Federal Reserve’s Credibility is More Imporant Than Bank’s Captial Rasing
Yesterday when I shorted 4000 share of Bank of America I was preparing to lost big because I thought Federal Reserve would play along with the banks and issue somewhat bullish meeting minutes to help the banks raising capital. I was wrong and I felt I was very lucky. I could easily lost several thousand dollar yesterday.
I guess the Fed looked at the reality and decided that it can not play along with the banks. The world is already very skeptical about the stress test result. The Fed just can push the limit further. If the Fed lost its credibility it will post serious damage to the market. I believe the banks’ problem is far from over. It is not over until one day they start declaring regular dividend again. By that time the banks evaluation will be based on the projected dividend stream. Right now the market just claim whatever price they think the banks worth. Price of Bank of American can go back and forth between $10 and $15.
In fact we can see the realty from the statistics no matter how the banks spin them. Our GDP was down more than expected last quarter, unemployment rate is higher, foreclosure is more, home price is still going down and consumer credit is still deteriorating. Former Fed chairman Greenspan has the following comments lately
There is still a very large unfunded capital requirement in the commercial banking system in the United States and that’s got to be funded.
Home prices will only start to stabilize once the liquidation rate of single-family homes has peaked. I don’t think we’re there yet.
until the price of homes flattens out we still have a very serious potential mortgage crisis
Things are definitely improved but not as rosy as the picture that Bank of America CEO painted
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