Bank Bloviation

If you read this blog much at all, you know that I could hardly be defined as a defender of the banking industry. I think it’s badly in need of radical reform and is probably looking at some pretty heavy losses before things get back to whatever the new normal may be. Having said that, the barrage of opinion regarding the banks and their relative health is over the top.

A case in point is Bloomberg’s article citing an Oppenheimer analyst’s report that Bank of America needs to raise $36.6 billion in new equity. Not $36 billion and not $37 billion but precisely $36.6 billion. The analyst contends that this amount of money will bring BofA’s capital in line with its peers. 

It would seem me that in order to draw the conclusions he has, the analyst would necessarily need to know the expected earnings for not only BofA but for its peers as well as the expected performance of the relative loan portfolios of both. Projecting that with any certainty in this environment is probably fairly described as a fools errand.

It’s not my intention to pick on this particular analyst. He has plenty of company in the blogosphere today. All manner of analyses are popping up that use data selectively and combine it with unsupportable assumptions to reach what were most likely pre-conceived conclusions.

The reality is that at this point in time the brush fire in financial services has been pretty much contained. That doesn’t mean that the system isn’t sick but it does mean that the potential for catastrophic failure has been minimized. The extent of asset impairment as well as the future earnings capacity of individual institutions is going to be revealed over the next few months. It might not be a pretty exercise but the numbers will start to sort themselves out.

When that happens, the amount of additional capital that BofA or any other player needs is going to be much clearer. That’s the point in time to begin making decisions about recapitalization and other critical issues. In the meantime, there must be other things worth worrying about.

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