Thain speaks

Reuters Staff
Jan 26, 2009 15:57 UTC

WSJ’s Deal Journal has the scoop:

Memo from John Thain

It has been an honor to lead this company over the last very difficult year.  The decisions that I made were always with the best interests of our shareholders and employees above all.  I believe that the decision to sell to Bank of America was the right one for our company and our clients.  While the execution has been difficult, I still believe in the strategic rationale of the transaction and I wish you all the best for the future of the combined companies.

I want to address several topics that have been inaccurately reported in the press.  The first issue is our year end bonus payments.  Our 2008 discretionary bonus pool was 41% lower than 2007.  The size of the pool, its composition (cash and stock mix), and the timing of the payments for both the cash and stock were all determined together with Bank of America and approved by our Management Development and Compensation Committee and our Board.

The total bonus pool was also substantially less than the amount allowed under our merger agreement.

The fact that the bonus pool is smaller than last year and within the limits allowed by the merger agreement is no consolation.  Merrill (and all the investment banks) paid out billions in bonuses to their workforces over the past 5 years based on phantom profits that are now unwinding violently.  Not only should there be NO BONUSES this year, past bonuses should be clawed back.

The second topic is the losses in the fourth quarter, which were very large and unfortunate.  However, they were incurred almost entirely on legacy positions and were due to market movements.  We were completely transparent with Bank of America.  They learned about these losses when we did.  The acting CFO of my businesses was Bank of America’s former Chief Accounting Officer.  They had daily access to our p&l [Deal Journal translator: that means "profit and loss," or the statement of the bank's accounts], our positions and our marks.

Our year end balance sheet target (which we more than met) was given to us by Bank of America’s CFO.

Thain is getting blamed unfairly for these losses.  While some speculate that the bank may have run up mammoth trading losses even after the deal was announced (but before it closed on Jan 1), certainly the lion’s share of the banks total losses to date are due to positions entered when Stan O’Neal was still CEO.  He’s the guy that deserves blame for Merrill’s downfall…more than Thain anyway, who rescued Merrill from certain death by selling to BofA.

The final topic is the expenses related to my office.  The $1.2 million reported in the press was for the renovation of my office, two conference rooms and a reception area.

The expenses were incurred over a year ago in a very different environment.

Nonetheless, they were a mistake in the light of the world we live in today.  I will therefore reimburse the company for all of the costs incurred.

I thank all of you for your hard work and your support over the past year.  I wish you all success in the future.

It’s nice of him to return the money for the office expenses.  A better gesture would be to return bonuses from his days at Goldman…

Monday layoffs

Reuters Staff
Jan 26, 2009 13:54 UTC

As layoffs increase, so will foreclosures.  This means more house price declines and permanent impairments for bank balance sheets.  These were the layoff announcements I spotted early today…

Caterpillar = 20,000

Home Depot = 7,000

Sprint = 8,000

Pfizer = 8,000+

Starbucks = 1,000

ING = 7,000

Layoff announcements will likely continue through the rest of Q4 earnings season.

Can Obama get us off the junk?

Reuters Staff
Jan 25, 2009 18:33 UTC

In his Sunday column this week, Frank Rich does a fine job diagnosing our economic disease. He does this in the service of his larger point, that Obama’s less-than-flourishing inauguration speech calling on Americans to be more responsible is exactly the message we need to hear. Well that’s all fine.  But Rich, being a very liberal Democrat, lets Obama off easy—crediting our new President’s words, but not criticizing his actions.

After taking the obligatory (& well-deserved) pot-shots at greedy fat cats, Rich gets down to the point…

In less lofty precincts of the American economic spectrum, the numbers may be different but the ethos has often been similar. As Wall Street titans grabbed bonuses based on illusory, short-term paper profits, so regular Americans took on all kinds of debt wildly disproportionate to their assets and income. The nearly $1 trillion in unpaid credit-card balances is now on deck to be the next big crash.

