ItsJustMe

Stocks Rally on Financial Writedowns: Overly Optimistic?

taxfreelife is correct that the banks cannot just write everything down to where they "think" the bottom might be. They have to evaluate where they are each quarter based on the present loan delinquencies, conditions and trends.

If the worldwide economy continues to sink into recession as it appears, the writedowns will continue each quarter. Many reputable economists (and the banks themselves) are predicting that $1 trillion will be the eventual worldwide writedown of mortgage, business and credit card debt so as you can imagine, $19 billion is just another baby step on the way down.

There are so many investors that know this and are shorting the banks that as soon as any positive development hits (I guess $19 billion is better than $20 billion), they get caught in a short squeeze and the banks skyrocket as they scramble to get out.

What they should do, is simply buy some 9 to 12 month puts and wait patiently as the banks replace their current profit equity with billions of new shares until their book value per share is finally diluted down to a fraction of what they're showing now.

Bear Stearns value of between $2 and $10 per share is about right for most of the banks but the Fed is keeping the other banks liquid long enough that they can reach that value in an orderly systematic manner which could take a year or two...