Chris Lau - Seeking Alpha

Saturday, February 21, 2009

Citi and Bank of America Nationalization?

I have repeatedly speculated that CitiGroup and Bank of America would need to be nationalized. The rationale was simple: Liabilities exceed assets, and the continued decline in home prices and the increasing rate of foreclosures would continue to stress the balance sheet.

In Friday's trading:
CITIGROUP INC 1.95 -$0.56 Down 22.31%
BK OF AMERICA CP 3.79 -$0.14 Down 3.56% (day's low was $2.53)

Investors need to be more concerned than the above possible fallout (a Government takeover of these banks will not likely be welcomed with any "relief rally." Instead, the S&P 500 @770, for example will have a reason to fall to 625-675 failing which, 459 is not impossible). The greater concern should be that the White House is sending mixed messages:

BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: I think there's a very strong commitment on the part of the administration to try to return banks or keep banks private or return them to private hands as quickly as possible.

Take over the banks, then sell it back to Wall Street? That would mean existing shareholders get wiped out.

Conversely, Timothy Geithner was silent on the matter. Robert Gibbs said that privately held banking system was the correct way to go.

Analysis:
Sending mixed messages is almost never a good thing. Interpreting it is not required, because the market has spoken. Continue to keep an eye on what really matters: unemployment rates, the price of gold (it is $1000 and is starting to be in a bubble), and the Case-Shiller Home index.
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