Bernanke Talks - Common Sense Walks

Bernanke assured investors today that the financial stress test is not a nefarious way to asses which banks to nationalize. Rest assured, we will only throw away taxpayer money on preferred shares and only convert them, i.e. partially nationalize, if extraordinary losses materialize. Well that puts my "Obama has a secret plan" idea to rest.

http://seekingalpha.com/article/120720-does-obama-have-a-secret-plan

I like it. I am really feeling much better now that we are spending all this money and getting no control, no bang for our buck. For institutions such as Citigroup and Bank of America we have already provided them more than their market capitalization all for some preferred shares paying a nice dividend. I have not done the math but I am sure with the nice dividend we will be made whole in a few hundred years. The taxpayers are screwed, which is all the more reason to bid up financials today, some over 20%. Heads shareholders win tails taxpayers lose. Nice equation.

But before all those looking to get rich quick on these stocks start to celebrate too much, read a bit between the lines. He noted things might change if extraordinary losses materialize. Heellllloooo!! If the losses so far are not considered extraordinary I don't know what is. Yet rest assured that if you do not think they are there now, they most certainly will be in due order. Don't get me wrong, I am partially in equities and have no short positions so I made money today, but I still don't believe it.

http://www.bloomberg.com/apps/news?pid=20601087&sid=auD.fPbtkf5I&refer=home

Now the real kicker is that he sees no reason to destroy the "franchise value" of these organizations. Yeah, right! How much franchise value do these companies still have?

Now I have to admit he has a bit of a point on creating legal uncertainty. For example, what impact does nationalization or partial nationalization have on credit default swaps? It may or may not be a default event. Who knows for sure as these multi-trillion dollars worth of insurance-like contracts are written off the grid. In other words the contracts say whatever the parties agreed for them to say. So it is at least conceivable that nationalization would trigger some. Certainly any move that zeros out the bondholders will do so. So I can appreciate the desire to avoid this move. And I can appreciate this is not in our "culture." But I can appreciate more that I don't like throwing my taxpayer money away and getting nothing for it. The widows, retirees, pension funds and the like only deserve what they get if they are still in these financial stocks. Moreover, I have few qualms about putting the final nail in that coffin if 90 nails have already been hammered in by the market.

We do, however, need to do this in one strike. Take out all the dead wood all at once to avoid doubt about the remaining banks. That, at least, is what I still suspect is the Obama secret plan with the stress tests. Advice to Obama - getter done!!

Disclosures: None

P.S. How can you tell if Bernanke, Lewis, Thain, the Fed, the FDIC, the Treasury, politicians or others in this financial mess are lying - their lips are moving. I know it is an oldy but a goody. As a lawyer, I hear it all the time.