loans.

$122 Billion in Pick-a-Pay Option Arms.

$84 Billion in Home Equity Loans (no chance of recovery if house is worth less than mortgage). More than $42 Billion are in California and Florida.

Level 3 assets (toxic) grew by 50% in 2008 to $34.7 Billion.

Lowest Tier 1 Capital Ratio among largest banks (reserves).

Pick-a-Pay Arms, Home Equity Loans (California and Florida only), Subprime and Level 3 assets total $222.7 Billion. All of these categories among all lenders are returning less than 20 cents on the dollar in the current economic environment.

$222.7 Billion x .20 = $44.5 Billion
$222.7 Billion - $44.5 Billion = Wells Fargo losses, just among those few categories, at today's market prices, will be $178.2 Billion.

WFC Market Cap = $36.5 Billion
$178.2 Billion divided by $36.5 Billion = Wells Fargo is bankrupt by more than 4.5 times.
As home values decline, those losses will grow. Wachovia's $400+ Billion loan portfolio is mainly in states that are being hardest hit by declining prices, so expect these numbers to get a lot worse.

Others

I have not included JPM Chase or any of the major Broker-Dealers that have now become banks so they can receive TARP monies. It is not because they are better off, they aren't. Many other variables come into play with all of them, especially Chase. Chase, in Sept. 2007, was the largest holder of derivatives in the world. They are also the largest shareholder of the Federal Reserve. Ben Bernanke is more under the influence of Jamie Dimon (CEO JPM) than he is President Obama. Unless congress changes that arrangement, JPM will likely be the biggest bank in the world in a few years.

The sampling above, I believe, is sufficient to make my point.

Any monies given these banks will be a total loss. All of their portfolios have no chance of recovering UNLESS housing prices go back to where they were in 2006, AND, all profits received are returned 100%. There is no way that can happen. At least not in the next 5 -7 years.

The reason for this is simple - The loss of jobs in the Financial, Insurance and Real Estate sectors would need to be replaced, immediately, with equivalent pay, for the same lending environment to have a chance to come back. I am not advocating the same lending environment, I am pointing out that you must first have enough borrowers with the ability to repay before that could happen.

If you have been watching the news, exactly the opposite is happening.

We must not allow our government to waste vital resources on entities that will squander those resources. There are hundreds of smaller banks that do not have toxic exposure that will fill the gap created by the departure of the big banks. Those smaller banks have not hired thousands of lobbyists to wine and dine congress. Unfortunately, the big banks have, and congress is not acting in our best interests.

Unless all of us insist the nonsense stop, congress will bankrupt our country by wasting untold Trillions more trying to save what cannot be saved.

Over the next few years, the times will get a little tougher. If our leaders waste any more money on these companies, that made very bad business decisions, that is less money they can use for viable business. Viable business is what creates jobs. If we do not create jobs of the future today, the times will be even tougher over the next few years.