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« In A Sign Of Things To Come For The United States: S&P Threatens To Slash Britain's AAA Rating | Main | Ohio Democrat Marcy Kaptur Rages Against The Bailout Machine (Video) »

Barry Ritholtz On Banks: "You Can't Drink Yourself Sober" (Video)

Another great interview from Aaron Task at Tech Ticker, this time with Barry Ritholtz, author of Bailout Nation and The Big Picture.

Barry makes many of the points I made in this piece last night, notably that we shouldn't be using new leverage in order to escape the excessive leverage already in the system.  That's not gonna end well for anyone.

From Tech Ticker:

The financial sector continues to bask in the afterglow of last week's stress test results and subsequent capital raises by numerous banks, with PNC and KeyCorp. joining the parade.

The fact bank stocks have rallied and many have been able to raise private capital is a positive, but it's folly to believe the crisis is over, says Barry Ritholtz, CEO of Fusion IQ and author of the forthcoming Bailout Nation. "You can't drink yourself sober and you can't leverage your way out of excess leverage."

Many big banks remain technically insolvent and "are only being held together by spit, bailing wire and tape," says Ritholtz.

Banks like Citigroup and Bank of America are being "propped up by the grace of Uncle Sam," which can't afford to let go because bad loans continue to rise and demand for credit is falling, says the money manager and Big Picture blogger.

The banking system needs more time, at least three to five years, to deleverage before it can be left to its own devices, Ritholtz says, suggesting only time can heal the sector's wounds.

That said, because the government is propping up "zombie" banks, you can't rule out the Japan scenario of a decade (or more) of economic malaise, he says.

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Reader Comments (18)

Could the Weimar Hyperinflation Happen Again in America?

May 20, 2009 at 11:38 AM | Registered CommenterDailyBail
Obama's Magic Bubble Deflator

May 20, 2009 at 12:03 PM | Registered CommenterDailyBail
5/19/09 Walter Jones discusses Ron Paul’s HR1207 on Fox Business

May 20, 2009 at 12:20 PM | Registered CommenterDailyBail
Love Walter Jones and Tom Woods.

Yay, California! (Now we get to bail out you guys, too.)

And check this shit out. I was reading some early (Jan.) Daily Bail and found this quote from bailout hero Henry Blodget about Ken Lewis and the Merrill deal:

"Unlike Vikram Pandit at Shitigroup [gotta love Henry -- never passes up a chance for potty humor] and John Thain at Merrill, Lewis can't blame the need for this bailout on his predecessor's idiotic bets. Bank of America needs another bailout solely because of an idiotic Ken Lewis bet: His decision three months ago to buy Merrill Lynch.

No one put a gun to Ken's head and said "You've got to buy Merrill." [Oh my] There wasn't some secret backroom Treasury deal where Hank Paulson forced him to take one for the team."

This is unreal. Just one more reason we can't trust either the bankers or our government.
May 20, 2009 at 9:37 PM | Unregistered CommenterJames H
Ken's crying they MADE me do it. I say we torch the system and see if anything worthwhile is left. You know we will be short a LOT of CONgress and SATANors...Oh, and Banksters. The people need to rise up and start their own community bank. No TARP, No PPIP, No TALF, NO more CRAP....Just ordinary people taking deposits and making loans to neighbors for TANGIBLE goods, services, and business needs. Who do you trust more...A guy based in Charlotte or the one who's kid goes to school with your kid? At least, if he looses ALL your money, you can go over there and beat the crap outta' him!
May 20, 2009 at 9:47 PM | Unregistered CommenterAin't Bullshittin'

Why Rookie Lawyers Get $60,000 Paid Vacations

May 20, 2009 at 11:16 PM | Registered CommenterDailyBail
What I wouldn't give to send a rookie Treasury Secretary on a 4-year vacation...
May 20, 2009 at 11:54 PM | Unregistered CommenterJames H
And then replace him with pinch hitter superstar Chris Whalen.


