Will Spring Bring Calmer Waters and Renewal for I-Banks?

The markets have been hurt badly these past nine months. Volatility remains at peak levels, but as with the change of season, new positive sentiment brings the chance of calmer waters and renewal.

Over the past 10 days, the chiefs of Morgan Stanley (MS), Goldman Sachs (GS) and most recently Lehman Brothers (LEH) have come out publicly to state the worst is behind us in the credit crisis. Their words all sounded similar, enough so to force me to pause and raise a skeptical eye.

Floyd Norris of the New York Times wrote a piece Friday's paper titled: Looking Up, but From a Deep Hole. I want to share a few clips.

Since the big banks first realized last fall that their capital situations were perilous, more than $100 billion has been poured into them. Without all that cash, the system would be in horrid shape, and there would be a lot more blood on the Street.

The chief executive of Lehman told his shareholders this week, just two weeks after Lehman raised $3 billion by selling convertible preferred stock on terms that were onerous but not debilitating.

The trouble with such assurances is that the bosses of Wall Street have been repeatedly blindsided by newly discovered risks that their firms - and others - had taken. The optimism of today may prove to be correct, but it follows a lot of other optimism that was not.

Things at Merrill Lynch (MER) have been tougher. It had similar exposures, and has Merrill Lynch Bank adding more troubled paper to its portfolio than its peers. Its write-downs caused a change in CEO in the fall of 2007.

In January, Mr. Thain did tell me he had raised more capital than Merrill really had to have, and the latest write-offs are not being accompanied by a search for more capital, another indication of confidence.

There has been a surge of new capital injected into investment and many commercial banks, primarily from foreign government funds. These funds have two agendas:

They wish to insure their vast existing investments tied to the U.S. economy and markets.

They see deep value investing in banks that have historically made billions of dollars for their shareholders and in good times practically printed money.

In general, it appears that the sovereign wealth funds that moved in quickly could have gotten better deals by waiting. But at least Citic Securities, the Chinese company that announced a $1 billion investment in Bear Stearns in October, avoided disaster. Perhaps Citic sensed disaster coming, and the transaction was never completed.

If pools of capital from outside of the country are not enough, the U.S. Government has assured the world that the Fed is ready to step in to assure efficient markets and liquidity.

Even if the capital is not adequate, however, investors are starting to assume that the government stands behind Wall Street. The share prices of investment banks began to recover just after the Fed made it clear the investment banks could borrow from it.

Merrill Lynch possibly paints a more realistic picture, pointing to the ripple effect of the credit crisis in another article that also appeared in Friday's New York Times. These quotes are from a conference call Merrill's new chief had with its 16,660 financial advisors.

"So far the slowdown has been finance-driven," Mr. Thain said. "What we haven't seen yet is the impact on the consumer of falling house prices, rising energy prices, higher food prices and higher unemployment."

The recession, he said, is going to move from being a finance-driven problem to a consumer-driven one, and Merrill may continue to struggle as a result.

With the negativity pouring out of the anything to get ratings media machines, it is good to hear Wall Street chiefs display leadership and the press to pause, and at least give them some ink on their more positive outlook. We remain skeptical and, as with the change of weather, cautiously optimistic.

The equity market is a predictor of the future economy. We are hoping for a seasonal lock step market performance with the renewal of spring.

Disclosure: The author holds no positions in the securities mentions. However, (LEH), (GS), (MER) and (MS) are constituents in the Clear Global Exchanges, Brokers and Asset Management Index licensed for the ETF (EXB). Mr. Corn is CEO of Clear Indexes LLC which publishes the index and owns shares of (EXB).