Zachary Scheidt

Blacklist Grows for Troubled Banks

Burton A. J - because they would immediately move from "troubled" to "failed." No one wants to do business with a troubled bank. The entire system is built on trust and if you know first hand that a bank is troubled then it is only a matter of time before depositors pull out leaving the bank insolvent.

Ray - I agree with you mostly. The issue is not necessarily that we need MORE regulation as much as we need to require adequate disclosure. If banks were required to show just how ugly their balance sheets were (bring all those skeletons out of the closet and open your book to the public), there would no longer be an incentive to act irresponsibly. Consumers could easily see who were the stalwart banks and the market share would increase. Being responsible at this point would be akin to being profitable. Instead of heavy handed regulation, we need to properly align the incentives so that responsible business practices are rewarded, not discouraged.

Thanks for the comments guys,
zachstocks.com

More on Capital Ratios of U.S. Banks

One of the biggest dangers to the capitalization rates (and ultimately to the banks survival) is the commercial real estate market. Many loans to developers and builders on the commercial side have not taken the hit that residential mortgages have. But the losses could simply be the next step of this ugly economic cycle.

If losses begin to mount on the commercial real estate portfolios the capitalization rates could evaporate and it wouldn't surprise me to see TARP #2 (or #3). This would be very troublesome for not only the banking industry but for the overall economy (and ultimately the broader equities market). Risk control is still necessary although the current market would lull many investors to a false sense of security.

Zach
zachstocks.com

Banking Reform: Value for Value

I agree with you that it is nieve to think that we have "learned our lesson" and the economy will avoid such a scenario in the future if bailed out today.

There is precious little that changes in regards to human nature. And the forces of fear and greed will undoubtedly create bubbles and recessions far into the future. It seems futile to try to legislate or regulate our way out of what is truly hardwired into society.

At the same time, I do think DISCLOSURE is the most important issue for regulators to tackle. This would allow investors to understand better what they are buying. It would ensure that consumers and businesses who buy insurance products actually have a picture into the insurer's ability to make good on his commitments.

It can be argued that balance sheets have become so complex that disclosure does little to help business partners make rational decisions, but if this is true, then I prefer to place my investment capital with firms who have a simple model. And I can buy my life insurance from a smaller firm who can show me their balance sheet in terms I can understand.

My view is that we let AIG, Lehman, Bear Stearns and others conduct the business that they will, but simply enforce the fact that they MUST disclose their capital base and balance sheet details. From that point, it is up to me as the consumer, or the pension fund, or the hedge fund, to decide if this is the company I want to do business with.

Going forward (at least for the next decade while our memory is still fresh) I think this would benefit simpler firms, and act as an incentive to cause companies with deep esoteric financial contracts to simplify their business in order to attract the wiser clients.

I appreciate your article and the chance to think through the big picture...

Zach
zachstocks.com

Why BAC Will Beat: Understanding a New Bull Market Is Not Underway

It looks like another "buy the rumor, sell the news" scenario to me. I wouldn't be surprised to see BAC (and the rest of the financial sector in turn) decline sharply over the next few weeks. We may in fact be at a turning point economically, but there will be disappointments along the way.

Thanks for the interesting perspective,
Zach
zachstocks.com

FD: I am long BAC

Citigroup: The Beginning and End of the Current Rally?

Cautious - You're definitely right... there were certainly plenty of games being played in order to report a "positive" quarter. Maybe I should have driven that point home a bit harder.

I don't know if we will see much more dilution from the TARP or not. Many of the larger banks are trying to raise their own capital in order to pay TARP funds back. (but you're right, that's dilution - just from a different source). The bottom line is that I think we are on the same page and a disciplined and conservative approach to this market will likely leave one with more capital. It's certainly not time to chase these higher prices.

Thanks for the comments guys!
Zach
zachstocks.com

If This Is a Good Year for Citigroup, What Does a Bad One Look Like?

You make a good point. There certainly has been a lack of due diligence in this process for years (whether that is considered moral hazard or just hazard is up for grabs...)

It seems completely senseless to me to buy something that you don't understand, haven't read, won't research, and hope to pass off to someone else.

Reminds me of the time as a young trader that I owned a big position in an obscure index option. Little did I know, the option expired at the OPEN not at the CLOSE on expiration. Also, there was a convoluted process of determining exactly what the OPEN price was.

Needless to say, I took an unjustifiable loss and had trouble explaining it to the head trader. I learned early that if you don't know the details, you don't trade the vehicle. If only our banking and insurance colleagues could have learned such a lesson.

Thanks for the comment,
Zach
zachstocks.com