This debt-ridden national binge of greed and irresponsibility washed over our culture not just through the Marie Antoinette antics of a Schwarzman and a Thain but in mass forms of conspicuous consumption and entertainment.

His point is clear: We can’t blame greedy Wall Street bankers, unscrupulous mortgage brokers, incompetent central bankers, unethical credit rating agencies, and W. for all of our economic ills.  We, the American people, are addicted to debt-financed consumption.  The above merely acted as drug dealers and enablers.  Even now the question being asked is “how do we get the economy growing again?”  But of course this misses the real issue: “How do we get off the junk?”

What we should be concerned with isn’t economic growth, it’s paying off our debts.  The distinction is important because it would inform our policy choices.  Focusing as we are on growth, the solution that is offered is more debt, or rather, “stimulus.”

On an individual basis, we all know that once we’ve overstretched ourselves, we have no choice but to cut back.  And yet we allow ourselves to be deluded into believing the logic should be different for society as a whole.

With all of this in mind, Obama’s speech rang true, says Rich:

President Obama did not offer his patented poetry in his Inaugural Address…

Such was the judgment of many Washington drama critics. But there’s a reason that this speech was austere, not pretty. Form followed content. Obama wasn’t just rebuking the outgoing administration. He was delicately but unmistakably calling out the rest of us who went along for the ride as America swerved into the dangerous place we find ourselves now.

Feckless as it was for Bush to ask Americans to go shopping after 9/11, we all too enthusiastically followed his lead, whether we were wealthy, working-class or in between. We spent a decade feasting on easy money, don’t-pay-as-you-go consumerism and a metastasizing celebrity culture.

All of this is fine. Yes, Obama’s speech was good. Yes, it called on us to take more financial responsibility at a time when we need to do just that. And yet, Rich has nothing to say about Obama’s actions.  What is this new President actually doing?

He’s spending more money is what, promising a mammoth “stimulus” package and hundreds of billions more to rescue the banking system.  This is not asking America to take its medicine.  It’s engaging in the same reckless behavior that got us into this mess in the first place.  But how do you solve the problem of too much debt with more debt?

What are the sacrifices Obama is going to ask of us so we can pay down our unpayable liabilities?

He has spoken of a “fiscal responsibility summit” to be held next month.  According to an interview with WaPo:

[Obama] framed the economic recovery efforts more broadly, saying it is impossible to separate the country’s financial ills from the long-term need to rein in health-care costs, stabilize Social Security and prevent the Medicare program from bankrupting the government.

“This, by the way, is where there are going to be very difficult choices and issues of sacrifice and responsibility and duty,” he said. “You have to have a president who is willing to spend some political capital on this. And I intend to spend some.”

If Obama pushes through legislation drastically reducing our long-term liabilities for Medicare and Social Security, not by increasing taxes but by cutting promised benefits, that would help convince me that he’s really serious about demanding “responsibility” and “sacrifice” from the American people.

New Stimulus details

Reuters Staff
Jan 24, 2009 16:54 UTC

The Obama administration released new details of its stimulus plan today.  You can find them all in this pdf.  The report is titled “The American Reinvestment and Recovery Plan – By the Numbers.”  Conveniently, the one number left out is the plan’s total cost.  Estimates are now in the $875 billion range I believe.

The plan’s goal is to spend 75% of the money in the first 18 months after passage and to create 3-4 million new jobs.  On the jobs figure, I’d be more interested to know the net number of jobs that will be created.  After you factor in the long-run taxation needed to pay for this plan—whether via IRS collections or the inflation tax—it may destroy more jobs as it creates.

Spending highlights:

Spurring a Clean Energy Economy

  • Doubling renewable energy generating capacity over three years…
  • [U]pfront investments and reforms in modernizing our nation’s electricity grid will result in more than 3,000 miles of new or modernized transmission lines and 40 million “Smart Meters” in American homes.
  • Weatherizing at least two million homes to save low-income families on average $350 per year and modernizing more than 75% of federal building space, saving taxpayers $2 billion per year in  lower federal energy bills…
  • Launching a Clean Energy Finance Initiative to leverage $100 billion in private sector clean energy investments over three years. The finance authority will provide loan guarantees and other financial support to help ease credit constraints for renewable energy investors and catalyze new private sector investment over the next three years.

