Market Panic Is Back

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After a touch-and-go recovery, it's back: Panic is in the air. Stocks are tanking. Gold is rallying. Treasury bonds' yields are plunging. The VIX volatility index shot up almost 20% at one point this afternoon. Despite a stimulus package to end all stimulus packages, and potential progress on a new bank bailout, stocks are back at three-month lows. What's behind the reversion to fear? Banks.

It's worse than you think
It's becoming increasingly clear that banks' balance sheets are radically worse than most thought. Washington, surprise surprise, doesn't appear to have much of a clue as to how to fix them, either. Adding to the panic, Stanford Financial was charged this morning in a $9.2 billion bank fraud, undermining public confidence at exactly the wrong time.

Just how bad might it get? According to The New York Times, independent research firm CreditSights ran a few numbers to determine what banks might fail the Treasury's so-called "stress test." Their conclusion, while more precise, was about the same as mine: Most of them.

According the CreditSights, estimated future losses at the biggest banks are as follows:


Estimated Future Credit Losses

Wells Fargo (NYSE: WFC  )

$119 billion

Bank of America (NYSE: BAC  )

$99 billion

JPMorgan Chase (NYSE: JPM  )

$124 billion

Citigroup (NYSE: C  )

$101 billion

Goldman Sachs (NYSE: GS  )

$47 billion

Morgan Stanley

$34 billion

Sources: The New York Times.

If those estimates turn out to be anything close to accurate, many banks would probably be forced into the government's arms in one way or another. This is consistent with NYU professor Nouriel Roubini's prediction that, as a whole, the banking system is "effectively insolvent." Scary, scary numbers, but it's important to bite the bullet and accept the reality of banks' health, rather than crossing your fingers and pretending everything's puppies and kittens.

Relax. Breathe. It'll be OK.
Still, all hope isn't lost for patient investors looking in the right direction. For one, a tremendous amount of fear is simply the torture of not knowing details of the Treasury's bank plan. Few big investors want to even think about making bold moves until they know the rules of the game. Once details emerge -- regardless of what the actual details are -- markets could start to regain confidence. Even complete nationalization of our largest banks doesn't mean economic collapse: It predominately just means banks' common shareholders would be wiped out -- which they largely have been already. Markets are being held down more by uncertainty than actual risk, which can be a boon to bargain-hunting investors.

Second, a handful of stocks are actually enjoying bits of good news. Sirius XM Radio (Nasdaq: SIRI  ) , for example, is up over 50% as I write this today on news it averted bankruptcy. An article in The Wall Street Journal pointed out how Oracle (Nasdaq: ORCL  ) is using its cash-rich balance sheet to scoop up acquisitions as bargain prices. Gold stocks have also been a huge success lately, bouncing off a massive sell-off in 2008 and gearing up for an inflation battle of epic proportions. There's plenty of opportunity in the market today; it's just a matter of where to look.

For related Foolishness:

Fool contributor Morgan Housel doesn’t own shares in any of the companies mentioned in this article. JPMorgan Chase is a Motley Fool Income Investor recommendation. The Motley Fool is investors writing for investors.

Read/Post Comments (30) | Recommend This Article (71)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 17, 2009, at 4:26 PM, RichieRich19 wrote:

    The balance sheets are worse than thought primarily due to mark-to-market rules. For a bank to have to write down a $10 million loan to $9 million simply because the rate today for a similar newly originated loan would be higher than the rate as it stands is absolutely ridiculous. So just because a loan is L+3 instead of L+7, you need to discount it. Doesn't matter that the company is still performing fine. It is absurd and the govt is too stupid to fix it.

  • Report this Comment On February 17, 2009, at 5:41 PM, eldetorre wrote:

    "For a bank to have to write down a $10 million loan to $9 million simply because the rate today for a similar newly originated loan would be higher than the rate as it stands is absolutely ridiculous."

    Mark to market isn't ridiculous but necessary to ascribe a reasonable valuation to a banks portfolio. However to avoid wild fluctuations they should be marked to the market over a period of time i.e. a 30 day trailing average.

  • Report this Comment On February 17, 2009, at 5:46 PM, modeltim wrote:

    I guess Sen. Gramm is right, we're going to end up nationalizing these zombie banks. I'm OK with that as long as they give the taxpayers an equity stake.

  • Report this Comment On February 17, 2009, at 6:00 PM, CathrynMataga wrote:

    "as long as they give the taxpayers an equity stake."

