Rescued From A Wreck

Last Friday, Marketbeat of the WSJ featured “Getting Rescued From A Wreck:”

There are heroes in this country, and then there is Bank of America CEO Ken Lewis.

The selling in equities that occurred in the first full week of trading in 2009 was not overly alarming to investors in the wake of a better-than-expected “Santa Claus rally.” But this week’s action, which saw the S&P; 500 lose more than 4% of its value amid a slight rise in Libor and a bit of renewed concern in the credit markets cannot be easily sloughed off.

The week was dominated by the hijinks of Citigroup and Bank of America, both of whom have discovered, far too late, that building a profitable, successful company for the long haul need not be done by utilizing a strategy that most would associate with taking the 72-ounce steak challenge at the Big Texan Ranch in Amarillo, Texas.

Those that choose to participate in that enjoyable activity only endanger those in the immediate vicinity with the after-effects — whereas the entire country has been forced to react to the banking mess, and to watch the bewildering sight of executives going back to the government kitty to complete an acquisition that they botched the first time around.

But to hear Mr. Lewis tell it, it’s being done out of patriotism. When asked Friday on his company’s conference call as to why the company did not decide to back away from the proposed acquisition of Merrill Lynch when it suddenly realized that the brokerage’s balance sheet was more disastrous than had been thought, Mr. Lewis said that “we just thought it was in the best interest of our company and our stockholders, and the country, to move forward with the original terms and the timing.”

How nice. A company that’s been given tons of money from the government runs back for more money in order to complete a transaction that a prudent manager of risk would have walked away from. Mr. Lewis, it should be reminded, did not successfully land a plane (which included some of his employees) in the icy Hudson River.

Investors had almost become convinced that the banks had managed to pull themselves from the brink even as the U.S. economy nosed closer to the ledge. But with the banking sector still trying to remove itself from the chasm, the drumbeat of layoff announcements picked up this week, from the likes of Saks, Barnes & Noble, Advanced Micro Devices, Pfizer, and the liquidation of Circuit City, which was unable to find a buyer and instead will hold a fire-sale of DVDs and other items.

At least, in this case, the lower prices will allow those assets to clear the market, which is something that cannot be said for the major banks.

[Emphasis added]

This has been my point all along. Banks are still hiding bad assets on their books, which will continue to be the source of mistrust along with unwelcome, sudden surprises. Baring it all and coming clean by allowing total transparency would be a step in the right direction to allow investors to see the total picture, which would greatly contribute to ending this crisis sooner rather than later.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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