As you may have re-read (I recommend you do this to refresh your memory of what I’m about to discuss), six months ago we were looking for arguments to justify the value of a bankrupt banking system. Of course, these are arguments with no real, accounting or fundamental value; some might even say they have no rational value whatsoever. But six months on, with a modest outlook that we will be expanding upon throughout 2009 and, above all, 2010, the political decision to keep the global banking system afloat with public money is now more than just a political decision. Huge cash injections have already been devised and approved for those whose collapse could prove traumatic. In fact, the ‘state-to-bank’ blood transfusion is already flowing through enormous veins the size of gas pipelines, which have been installed to provide service for longer than we could have imagined or would be desirable.
As we said at the time, this political decision stems from our society’s need for a stable banking system that acts as our banking sector in a Global Monopoly in which we wanted to transform the world. Consequently, the survival of the banks is politically guaranteed by their respective governments. All states have the capacity to bail out some of their banks, but bear in mind that only some states have the capacity to rescue their financial system as a whole. Of course, this requires a central bank of their own and a flexible currency, and the clearest example of this is the US.
In this context, we might conclude that the major banks that make up the core of the financial systems of those powerful and capable states are, in all likelihood, set to survive. In other words, the chances of a second Lehman Brothers occurring are negligible in the short and medium term.
Let’s now recall what we said in «The Broken Bank«: There were too many (perhaps irrational) reasons why the valuations of the major banks in a country like the US would not fall to zero. The risk of collapse has now passed, and the foundations for ridding their balance sheets of the toxic assets that still plague them were laid in a Obama’s public-private rescue plan at the expense of the FDIC (Federal Deposit Insurance Corporation), that is, from state funds. It is true that bids for the toxic assets arising from the bailout plan will be based on private rather than public criteria, but that does not guarantee that the process will be rigorous. Nothing will prevent the banks themselves from, under the guise of independent organisations, act as «private investors» and value those assets at prices high enough to inject sums into their balance sheets that will breathe new life into them. With varying degrees of abuse or discretion, but with a vampiric ability to guarantee the stability of the system. Let’s look at it from the other side: what is not going to happen is that the private entities bidding for the assets will do so at such unreasonably low levels as to cause the failure of certain banks that are meant to guarantee the stability of the system and are the very essence of it. And those private organisations will be as opaque and have such hidden agendas as is necessary to ensure that their proposals are, at the very least, enough to shore up the balance sheets of the major US banks. For every million $, only 3% will actually be at risk from private investment, with the remainder comprising up to 20% in public funds and 80% belonging to the FDIC on a «non-recourse» basis. In other words, the 3% of private capital will bear no liability for the remainder of the money invested should the purchased assets prove to be insolvent.
What we mean by all this is that If we’re thinking of a high-risk speculative investment, perhaps now is the time to buy shares in major US banks which are set to benefit from a pseudo-private bailout scheme, but which will use vast amounts of public funds – effectively as grants – that definitively ward off the risk of bankruptcy. We may well continue to see capital increases that indefinitely weigh down the share price of certain financial sector stocks. But it is also reasonable to assume that the risk to our investment is no longer that the share price will fall to zero, but rather that it will remain undervalued for years. On the other hand, the potential for an upturn, should the toxic assets be sold to a willing buyer – whether genuine or artificially created – is there, more so than ever before in the short history of this financial crisis. And let us remember that the goodwill from the major US banks («a set of intangible or non-material elements of the company that represent value to it»), remains unique amongst those we can find in the listed market. And that very special rescue plan is a intangible asset a real showstopper – and not the only one.
Just six months ago, the ground gave way beneath the global banking system. And today, they are once again standing on ground which, whilst far from solid, might lead us to consider that sector for our more speculative investments. But be careful: this applies only in the US and/or to those institutions whose states meet the requirements mentioned above.
As for RF emissions from those same organisations, if there are any, doubts remain. But that is a topic for another article.