    Bank equity would be a tiny reward in comparison to the vast amount of money that will be flushed into this project if we have to make good on all of their obligations.

    My concern is we're hooking a toe line from the US government to the Titanic (insolvent banks), and all this debt is going to the whole thing down to the bottom, like where the UK is going.

    This is a scary prospect, but to save the sovereigns, we may have to just let the house of cards fall down. That won't be pretty, but it'll be over fast, and then we can build a new bank with the money we would have otherwise have spent. Of course, Obama is surrounded by bankers over there, so this would never happen.

  • Report this Comment On February 17, 2009, at 6:00 PM, cfool111 wrote:

    The government is trying to overcome the deflationary loss of over twenty trillion dollars in the financial sector, the stock market and real estate values by printing money with no basis of value since Nixon took the dollar off the gold standard. It won't work. President Obama;s Catastrophy is well under way.

  • Report this Comment On February 17, 2009, at 6:03 PM, jeffduby wrote:

    As far as I am concerned, banks like citi and bac are essentially bankrupt. I am not putting my money anywhere near them. Also, it's not a panic if there is good reason for selling.

  • Report this Comment On February 17, 2009, at 6:25 PM, opedbyme wrote:

    "Relax. Breathe. It'll be OK."

    what the hell are you smoking.

  • Report this Comment On February 17, 2009, at 6:40 PM, Seano67 wrote:

    "President Obama;s Catastrophy is well under way."

    Well, this is not a crisis of Obama's making. He's just been given the task of trying to clean up the mess as best he can.

  • Report this Comment On February 17, 2009, at 6:55 PM, pizzamakinfool wrote:

    Here's a dumb question,

    If these banks are going to be nationalized, why would I want to buy their stock now? Wouldn't I lose the investment?

  • Report this Comment On February 17, 2009, at 7:10 PM, Seano67 wrote:

    It's not the right time to be talking about bank nationalization, in my opinion. The time to nationalize would have been when the crisis was beginning, not in the middle of it. The damage has already been done, so what good would nationalization do now?

    Beyond that, they're making a concerted effort to make things right, so I think they should be given every opportunity to do that before something as drastic as nationalization were to take place. And in stating that, I'm referencing the fact that Bank of America did make its first TARP dividend payment in the amount of $402 million to the US government and American taxpayers today, which reflects their commitment to paying those loans back. That's just the first bit of $2.8 billion in dividend payments that BofA will be returning to the American taxpayers this year, so I would prefer to see them given the continued opportunity to do that and rectify things themselves.

  • Report this Comment On February 17, 2009, at 7:23 PM, oceantraveller wrote:

    Seano67 you are very correct.

    Then they can recirculate the dividend payment to other institution.

    They are the best persons now to manuever their own banks.They made mistakes,so everybody else in other industries.

    They can pinpoint their own road to recovery because ,they are the same team that made that mistakes.

    We do not expect this correction overnight or a year.

    Nationalisation is the most stupid thing to do.Bankers will just sit from 9 to 3 if nationalised.

  • Report this Comment On February 17, 2009, at 7:36 PM, SteveMaxam wrote:

    There is still the attitude of to heck with the shareholders. Well, the shareholders turn out in many cases to be me and thee. Checked you funds' holdings lately? What about those of your pension plan?

    To paraphrase Pogo, "We have met the shareholders, and they is us."

    And, before you call anybody an idiot, there is 36 billion dollars of Fannie Mae preferred stock out there, owned by banks large and small, like JP Morgan, who owns 2 billion dollars worth, as well local banks.

    It was rated with multiple A's by S&P when it was issued.

  • Report this Comment On February 17, 2009, at 7:42 PM, sharktrade wrote:

    It's time to find a real job guys !

  • Report this Comment On February 17, 2009, at 8:20 PM, trenton1ryan wrote:

    time for gold

  • Report this Comment On February 17, 2009, at 8:29 PM, Fliujniligui wrote:

    I wonder now if I am a bargain hunter in uncertainty or more of what could be called a "suicide investor".

  • Report this Comment On February 18, 2009, at 7:04 AM, cityhunter66 wrote:

    Obviously, you would have to be very astute to make those new investments that is up 50%....even WB can't claim that in these turbulent times. So maybe if you're REALLY confident you can do better than the oracle, go right ahead.