Lowering Health Care Costs and Ensuring Broader Health Care Coverage

  • Accelerating adoption of health IT systems to modernize the health care system, save billions of dollars, reduce medical errors and improve quality.
  • …Increase the Federal Medicaid Assistance Percentage so that no state has to cut eligibility for Medicaid and SCHIP because of budget shortfalls…
  • …[P]rovide newly uninsured Americans who lose their jobs a new tax credit to keep their health insurance through COBRA as well as a new option in Medicaid for low-income people that lack access to COBRA.
  • …More than half of Americans—156 million—go without the flu vaccine every year, and this plan ensures that no American will lack immunizations due to costs. Further, given that 1 in 3 adults have a chronic disease, this plan tackles obesity, smoking and other health risks from nearly 100 programs to potentially, as many as 800 prevention programs in urban and rural communities across the nation.

Preparing Our Children for the 21st Century Economy

  • An historic investment to school modernization, sufficient to renovate and modernizing 10,000 schools.
  • Increasing college affordability for 7 million students by funding the shortfall in Pell Grants and increasing the maximum award level by $500.
  • Providing a new higher education tax cut to nearly 4 million students. The plan will create a new $2,500 American Opportunity Tax Credit that is partially refundable.
  • Tripling the number of undergraduate and graduate fellowships in science, to help spur the next generation of home grown scientific innovation.
  • [D]ouble the Early Head Start program…

Rebuilding America’s Roads and Bridges and Investing in 21st Century Infrastructure

  • Enacting the largest investment increase in our nation’s roads, bridges and mass transit systems since the creation of the national highway system in the 1950s. The plan will repair and modernize thousands of miles of roadways in the U.S. and providing new mass transit options for millions of Americans.
  • Enhancing the security of 90 major ports, to improve homeland security, increase international trade and commerce, and create jobs.
  • Modernizing our nation’s water systems with funding to support 1,300 new wastewater projects, 380 new drinking water projects and construction of 1000 rural water and sewer systems…
  • Supporting our troops and veterans by making much-needed repairs to military housing units and accelerating modernization of VA medical facilities to properly serve our veterans.

Supporting America’s Working Families

  • Providing a $1,000 Making Work Pay tax cut for 95 of workers and their families.
  • Cutting taxes for more than 16 million children through an expansion of the Child Tax Credit.
  • Increasing food stamp benefits for over 30 million Americans who currently receive food stamp benefits. The plan also provides additional support for food banks, school lunch programs and the WIC program. The plan will also replenishing the TANF contingency fund, which is expected to run out of funding this fiscal year.
  • Providing 7.5 million blind, disabled and aged Americans an immediate $450 through temporarily increasing Supplemental Security Income (SSI) benefits
  • Extending and expanding unemployment insurance (UI) benefits by extending the Emergency Unemployment Compensation (EUC) program through December 2009, increasing weekly UI benefits by $25…

That’s a lot of great stuff.  Who could be against any of it?  I bet we could get twice as much for only double the cost.  (Or maybe not, considering the law of diminishing returns).

The report notes that we’ll get to track all of this spending via a new website:

Freddie asks for another $35 billion

Reuters Staff
Jan 24, 2009 14:31 UTC

In a filing with the SEC yesterday, Freddie laid out its second request for taxpayer funds:

Based on preliminary unaudited information concerning [Q4] results…[Freddie Mac] management currently estimates that [its Conservator] will submit a request to…[Treasury] to draw an additional amount of approximately $30 billion to $35 billion under the $100 billion Senior Preferred Stock Purchase Agreement (Purchase Agreement) between Freddie Mac and Treasury.

