I was asked today if I thought that parts of the financial system, greased by petrodollars, hadn't recapitalized and repaired themselves fairly effectively and were working down the backlog in syndicating LBO debt etc. This was my response.

1/ If "repair" is code for "write off amounts exceeding the fee revenue earned from 'financial innovation' in said lines of businesses over the last 3-4 years, blow your capital ratios, panic and raise capital from the Gulf and China that dilutes current shareholders from 10% to 30%, wipe the 5th largest US i-bank off the face of the earth and watch the 4th largest teeter on the brink, stick the Fed, the ECB and the Bank of England with all types of bullshit assets that will ultimately be eaten by the tax-payers (e.g. privatized gains and socialized losses for the least worthy interest group of all time). all the while not clawing back any bonuses that were paid along the way" then I agree that that those businesses have been "repaired". And some of them (Citi, Wachovia, etc) still have more pain coming.

But I am not sure why as a shareholder or taxpayer or US citizen that might not consider selling off chunks of our economy to be a good idea, why this isn't grounds for public flogging as opposed to being impressed by how "quickly" it was repaired

2/ Check out the 5 year stock charts

Morgan Lehman Citi Merrill

Goldman JP Morgan

Morgan, Lehman, Merrill, Citi = Flat or down; Only JP and Goldman are up and even then the CAGRs are pathetic. In no other industry do employees get so rich at the expense of shareholders. Actually hedge funds are even worse but the data is not publicly visible.

3/ Lest we forget, Americans are cumulatively 50% poorer against much of the rest of world since we have had to take sensible monetary policy to the woodshed to help with these repairs and the dollar is flirting with a run on the currency. Incredible for the global superpower and world's reserve currency.

USD-Euro Ratio

Another socialization of loss.

Plus huge reduction in strategic scope of action against competitors like China with their huge reserves locking up natural resources and with the ability to send the dollar falling to the floor if they ever started selling. Sure it would hurt them too, but that does not mean that the leverage is not there

4/ And anyway, Round 2 is still to come. And that is the slowdown in the real economy which will swing around and punch everyone in the nose again. We are not done yet.

5/ also note that the mortgage market outside of conforming is basically closed for business as are large parts of the student loan market and increasing amounts of home equity (and car loan is next)

Posted on June 2, 2008 and filed under Finance.