Thursday, March 26, 2009

Will Geithner End Up As XLF's Last And Only Bagholder?

When I wrote about the implications of Geithner's upcoming stress test, I observed that the institutions that have the lowest metrics in the "tangible common plus reserves plus pre-provision earnings less cumulative losses as a percentage of assets" ratio are the companies most at risk for test failure and nationalization of conservatorship. Globalmacrotrader has rerun the numbers and seems to conclude that things are even worse, concluding that absent the PPIP luring up to $750 billion in new private capital, banks are in for a world of pain. Inversely, if through the generous leverage terms, PIMROCK et al do in fact commit massive funds to bail out the asset side of the balance sheet, the outcome would again be adverse as banks will "end up less profitable" by the virtue of the downsizing in their cash flow generating assets.

While Zero Hedge does not promote trade recommendations, GMT concludes that the XLF is enjoying a sucker rally, and the best risk/return is shorting banks with low TCE ratios.

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9 comments:

Anonymous said...

Perhaps that is why one of the fed governors came out today and said stress test's may have to be changed?

In Debt We Trust said...

Any thoughts on today's Treasury rally?

Naufal Sanaullah said...

I don't understand... you think (like me) the PPIP can be gamed and legacy asset losses can be transferred to taxpayers and holders of dollars/treasuries through quantitative easing financing the deficit spending required for PPIP/TALF/TARP. But at the same time you think that the divestment of toxic assets by banks won't free up their equity and consequently credit markets (again, currency depreciation rather than bank equity depreciation)?

I agree that upcoming earnings and news of the stress tests will cause a financials sell-off, as current values of bank stocks still haven't taken account this quarter's writedowns (thanks to a couple memos) and the risk of conservatorship. But from that sell-off's bottom, I expect the PPIP to cause investors to look forward... switching sentiment from "how toxic are these banks' assets in suppressing equity?" to "how sound are these banks as legacy asset divstment occurs?"

i'd love to read your thoughts.

Anonymous said...

Off topic but what are the odds this article is true?

http://www.forbes.com/forbes/2009/0413/096-sachs-semgroup-goldman-goose-oil.html?feed=rss_news

Anonymous said...

I agree with Naufal. Either the PPIP overpays for toxic assets and helps the banks, or underpays and hurts them. I think it would be helpful to a lot of readers of this blog if you would elaborate on this point, specifically whether Zero Hedge has a definitive position on whether Pimrock et al will be trying to get the best deal for itself when bvidding, or whether they will be "taking one for the team" and bidding generously for the assets, protecting the banks (and their own considerable legacy positions). Thanks for any response.

PS said...

What does anyone think the mark-to-market ruling will be and how do you think it will affect the financials such as XLF?

Anonymous said...

if i don't want to short C, can i short XLF and go long a few banks with relatively good TCE ratios? anyone know any candidates for this?

Naufal Sanaullah said...
This comment has been removed by the author.
Anonymous said...

whatever the odds, gimme 100 barrels on the goose please.