The Purchase Agreement requires Treasury, upon the request of the Conservator, to provide funds to the Company after any quarter in which the Company reports a negative net worth (that is, the Company’s total liabilities exceed its total assets, as reported in accordance with generally accepted accounting principles)…

“Negative net worth” is an important formula to keep in mind because it’s the same one that demonstrates why the private banking system needs so much money.  By virtue of its implicit government guarantee, Fannie and Freddie borrowed $4.5 trillion to create $4.5 trillion worth of loans.  Assets = Liabilities + Equity.  For Fan and Fred, Assets equaled Liabilities, so Equity was zero.  With no equity in the equation, they had no cushion to protect against the declining value of their assets.

The banking system may have a similar degree of leverage.  To wit, backing out Citi’s deferred tax assets would leave it with just $7 billion of tangible common equity…against over $2 trillion of on-book and off-book assets.  This is why banks, just like Fan/Fred, need an open line on Treasury in order to survive.  None have sufficient equity to withstand losses on the asset side of the balance sheet.  In the absence of government support, they all have “negative net worth.”

Treasury has agreed to pump as much as $100 billion into both Fannie and Freddie so they can maintain positive net worth and continue operating. But Fannie has already made it clear $100 billion ain’t enough.  Last quarter Freddie received $13.8 billion.  Bloomberg has a good article on the topic this morning:

“Their losses are going to be much higher than anyone anticipated,” said Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia. “The more and more that people are digging into these portfolios, they’re finding out the more and more these guys were doing subprime and Alt-A loans and classifying them as prime.” Alt-A loans were made to borrowers with little or no income verification or to those with credit scores slightly above subprime…

Actually plenty of folks anticipated higher losses.  As I published in my January op-ed, all you had to do was read the footnotes to their filings to know they had hundreds of billions of $ at risk in subprime and Alt A.

“Given that they have $4.5 trillion of risk out there, $100 billion is a drop in the bucket,” Miller said. “Given the fact that their risk profile on these loans is greater than they led everyone to believe, greater than $100 billion in losses on each institution would not surprise me.”

It’s a shame Congress and our new President don’t understand leverage…or implicit guarantees.  Asking the banks “to lend more” when they’ve already lent way too much relative to their sliver of equity capital is a recipe for blowing a bigger and more unstable bubble than the one that just popped.  And offering an explicit guarantee that none will be allowed to fail simply encourages investors to pump more capital into failed banks.  See for instance, FDIC-subsidized borrowing by Citi, GE, BofA, Chase et al.  No way these guys could raise money without FDIC and other government guarantees.  Certainly not at such tight spreads relative to Treasuries.

Good investments…

Reuters Staff
Jan 23, 2009 17:21 UTC

As pessimistic as this blog tends to read, in reality I’m optimistic.  Not about the economy, but about how people will deal with it.  Money isn’t everything.  When there’s less of it, and less opportunity to earn it, folks may just find other, more profitable things to do with themselves.  Justin Owings has a nice piece reminding us that there are more important things in life…

Setting…aside [questions of good financial investments], there are irrefutably good investments that you can make in bad economic times. They require setting aside more of your time than your money. Since time is the most scarce resource you can spend (And your happiness one of the most precious assets you can buy), these investments are arguably…more important than your physical wealth, anyway.


Your family is a wealth of advice, laughter, entertainment, and support (Sure they can be a pain, but focus on the big picture!). Parents love you even when you screw up. Siblings understand you in ways others can’t. And who doesn’t have warm memories of holidays spent playing with cousins or aunts and uncles? There’s no good reason family moments should be isolated to major Judeo-Christian holidays or the occasional birthday…


…[F]riends are bastions of wealth that merely take investments of time. These days, with social applications like Facebook, it’s even easier to stay in touch and make plans with friends — even those you haven’t seen in awhile.


