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Dead Banks Walking?

By

Short list of troubled institutions.

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Regions Financial

  • Equity down from 40 to 8.
  • Preferred Stock Trading at 10%.
  • Debt trades in the 10-11% range, if you can seel it.
  • Cut dividend by 75% in June.
  • Needs to raise $2 billion, according to Sanford Bernstein.

General Motor/GMAC (GM)

  • Equity has traded from 80 to 10.
  • Preferred stock trades in 18% area.
  • Short-term debt trades in 25-30% range.
  • Long-term debt trades in 17% range.
  • Eliminated common dividend in July.

Ford/Ford Motor Credit Co. (F)

  • Equity has traded from 60 to 4.
  • Preferred stock trades in 16-17% range.
  • Long term debt trades in the 18-20% range.
  • Eliminated common dividend in September.

Wachovia (WB)

  • Equity has traded from 60 to 14.
  • Issued a $3.5 billion 'hybrid security' in February that now trades at 11%.
  • S & P has stated they cannot issue any more hybrids.
  • Sold 92,000,000 shars of a preferred stock in December at 8% that now trades $18 or 11%.
  • Cut common dividend twice since February to .05 a share or 90%.
  • Debt trades at 9.5-10.5%.

CIT Group (CIT)

  • Equity has traded from 60 to 9.
  • Preferred Stock trades in 12% range.
  • Outstanding debt trades in 12-14% range.
  • Cut common dividend by 66%.
  • Sold 91,000,000 shares of common at $11 in April 2008.

Who is in the 'Limping but Not Dead Walking Crowd'?

These companies would include those that may be 'too big to fail', have enough quality assets to sell, a franchise that is worth something to an acquirer or could just be broken up into pieces. They include: Citigroup (C), Merrill Lynch, Morgan Stanley, Suntrust (STI), Legg Mason (LM), Capital One (COF), AIG (AIG), MetLife (MET), Prudential (PRU).

Summary: This is Not Shaping Up to be a Pretty Couple of Years

As I stated earlier, when we have just one or two firms with issues, we can deal with it. But when we add rising unemployoment, explosive debt growth in recent years and non-performing assets to many hobbled financial institutions with trillions of dollars of exposure, it's hard not to be concerned.

For this reason, I remain cautious towards credit, expect a hard sell-off in stocks into 2010, consolidation in the financial services industry and some pain, like it or not. I'm just not sure where the capital will come from to bail everyone out simultaneously. And even if the capital showed up, it would likely come at a cost that is uneconomic and would be dilutive for many years to come.

It's why I expect much lower than consensus earnings across the board and lower stock prices ahead. In the meantime, I sit with my historically cheap GNMA's at the widest spreads in 20 years and continue to add to that position.

In the meantime I position my portfolio so that if I'm wrong, the most I can lose is opportunity, not precious capital.

No positions in stocks mentioned.

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