  • Report this Comment On February 18, 2009, at 7:59 AM, jimdog wrote:

    Let's see. First Barney Frank and Bill Clinton strong-armed the banks to loan money so people who couldn't pay their rent could obtain a mortgage to buy a house.

    Now there's going to be a freeze on foreclosures.

    Is anyone still confused as to what happened here?

  • Report this Comment On February 18, 2009, at 11:21 AM, socalclint wrote:

    As we continue to pour good money after bad, I can't help but wonder where it's going? Right now, with a 700+ fico & 40% (FORTY) down, I cannot get one bank or mortgage company to even consider parting with any of 'our' money! I do not see this plan working for anyone BUT the execs, etc. As a hard-core democrat, I am seriously let down, so far, by President Obama's plan(s). Plus the amazing fact that my 'portforlio' is now worth $13,000 (yesterday) from a high of $300,000, it doesn't appear I am alone in my concern according to the stock market.

    The original $88 BILLION given to AIG to 'save' them should have been divided up between each citizen over the age of 18 (even those in prison) and taxed. Each of us would have recieved about $240,000 and the 'bailout', after taxes, would have cost about $59 billion! At that point, we the people...and btw, the OWNERS of this money would've then decided who stayed in business by supporting (or not) with our wallets. I'd guess most mortgages could've been brought close to or up to current, etc.

    But instead we (you and me & your kids & grandkids) to people decided a big ass party was deserved. And we weren't even invited! The debacle continues still...

    I disagree with 'jimdog' though, while there may have been some force applied to get lenders to loosen up, it is still that buyer that knew they would not be able to pay when the payments went up who is the cause. I was approved for a house in the millions(!) @ the time, would it have been the mortgage broker's fault if I'd have been stupid enough to buy something I could not afford?

    But worst of all, the buyer who didn't rush in, saved their money, paid their bills is now being punished. Those who shouldn't have bought in the first place are being rewarded! We're not becoming a 'socialist' country, we are a welfare country.

  • Report this Comment On February 18, 2009, at 11:23 AM, socalclint wrote:

    Oops...this paragraph should have read:

    "But instead we (you and me & your kids & grandkids) to GIVE THE MONEY TO people THAT decided a big ass party was deserved. And we weren't even invited! The debacle continues still...

  • Report this Comment On February 18, 2009, at 12:40 PM, ayekappy wrote:

    Watch out about gold and silver... maybe in the long term, but when some European nations start defaulting/banks get nationalized, PMs might take a pretty big short term hit.

  • Report this Comment On February 18, 2009, at 1:24 PM, kevinkunzmann wrote:

    When the market is low you should buy. Right now is a good time to buy anything because everything is low. Remeber that when the market was high the experts were not telling anyone that they should sell. Now the experts are recommending to put your money somewhere safe.

  • Report this Comment On February 18, 2009, at 1:52 PM, ayekappy wrote:

    Wasn't the market low when DOW was 11k, or 10k, or 9k, or 8k, or soon 7k?

  • Report this Comment On February 18, 2009, at 3:31 PM, opedbyme wrote:

    WOW I don't see much empathy for those folks that gave owning their own home a shot but now because of:

    1.0) either loans agencies did not do their due diligence and issues loans to folks unable to pay monthly installments when the grace period ended. These loan agencies did manage to do their own due diligence and passed on (packaged and resold the loan) like a hot potato or

    2.0) some unforeseeable event (hardship) made it impossible for them to pay the mortgage.

    I think it's "not very nice" of us to not try to find some policy that can accomplish trying to keep folks that honestly thought that they could pull off home ownership a chanced to keep there home.

    The easy thing to do/say is let the banks foreclose and kick them the hell out……

    the harder thing to do is finding some why to keep folks in their home but on terms both they and the loan agency can live with. If they can find middle ground it's a win/win for all of us.

    PS 'jimdog” I disagree with your assessment that Frank and Clinton deliberately strong armed loan agencies to give loans to folks that could not afford them. You must be on of those Neanderthal republicans my liberal friends tell me are out there doing the heavy thinking for the Republican Party. Carry on.

  • Report this Comment On February 18, 2009, at 3:53 PM, sugar1025 wrote:

    What strikes me is the rest of us folks, who have been paying on their mortgages, are getting not a thread of relief, while our neighbors who weren't qualified to buy the home next door in the first place, are having their mortgages re-written and debt forgiven.

