Why Many Banks Will Go Under

[Genesis Of The Financial Meltdown]

Let's face it. America's banks are bankrupt.

How bankrupt? American banks are so underwater that they cannot be reached by nuclear submarines. These submerged banks are against mark to market accounting.

Mark to market accounting is simply valuing an asset at the price, for which the asset would sell in a market economy; their current value. The toxic assets, which banks hold, are so overvalued that if these toxic assets were to be marked at their current value the Treasury would have to close these banks.

Let us examine how valueless the bank assets are.

In July 2007 Merrill Lynch sold $31 billion of CDOs—collateralized debt obligations, which in this case are synthetic derivatives based upon CMOs, collateralized mortgage obligations. Lone Star Funds purchased these CDOs for 22 cents on the dollar.

Lone Star was obligated to put up only 25% of the purchase price. Lone Star Funds reserved the right to walk away from purchase if the assets were worth less- effectively purchasing an option on the CDOs.

Guess what? The assets were not worth 22 cents on the dollar. So you must understand that Merrill Lynch was carrying these assets on its books at the inflated value of $31 billion.

As a trader every day my inventory of stocks and options was valued at market value- it could not be avoided. If I did not have sufficient net capital, I either had to sell assets or borrow the money.

The banks are stating that the assets are currently undervalued- but in perhaps 10 years these assets would be worth their full value. This is nonsense.

The banks are borrowing money from the Treasury.

With a 5% rate of interest- the assets would have to increase in value by 60%, that is have a value of 160% of their current value (rough approximation). 100% of value + the interest payments at 5% (60% of current value).

In a proper economic evaluation the assets would have to increase 60% in value just to pay the interest on the government loan.

The banks want the government to gorge on a minimum of $1 trillion in toxic assets.

Addendum:
Today, February 13, 2009, Joseph Price, Bank of America's Chief Financial Officer, informed employees that the company's liquidity "continues to be strong despite the difficult market environment."

What a lie. Bank of America (NYSE BAC) has received $45 billion in TARP funds and the Treasury has guaranteed $118 billion of worthless securities.

One year ago, BOA was trading at $43.60. Last week the company’s stock traded at a 52 week low of $3.77.

Today BAC was trading at $5.67. BAC has declined more than 80% in the past year. The market value of BAC is currently approximately $28 billion- that is $17 billion less than the money BAC borrowed from the Treasury. And what about the $118 billion of worthless securities.