You can invest in your health right now by taking a walk outside…Taking a walk and getting some sunlight is only marginally going to improve your health, but health is maximized by simple things…


Reading a book is a cheap way to live vicariously, acquire knowledge on the cheap and amass immense quantities of accretive, intangible wealth…

Good advice.

Sponsor an Executive

Reuters Staff
Jan 22, 2009 22:55 UTC

John Thain is in desperate need of new furniture (see previous post).  Please show your support…

(hat tip Joey W)

CNBC: Thain out at BofA

Reuters Staff
Jan 22, 2009 16:41 UTC

CNBC’s Charlie Gasparino is reporting that Ken Lewis will be holding an emergency meeting at 11:30 with John Thain to decide Thain’s future.  Ken Lewis and the BofA folks are pissed they overpaid for Merrill and need someone to blame.  Thain is the logical target.

[12:00 update: Thain is out]

The whole episode is reminiscent of the AOL/Time Warner saga.  Back then, AOL CEO Steve Case convinced Time Warner CEO Gerry Levin to buy his company for the absurd price of $164 billion.  It was a fantastic exit for AOL shareholders and a phenomenal destruction of wealth for Time Warner shareholders.  Angelo Mozilo, CEO of Countrywide, and John Thain both convinced Ken Lewis to buy their banks for values significantly higher than $0, which is what they were both worth on a stand-alone basis.  And everyone knew it.

Some believe that after BofA realized Merrill’s losses were far steeper than previously thought, it wanted to back out.  But Bernanke/Paulson forced them to close the acquisition anyway with a promise of additional government funds on the back end.  On January 1st, BofA closed the deal.  On January 16th, the bank got a second batch of taxpayer cash.

Flashback to December 5th—two weeks before Lewis met with Bernanke/Paulson to inform them he wanted to call off the deal—American Banker honors Ken Lewis as its “Banker of the Year.”  In an article that reads like a BofA press release, American Banker credited Lewis for “not backing off” his belief that Merrill and Countrywide had value:

Kenneth D. Lewis has emerged as a critical force for stability in tumultuous economic times.

A clear voice in policy debates, Mr. Lewis stood and made the convincing case last month when limits on executive compensation threatened the consensus behind the Treasury Department’s plan to invest capital in financial firms. And it was Mr. Lewis who, under fire for his deals first for Countrywide and later for Merrill Lynch, never backed off his belief that each target had value, not merely as an opportunistic purchase, but also as a strategic one.

For these reasons and others, American Banker has named Mr. Lewis its 2008 Banker of the Year.


One way to find stocks to short is to watch magazine covers. Still my favorite: Mercury Interactive CEO Amnon Landon named “Entrepreneur of the Year” by Forbes in 2003.  At that point, Landon had already given himself and his executives tens of millions worth of backdated stock options.  By 2005 he was forced out.  BofA was a slam dunk short as soon as the folks at AB featured Ken Lewis…

[This has nothing to do with BofA, but Gasparino is also reporting that Thain spent $1.22 million redesigning his office at Merrill when he arrived.  Of which, $838k went to "Michael S. Smith Design" for, among other purchases:

  • Area rug...$87,784
  • Mahogany pedestal table...$25,713
  • 19th Century credenza...$68,179
  • Pendant light furniture...$19,751
  • 4 pairs of curtains...$28,091
  • Pair of guest chairs...$87,784
  • George IV chair...$18,468
  • 6 wall sconces...$2,741
  • Parchment waste can...$1,405
  • Roman shades & fabric...$18,282
  • Coffee table...$5,852
  • Commode on legs (?)...$35,115]

Caroline Kennedy….OUT!

Reuters Staff
Jan 22, 2009 05:26 UTC

Wow.  I’m positively giddy over this.  NY Post:

Caroline Kennedy tonight withdrew her name from consideration to replace Hillary Clinton in the U.S. Senate after learning that Gov. David Paterson wasn’t going to choose her, The Post has learned.

Kennedy’s decision removes the highest-profile name in the ring to step into Clinton’s now-vacant seat, as she departs after getting confirmed today as President Obama’s Secretary of State.

