Bank stocks rebounded on Wednesday from record lows the day before, as the debate over how the Obama administration should address the financial crisis intensified on Capitol Hill and beyond.
Financial stocks have again fallen on hard times early this year, as a rash of dour earnings reports from blue-chip stocks like
Bank of America
about the adequacy of capital levels amid mounting loan losses. The Keefe Bruyette & Woods bank stock index, which tracks 24 of the largest banking institutions, rallied back from a 52-week low on Tuesday to close up 14.6% on Wednesday to 29.03.
The Senate earlier this month approved the release of the second half of the Troubled Assets Relief Program, or TARP, which gives Obama $350 billion it can use to put its stamp on the financial rescue. But so far, the new administration has remained somewhat vague about its plans.
"This is an import ant program and we need to make it work," Treasury Secretary-designate
on Wednesday told the Senate Finance Committee at his confirmation hearing. "We're going to keep at it until we fix it."
He said the still-evolving Obama economic plan would include a "comprehensive housing package." He also said the Obama stimulus package and related legislation would deal with the crisis in an effective way.
Options include increasing preferred equity stakes in banks taken in the fall, the approach taken by the Bush administration, or buying bad assets weighing down their balance sheets, TARP's original intention.
"The new administration needs to come up with a new and more impactful financial plan to assure the country that the major banks are not about to fail or be nationalized," says Todd Morgan, a senior managing director at Bel Air Investment Advisors in Los Angeles. "We need a significant impact to add to the country's confidence of these banks. That's what crushing the market the last few days."
Morgan has some personal investments in the financial sector.
Industry observers took the opportunity to weigh in with various opinions on aspects that should be included in the latest version of a federal rescue program.
Larry Tabb, founder and CEO of consulting firm The Tabb Group says one of the first priorities for Obama administration in relation to fixing the banking crisis is to get bad assets off banks' balance sheets, which needs to be done "in tandem" with recapitalization efforts.
"As both the economy and toxic-asset values continue to decline, the toxic assets, like weeds, will draw capital from the good side of the bank until the garden is choked out," he writes in a published commentary. "Capitalization without asset quarantine is what happened with the first tranche of the TARP funds and that money has all but vanished with little to show for it."
Once the asset purchase or similar arrangement is done, then pumping more capital into the banking system will be necessary -- and likely much more than the $350 billion allocated in the second half of the TARP funds, Tabb writes.
The U.S. Treasury announced this fall that it would buy the toxic assets hindering company balance sheets in an effort to clear the way for banks to start lending again. Instead, the government took a page from U.K. regulators and decided to invest a large portion of the funds into bank stocks themselves through the purchase of preferred stakes. Among the first round of investments made by the government included the largest nine banks - BofA, JPMorgan, Citi,
Bank of New York
, acquired by BofA on Jan. 1.
But as bank stocks sink to multi-year lows from investors becoming increasingly wary of the capital positions of many companies, particularly as loan losses intensify, critics are pointing fingers that the decision to invest directly in bank stocks was unsuccessful.
Both Citi and BofA have had to go back for second rounds of capital through the TARP program.
A good bank/bad bank structure has already been initiated by at least one struggling banking institution. Citi announced last week in conjunction with a huge fourth-quarter loss that it was splitting its businesses into two firms -- Citicorp, encompassing the bank's core assets, and Citi Holdings, which will house mostly unwanted assets and units it is looking to unload.
The majority of the losses in the next 12 months to 18 months -- estimated at above $1 trillion in aggregate -- will be experienced by the largest banks, such as Citi, says Christopher Whalen, managing director of Institutional Risk Analytics.
Whalen says that similar to the savings and loan crisis in the early 1990s, more banks need to be seized by regulators before poorly performing assets are separated into a special portfolio.
"Simply buying and/or guaranteeing bad assets, without first passing these banks through a receivership, is pointless," Whalen writes in his most recent commentary on Wednesday. "First the market value of the assets and liabilities must be put back into balance, then and only then the banks may be recapitalized."
Whalen suggests that the "continued heebie-jeebies in bank equity and debt stems from the unfinished business in the market for credit default swaps."
He says that stringent regulation is needed, particularly on contracts written on companies that have participated in the TARP program.
"Unless and until Chairman Bernanke and the other regulators are willing to tame the CDS tiger, there will be no success in bringing stability to the U.S. banking system or foreign banking markets," Whalen writes. "Making this change may force Goldman Sachs and other dealers into mergers or liquidations, but such is the cost of reform. The U.S. economy can live without the major 'sell side' dealer firms, but we cannot survive without commercial banks, insurance companies and commercial companies."
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