Disclosure: Author holds a long position in BAC
Thanks to Treasury Secretary Tim Geithner, the uncertainty surrounding bank stocks returned in full force on Monday. I’m sure many in the Obama administration are shaking their heads in disgust over Tim Geithner’s remarks on Sunday that suggested U.S. banks will need to raise more capital. These statements are in direct opposition to the banking CEO’s who have repeatedly expressed that no more government bailout money is needed. The Geithner interviews completely froze investors from buying any more shares. Nobody wants to own a bank that needs to raise additional capital in the near future. Geither did his best to destroy the progress that has been made in banking, I’m here to tell you that his efforts will be short lived.
You have to wonder about Geithner’s motivation. Perhaps he was just putting one more nail in the banking coffin to ensure that FASB does enact all the mark to market changes that Congress has requested when they make their final vote on April 2nd. He doesn't want them thinking that banks are so strong that they no longer need the regulatory change. Or perhaps this is a guy who desperately wants to be king of the banking universe; his bank rescue plan requires trillions of taxpayer dollars that will support the system over the next few years. In this scenario, he controls who survives and who doesn't, he can punish the bank executives, and he can become the hero of the recovery. Thank goodness his capital injection plan is not the only game in town. If it were, we would be headed for a second Great Depression because the amount of capital necessary to prop up the banks in this faulty system would be endless.
The real solution involves fixing the faulty system of mark to market. Seemingly against Geithner’s wishes, the SEC and FASB are going to jointly support a regulatory change away from the current mark to market accounting model that forces banks to take short term writedowns which in turn forces them to raise capital. Once this change is in effect, there will be no more immediate pressure on the banks to raise capital and investors will be more likely to invest in U.S banks.
According to Realmoney.com contributor Tony Crescenzi, commercial banks are sitting on historically high levels of cash since the fall of Lehman last year. At that time, the banks had $300 billion of cash. As of last week the banks had more than tripled the amount of cash on hand to $976 billion. Adding to that total will be the government programs of TALF and PPIP that will purchase many of the asset backed securities that make up approximately 20% of bank assets. These numbers reflect quite a different picture than the one Geithner described on Sunday.
If you missed out on the big financial rally of two weeks ago that doubled the stock price of Bank of America and saw the financial index surge by more than 50% you have the opportunity to buy these stocks on a dip this week. After the FASB vot on April 2nd, much of the uncertainty that has plagued the sector will be replaced by solid fundamentals to create an environment where financial stocks can return to prior norms. The Financial Select Sector SPDR (XLF) is a great ETF to buy as it owns a 12% stake in JP Morgan (JPM), a 10% stake in Wells Fargo (WFC), and a 5% stake in Bank of America (BAC. For those investors who want to push the envelope, you may consider buying the leveraged ProShares Ultra Financials ETF (UYG). Either way, this is setting up to be the big play of 2009.