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Will the Banking Industry Survive?

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BKX shed nearly 20% yesterday.

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Yesterday afternoon, we offered that a 20% loss in a single day is considered a "crash." As such, the BKX (bank index), after a horrific stretch dating back to 2007, effectively "crashed" yesterday (-19.71%), bringing the cumulative loss during that period to a staggering 80%.

Old school Minyans know we've had a love-hate relationship with this sector for many years in that we loved to hate 'em. It wasn't personal as much as a lucid assimilation of the collective imbalances, unsustainable leverage and profound consequences of derivative contracts tying together the global finance based economy.

For newbie Minyans in our midst--and there are many of you--I would recommend sniffing at the following links, for to understand where we are, we must appreciate how we got here.


To be sure, we were early in ringing the alarm bell--heck, I was on CNBC in 2003 warning of the dangers of debt, the dollar, derivatives and housing, as well as the risks in Fannie Mae (FNM), and following that thread of thought, at the time, would have led to massive opportunity cost, if not a spanking on the short side.

Why do I bring this us now, you ask? To bring the discussion full circle. Yesterday, a well known financial commentator warned of "potential insolvency" in the financials, throwing fuel on a fire that's been raging for years. He may be right, we know, but this information is nothing new, as evidenced by the links above.

I've always had a natural affinity for this complex. It was the "group" I traded as a young buck at Morgan Stanley and I had a front row seat as the industry evolved. I made a windfall when Chemical Bank and Chase Bank merged and lost a fortune when Wells went hostile for First Interstate. Through it all, I learned the ropes, along with many valuable lessons.

To be clear, I've avoided--or shorted--the financials for years. It's long been my contention that equity holders are at the end of a very long capital structure line, one which the government continues to cut at will. And that could be the best case scenario, for nationalization remains a very real risk and if that happens, we're looking at goose eggs across the board.

As discussed Friday, through the lens of culpability, a strong case can be made that equity in companies that engineered financial risk should be wiped out. The fatal flaw of this path is that if you remove incentive from the Wall Street mix, there won't be anyone left to man the fort. This, to me, remains a critical component of any potential fix, one that must be addressed by policy makers.

Perhaps it's as easy as issuing options that are struck at current levels, thereby rewarding those who create value and are keeping our capital market construct in tact. There is a recipe to do this, while protecting tax-payers, and that to me is the first order of business. When you're sick, taking drugs that mask the symptoms only serves to dull the pain. In the end, we must identify the medicine that begins to cure the underlying disease.

I bought bank stocks a few times over the past year in an attempt to catch the bears off-sides.

The first was on the Bear Stearns news, which nabbed a quick 23%.

The second was into the summer bummer, which yielded a nifty 48%.

I also dabbled in some Citigroup (C) in November, buying the "$3.75 Infinity Call" and watched it double (some of it without me).

Perhaps three times is the charm and I should quit while I'm ahead. That has, however, never been my style. I began nibbling on some Bank America (BAC) yesterday at $5.90 and scaled into further exposure as a function of price. I do so with a humble nod to the trading Gods and the understanding that real risk remains to zero.

That's the cost of doing business however, for if there wasn't risk, it would be called "winning," not "trading."

Fare ye well today.

Click here to continue this stream of consciousness with "Can We Bank on this Rally?", "The Anatomy of a Profitable Process" and "Buy the Dips for a Trade?"

R.P.

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Position in BAC

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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