All Hourly Candles Must Be Green
Courtesy of Karl Denninger at The Market Ticker
This is truly amusing….
CNBS has Chris Whalen on in which he puts forward that the banks are suffering compressing interest income and that despite the claim of "excellent" margins the truth is that in absolute dollar value terms the income level is collapsing, SEVERAL LARGE BANKS WILL SHOW STRESS IN THREE TO SIX MONTHS AND WILL ULTIMATELY FAIL, HAVING TO BE RESTRUCTURED UNDER DODD-FRANK.
Watch this clip at 7:10 in….. and then watch how CNBS tries to spin it.
Incidentally, what Chris is saying in this clip is exactly what he pointed out in his presentation of a few days ago that I outlined.
CNBS, for its part, immediately tried to turn this around into a positive for bank stocks – that is, a reason to buy them, and Najarin claimed there was a "Bank Put" out there as a consequence of the law.
This is a complete and utter LIE.
Dodd-Frank provides for no such thing. The resolution authority provides for an orderly process to wind down a failed institution in which creditors are covered to the extent possible and the capital structure is honored.
THERE IS NO PROVISION IN DODD-FRANK TO PROP UP A FAILED BANK!
Please note, ladies and gentlemen, that common stockholders are at the bottom of the capital structure. That is, they will absolutely be wiped out in any such proceeding and get nothing.
Got that? Common stock value in any such "resolution" is zero.
Bupkis.
Zilch.
Nada.
Now you’re probably ok with senior secured debt in these institutions. You will almost certainly get nailed to some degree with subordinated (that is, any non-senior) debt. But if you hold common stock and the bank in question is "resolved", you’re going to get zero.
Chris Whalen is one of the best-respected and most-thoughtful analysts out there when it comes to these matters. Institutional Risk Analytics is a firm that, when you bet against them, you are taking a very severely odds-against bet. Bull****ting his position like this and then not giving him the opportunity to respond was unbelievably unprofessional.
These stocks have been on an absolute tear over the last 18 months under the premise that their revenue and earnings model would all be "good" and continue to advance, largely predicated on the idea that "mark to myth" would allow them to both earn out of it but in addition asset prices would recover and thus make the prices "money good."
Chris’ report throws a whole bucket of icewater on that thesis, and if he’s right holding any of these stocks is going to be a portfolio-destroying act as their common stock is a zero.
I have no problem with people who have a difference of opinion – that’s what makes a market.
But to misrepresent what’s in passed legislation and to argue that Dodd-Frank provides for a "PUT" under the common stock of a financial institution as was done in 2008 is absolute lunacy at best.
It does no such thing and in fact was enacted specifically to avoid such a thing happening in the future.
This is almost exactly the sort of thing that CNBS did with Angelo Mozilo and Countrywide just months before they collapsed – they had him on multiple times to pronounce how healthy the company was and how they were taking market share from everyone else.
I will remind everyone that Countrywide Financial blew up and was forcibly-acquired by Bank of America, and if you held the stock to that point you got – for all intents and purposes – BUPKIS.
Many people got gang-****d listening to Mozilo’s appearances on CNBS and elsewhere in the months before Countrywide blew up. I maintained at the time all the way until they went boom that they were a zero, despite the claims of "all being good" – and was ultimately proved correct.
This call – that all the big banks will have to be restructured – comes not from me but from one of the best-respected bank and credit analysts in the world.
He may be right and he may be wrong – but the argument against Chris’ beliefs is not found in Dodd-Frank.
Don’t let it happen to you again.