    Makes me feel like a fool for paying my bills! The temptation to just let "Big Daddy O" do it, or let the government take care of us, will be the death of democracy.

    Abraham Lincoln said, "You cannot help the poor by destroying the rich. You cannot strengthen the weak by weakening the strong. You cannot bring about prosperity by discouraging thrift. You cannot lift the wage earner up by pulling the wage payer down. You cannot further the brotherhood of man by inciting class hatred. You cannot build character and courage by taking away people's initiative and independence. You cannot help people permanently by doing for them, what they could and should do for themselves."

    So much for Big Daddy O's Lincoln admiration. I;m afraid it was all for show.

  • Report this Comment On February 18, 2009, at 4:59 PM, daelon wrote:

    Has anyone read Murray Rothbard's 'The case against the Fed"? Our banking system is based upon a fraud; that is, Fractional-Reserves. Essentially, banks only have to keep a fraction of their assets on hand to meet redemption demands for liabilities.

    If I put 100 dollars in my savings account, the bank is free to loan 90 of those dollars away, while they still have to be able to return my $100 immediately upon request. How can my money simultaneously be available for me to withdraw, while it is also lent out? That means there are two or more people with claim to the $100, Me, and the person who borrowed the money. This is fraudulent. In order to pay me my $100, the bank has to use someone else's money.

    When everyone panics and demands their money, a bank run insues because the bank only has 10% of its assets on hand to meet liabilities.

    Our banking system is always insolvent, even in good times. It's only a problem now because paper asset values have plummeted and the banks don't have enough assets to back up their liabilities to meet the public's demand for redemption.

    If banks are forced to keep 100% reserve deposits on hand, banks will never be insolvent. Savings would be contractual, i.e 'I put $100 in savings and cannot get it back until the person who borrowed it pays it back". The loan might fail, but the bank would still be solvent because the saver knew there was a risk that the savings might not be returned.

    Every other industry is prevented from engaging in this type of fraud, save for banking. If we really want to prevent another financial crisis of this magnitude from happening again, we should ensure banks can never be insolvent through Fractional Reserve Banking. That would be a legitimate function of government.

  • Report this Comment On February 20, 2009, at 1:51 PM, gtilling wrote:

    BTW, don't put all the blame for this disaster on Bush! As a matter of record start with Barney Frank and his housing bill from 1998 that allowed people who couldn't afford homes to get into homes they couldn't afford. BILL CLINTON signed that one and all the crap hit the fan 7 - 10 years later when between adjustable rates and balloon payments the mortgagee's realized they were in over their heads. So President Obama quit with the PAST EIGHT YEARS CRAP and call up Bill and ask him why he signed a piece of crap legislation that has caused (or at least a major part of it) this mess!!!!

  • Report this Comment On February 20, 2009, at 3:22 PM, Buckoux wrote:

    When it really is time for gold it will also be time for the alchemy to turn that gold into lead for ammunition. Be careful what you wish for or thoughtlessly repeat.

  • Report this Comment On February 20, 2009, at 8:00 PM, skat5 wrote:

    I suspect that the big secret is that the large banks, at least BA and C, are insolvent and not even the U.S. Treasury and Federal Reserve have enough money (without suffering dire consequences) to clean them up. Otherwise why wouldn't the Obama administration have presented a bail out plan on Day One? Instead we have weeks slip by (while the new lads are given a tour of financial 'area 51') followed by a press conference begging for more time. Sorry, but you are not going to be able to stall for four more years, no matter how well you tap dance.

    Financial institutions work on leverage. I am surprised by the number of people who do not know this. I have read with surprise the suggestions of some that the bank should have 100 percent of its money in its vaults. That is not a bank; that is a safety deposit box. In that case, you pay them to store your money. Try watching "Its a Wonderful Life" to get a handle on what banks do, which requires leverage. The question is the amount of leverage and the genuineness of the collateral that secures it. Both of these were allowed to spin out of control.