Sources said the reason Paterson had decided not to tap the daughter of John F. Kennedy was her poor performances in media interviews and in in private sessions with various officials.

Calling her performance “poor” is being charitable.  She was really quite terrible, as the transcript of her interview with the NYT demonstrates.  And her people knew it, which is why after just a couple days of halting and inarticulate public appearances, they made her unavailable.

There was never a good rationale for Caroline Kennedy to fill Hillary Clinton’s vacant Senate seat. Not for the people of New York, anyway.  In the few moments she was able to speak to the press, she muttered something about her charity work and that she’s a Kennedy.  And that was kind of the point, even she couldn’t articulate a good reason why she’d be the best choice to fill the seat.  Also, New Yorkers don’t want her.  One alternative, state attorney general Andrew Cuomo, polls 15 points ahead of her.

But she had powerful friends.  Barack, ever the Chicago machine politician, supported her bid as payback for convincing Uncle Teddy to come out for him instead of Hillary.  And Mike Bloomberg was a backer; he had his top political operative Kevin Sheekey work the phones very aggressively on her behalf.  And then there was Paterson himself, whose sole prerogative it is to pick Hillary’s successor.  The conventional wisdom seemed to be that he’d pick Caroline because she’d be a great name down-ticket and could raise mucho money for him and other Democrats when she came up for re-election in two years.  (Paterson, who got the top NY job when Eliot Spitzer resigned, will also be facing voters for the first time as governor in 2010.)

If indeed he decides to go in another direction, Paterson deserves kudos.  Kennedy would have been an easy choice for selfish reasons and because of her powerful backers.  But it was clear from the start she’s not ready for the job.

[Update:  ABC News is reporting that Paterson was still planning to appoint her and that Kennedy withdrew of her own volition.  The distinction is more than academic: Under Scenario 1, Paterson gets credit for having a backbone.  Under Scenario 2, he doesn't.]

Chutzpah, thy name is Chrysler

Reuters Staff
Jan 21, 2009 14:26 UTC

by Rolfe Winkler, CFA

(n) chutzpah—Yiddish—unbelievable gall; insolence; audacity (via wordnet)

Two days ago, Chrysler worked out a venture with Italy’s Fiat SpA to make itself “viable” and thus worthy of the second, $3 billion tranche of government loans offered last month.  It’s an odd deal.  WSJ (emphasis mine):

The car that will save Chrysler?

On Tuesday, Chrysler and Italy’s Fiat confirmed they had reached an agreement on an alliance that would give Fiat a 35% stake in the American company. Fiat would not put any cash into Chrysler but would provide technology and vehicles that Chrysler could build and sell in the U.S.

But the deal becomes binding only if Chrysler gets $3 billion more in financial help from Washington, said the people familiar with the terms of the agreement.

A Fiat spokesman declined to comment on the matter. Chrysler spokeswoman Shawn Morgan wouldn’t comment on Fiat’s demand, but said Chrysler believes the $3 billion in loans are necessary for its viability.

Last month Chrysler got $4 billion of taxpayer loans and the promise of $3 billion more should the automaker devise a realistic plan to remain “viable” prior to February 17th.  (Add to that the $1.5 billion Treasury loaned to Chrysler Finance last week.)

And according to the article, if Fiat meets certain operational goals within 12 months, it would have an option to buy an additional 20% of Chrysler for a mere $25 million.

Cerberus, the private equity shop that owns 80.1% of Chrysler, has been unwilling to contribute additional capital of its own.  Why would they give away the business to Fiat for so little cash?  I imagine because it would also get them out from under Chrysler’s mammoth liabilities, which the new majority owners would become responsible for.

But this is pure speculation on my part.  Few details of the deal have emerged.

In any case, Chrysler stakeholders still seem unable to make hard choices necessary to save the company, even when faced with bankruptcy.  One is to drastically reduce employee/retiree benefit obligations.

