Michael Shulman

The Best Stock For 2009

by Michael Shulman   01/08/09

Wrong. The Fed is buying new stuff, and according to its charter -- not policy, but its legislative mandate -- the Fed can only buy high-quality debt. That's not what we're talking about here.

Financials Striking Out

Let's go back to the beginning. This all started with bad mortgages.

Subprime defaults have peaked, but option ARMs and the recession are kicking the default and foreclosure rate up.

Defaults and foreclosures will climb throughout 2009, ruining more bonds and assets than Wall Street expects. There are more write-offs than anticipated and modeled into bank balance sheets coming. Strike one!

Housing problems means less spending and less money to pay off auto loans, home equity lines of credit and credit card debt -- and much more of this is held directly on bank balance sheets. Strike two!

SEC Chairman Christopher Cox and the other pseudo-regulators under the Bush administration, who were supposedly watching out for the public interest, were too lame or ideologically biased to realize they were presiding over Enron redux.

They have been letting the banks, notably Citigroup, stash all sorts of potential nonsense off their balance sheets in exotic things called "qualified special-purpose entities" (QSPEs) and "variable interest entities" (VIEs). Remember Enron's special purpose entities?

Anyway, Citi's off-balance sheet assets as of its latest SEC filings in November are more than $1.2 trillion, and it's anyone's guess what they're really worth.

Strike three! You're out!

For the purpose of full disclosure, I have most of my liquid net worth at Citi, so while I think shareholders are in grave danger, I don't believe that applies to customers.

What about the other banks?