    The failure of government has been truly bipartisan. On the left, we have those who compelled bad mortgage loans to be made to unqualified persons because it would be nice if everyone could own a home even though everyone cannot afford to, and adamantly opposed cutting lose Fannie and Freddie from the implied federal guarantee of all their loans. On the right, we have a lack of enforcement by the SEC (and this after a great increase in the agency's funding after Enron-- it was NOT a lack of funding, it was the lack of performance there) so appalling that it really calls out for the torchlit mob shaking pitchforks in front of the castle gates, and a Federal Reserve under Al Greenspan so out of touch that it allows a tech equity bubble (could have been moderated by raising margin requirements) and then a real estate bubble. But then, that stuff was not in their financial model, so they chose to totally ignore it. The partisan finger-pointing is less rational than two street gangs that have been a war for so long they forgot how the whole thing started. Put some eyedrops in, open your eyes wide, and see that the problem is not which party is strutting on the stage, it is the players, all of them. The moderates and statesmen have been driven away (mostly in dispair and disgust but also by the concerted efforts of both parties) leaving many persons of questionable ability in charge. The same goes for many corporate boardrooms; with the worst ones having close ties to government (AIG, Citi, Fannie, Freddie). Meet the new boss; same as the old boss.

    I see no way out. Japan spent loads of money on a stimulus, much of it on infrastructure, but much of that on roads not used much, etc. See how well that has worked out? And when they started that spending, they were not badly indebted.

    Our bad debts might be worked off gradually, over 10 or 20 years. In the meantime, we can move into vans, and park down by the river... be seeing you.

  • Report this Comment On February 21, 2009, at 5:17 AM, crlowryjr wrote:

    While I have the deepest sympathy for the people who will lose their homes, and potentially fall into financial peril, in many cases it's unavoidable, and to some extent earned.

    Back in the early 2000's so many of my friends took out loans they could never possibly afford. Their reasoning ... my stock options will kick in; my job will earn me more; I can always sell it ... blah blah blah. Now these same friends are in dire straits. Stock options turned into a gigantic bait and switch; most of us never got the huge bonuses or raises; end even worse, some of them re-financed and used their 'new cash' to buy cars they couldn't afford or sold and got into a newer and even 'less affordable' home.

    Again, these are some of my very close and personal friends, and I really do worry for them. The reality is however...they were gambling. It may not have been in Las Vegas or Monte Carlo, but they were taking enormous risks without any real plan. While I will help them out on a personal level...I see absolutely no reason why the government should suck dry, those of us who lived within our means...who bought the house we could afford, and drove the cars we could make payments on. When you take risks, some times they pay off, and sometimes they don't ... that's why it's called gambling and not 'guaranteed winning'.

    Like so many others I'm down 65% on my investments and wondering if I'll lose it all. I'm not standing in line wondering if the government is going to hand me a big wad of cash to save my retirement. I invested in what I felt was relatively safe and I turned out to be wrong. It sucks, but taking money out of one pocket and putting it into another isn't going to fix this problem. If the government continues to take from those who have, to give to those who have-not, we're all gonna end up in the same food line.

    In my angry moments I do fantasize about capital punishement for those who have perpetrated enormous frauds on the rest of us ... and grin ear to ear at the idea of making every single exec from a company who takes a goverment handout to pay a personal fine of $10~$20m for so incompentantly running their businesses while provinding themselves with such enormous salaries. Maybe somebody should turn that into a video game ... angry mobs go around assassinating CEOs and Wall Steet Insiders. In the current climate, I bet that would outsell all other video games combined ; >

  • Report this Comment On February 28, 2009, at 2:39 AM, nicko168 wrote:

    Based on the past weeks, the stock market has been a place for the guys to rally & show their frustration towards "Robin Hood".So, no matter what stocks u thinking of..forget it....

    Ultimately, do you know who's the real fools? Ha..Ha..

    Real fools are the one who plunge their own economy to zero together with the $787 billion stimulus plan. Why?

    They'll be slapping their own face caused it opens up the opportunities & competition to the "third" world to buy all the "CHEAP" US Companies..Arabi, China, Kuwait & maybe Iran, Iraq etc...

    Based on the recent news, US companies are selling off thier valuable assets (technologies, bank etc) in order to pull through the crisis & who are they selling to? Make a guess....AIG went to China, Singapore etc selling off their stakes..Another is selling their US technologies or commodities caused they're ridden by billions of dollars debt....At the end of the crisis, what will the US companies who once holds the supremacy in technologies, banking etc become? "Zero" is my answer...

    Who the losers? The real losers are the next generation facing the real US....

    There's a old chinese teaching:

    "To break one chopstick is easy..

    To break a bunch of chopstick, is difficult"

    To the real fools, WATCH OUT!!! Ha..Ha...

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