But union members may have a perverse incentive to prefer bankruptcy over benefit givebacks.  If Chrysler goes under, taxpayers (via PBGC) would be responsible for the underfunded portion of its pension plans.

Cool photo of the inauguration crowd

Reuters Staff
Jan 21, 2009 04:00 UTC

From a satellite.  If you zoom in, you can see GWB’s helicopter behind the Capitol building, which itself looks pretty cool from space.

Looks like attendance was far lower than the anticipated 2 million.  An ASU professor estimated 800,000.  That’s still an impressive number.  I wonder how many were watching worldwide…

Out-Francing France?

Reuters Staff
Jan 20, 2009 20:48 UTC

While the new administration is kicking around a near $1 trillion stimulus plan, the French appear to be done stimulating, at least for now.  Forbes:

France is not planning a second economic stimulus plan to complement the 26 billion euro ($33.74 billion) programme announced late last year, a senior official in French President Nicolas Sarkozy’s office said on Tuesday.

‘We have to implement the one that has been decided,’ the official, who could not be identified by name, told Reuters. ‘We are going to analyse what our neighbours are doing. We are already making a considerable financial effort.’

The official also said that France’s deficit would pass above 4 percent of gross domestic product, well above the European Union’s 3 percent limit.

By comparison, the CBO estimates the U.S. budget deficit for fiscal 2009 at $1.2 trillion or 8.3% of GDP.  That estimate does not include Obama’s stimulus.

The Mattress Savings Plan

Reuters Staff
Jan 20, 2009 18:36 UTC

I’m just saying…

  1. Banks are “effectively insolvent.”
  2. FDIC doesn’t have the money to bail out the depositors of even one large failed bank.
  3. Banks are paying 0% on liquid deposits.

If the banking system is insolvent, so is your bank.  If the FDIC has no money, it’s quite possible the government can’t protect you.  If the bank is not paying any interest, then you are paid nothing for exposing yourself to these risks.  So why not convert at least a portion of your savings to Benjamins and put them in your mattress?

Two reasons: cash can be stolen and can lose its value due to inflation.

But if banks pay no interest, then the purchasing power of your savings is as vulnerable in the bank as it is in your mattress.  So inflation is a moot point.

The only real risks are fire or theft.  These are real risks, of course.  So it probably makes sense to diversify: keep some in the bank and some elsewhere.

In a total collapse of the financial system, cash equivalents are not cash.

Bank Death Watch, adding Wells & Chase

Reuters Staff
Jan 20, 2009 14:48 UTC

Don’t look now, but Chase and Wells Fargo are getting hammered in early trading.

Chase appears to be headed below $20…

…while Wells is moving inexorably toward single-digit midget land:

And don’t look now, but C may drop below $3…

…while BofA is flirting with a $5 handle…

Perhaps American investors are reacting to the RBS news yesterday. The British bank reported a huge loss and is now 70% owned by the UK government.  Brits are skeptical the bank can survive with ANY private ownership.

Our markets seem to think this will be the outcome for America’s banks as well.

By the way, it’s also entirely possible that these stocks end higher today.

Roubini: Banking system “effectively insolvent”

Reuters Staff
Jan 20, 2009 13:25 UTC

Fresh bearish commentary from Dr. Doom.  Bloomberg:

U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent,” said New York University Professor Nouriel Roubini, who predicted last year’s economic crisis.

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis…

“The problems of Citi, Bank of America and others suggest the system is bankrupt,” Roubini said. “In Europe, it’s the same thing.”

The stock market is way ahead of Nouriel on this, frankly.  All bank stocks are converging to $0 because everyone knows big losses combined with huge leverage = zero equity.  It’s the same as being upside down on your mortgage: The banks owe more money than the value of their assets will ever be able to pay back.

Bank stocks haven’t hit $0 yet because they still have option value.  To wit: never underestimate the amount of money the federal government can throw at the banking system to keep it’s heart beating.