Capital Destruction is About to Happen

I’m listening to Cramer, Roach and the other talking heads on TV. Bottom line from these folks is that the market’s a buy. China is not going to have a hard landing says Roach, and according to Cramer THERE WILL NOT BE ANOTHER LEHMAN.

It’s getting impossible to figure what will happen next in this world. But to even think that there is a “0” chance of another TBTF failing is just cheerleading.

There are at least a dozen EU banks who have had their stocks collapse. Their market cap value is less than 1% of assets. The “Short Ban” in Europe is forcing global investors to take defensive positions in bank stocks where trading is not restricted. This is just adding to the selling in the US financial names.

Lehman went bust in a matter of days. The end came after the stock broke $5. When a stock breaks $5 there is a pretty decent chance it is headed to zero. Institutional holders (there are a ton who own this dog) HAVE to off load stocks when the $5 level is breached.

I think that Bank of America (BAC) should not trade under $5 based on their book. But that makes no difference at all. “Book” and “logic” have little to do with what is going on today. The problem is that everyone understands the market dynamics. In the present climate the market players will push BAC, knowing that long-term holders will be forced to sell if the “players” prevail.

There is no TARP option this time around. The TBTF argument has been decided. Failure will be permitted this time around. Should things role in this direction the Fed could stand up and purchase a big chunk of BAC assets. But that would be the last decision that Bernanke will make. There is absolutely no stomach left in America for another big bank bailout. There is no “Bernanke Put” in BAC stock.

Cramer is dead wrong. Another Lehman type event is staring us in the face. It will probably come first in Europe, but it will boomerang around and hit BAC hard.

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