Loan reset threat looms till 2012

Updated chart from Credit Suisse.
May 21, 2009 at 12:43 AM | Registered CommenterDailyBail
I would pony up a small fortune to see Chris Whalen in action at Treasury. The way that some people felt on November 4th -- that all was right with the world again, the stars were in their courses and all that -- I think that's how I would feel if Chris Whalen were to take over for Turbo. Sadly, I think it's emblematic of our present condition that someone like Geithner, who has more responsibility than he can possibly handle, is in the starting lineup, while someone with Whalen's expertise and intelligence is left sitting in the dugout.
May 21, 2009 at 1:17 AM | Unregistered CommenterJames H
I think this can be filed under "drinking yourself sober." Nathan Martin of Economic Edge has a nice little post about who benefits from the bank bailouts (and who doesn't). He also does a nice job of explaining what happens to the debt when someone gets bailed out. (Interesting blog, btw. Looks like he's on our side.) Here he's talking about the "bad bank" or "aggregator bank" idea, but it applies to any taxpayer bailout plan.

"There are two sides to the credit equation, the lender (the banks) and the borrower (the people).

Once money has been loaned, there are two and only two ways to get rid of the debt. One way is to pay it back (with interest), and the other is to default.

The aggregator bank idea is to simply peel the bad assets from the remaining “good” parts of the banks and leave the bad assets to fester in a “new” bank that is basically owned by you and me – the government. Was the debt paid back? Was it defaulted? No, it’s still there, and it still must be serviced. All that’s been accomplished is to change who will ultimately take the losses on the loans when they go bad! ...

Guess what, this is a giant circle jerk as the very people who are still in debt as individuals become more in debt in their role as taxpayer."

May 21, 2009 at 7:38 PM | Unregistered CommenterJames H
America has but ONE choice...DEFAULT. Our balance sheet is about to crush the Nation and we have NOT even gotten 1/2 way through the residential loan problem. We have yet to tackle the commercial lending, health care, social security, medicare, medicade, and the rest of the pigs that are in line at the trough. There is NO line drawn in the sand...so the sand will just erode out from under us. This Nation is no longer standing on firm footing but built upon sand. The next rain shower or stiff wind that comes along will finish what this crisis started.
May 21, 2009 at 9:48 PM | Unregistered CommenterAin't Bullshittin'
I know this isn't a trader's forum, but given the pump and dump I would expect at least a partial retrace of the rally, possibly a retest of the "666" and maybe something worse. I'm not a trader, never really paid attention to the markets until last August, but I'd like to profit from the decline if I can. I wouldn't know how to short a stock if my life depended on it, but I'd like to use an inverse ETF. I understand, more or less how the levered inverse ETF's work and I know I don't want to fool with those, but with the non-levered inverse ETF's can't you "go long" in a downtrend just as you would a regular ETF in an uptrend?

What do you guys think, will the rally fade soon -- and is there a chance that they WANT stocks to fall, given the action today in Treasurys, gold and the dollar?
May 21, 2009 at 10:32 PM | Unregistered CommenterJames H
This rally will fall due to fundementals. These fundementals will catch up to it sooner or later. You can stand safely on a train track for quite some time but when the train comes.......You ain't got a prayer.Look at the fallacy of the securitization model....all was good for a long time then...Mushroom Cloud. Better stay parked safely on the side than rush into the front line...only to catch a bullet.
May 21, 2009 at 11:31 PM | Unregistered CommenterAin't Bullshittin'
James H,

Unless you have money to literally throw away on a chance & hope, you'd be better served keeping that cash in this deflationary environment. Or if you're of the uber bear, doom and gloom inclination, buying (physical) gold. It might come in handy, and has never gone to zero. Vegas probably has some fantastic deals now, and at least you know the odds upfront.

Yes, with a simple short ETF, you would go "long," but where would you buy? At today's level? What if we head up to S&P 1000+, which is entirely possible. What if we decline to low 800s/high 700s, and then up to 1000+ before we ultimately head back down to test the lows or see new ones? How much in the red and for how long are you willing to hold? What if .gov really is buying everything and we never see those lows again, but just bounce between 800 and 1000 for years? The only folks making money in this market are the big boyz and experienced "traders." Not bears, not bulls, but traders.

I would agree with you that the ultimate lows most likely have not been seen, as would all the preferred Eliott Wave counts. However, they also say we can do everything I just mentioned before we see those lows, and the market usually does its best to throw everyone off the bus, or at least extract as much "fare" for thinking it is going one way, when its really going somewhere else.

Just really, really not a good time to try and cut your teeth in this market, IMHO.
May 22, 2009 at 12:05 AM | Unregistered CommenterWizeUp
Sounds like sage advice, WizeUp. Maybe I'll just return to my bunker and count my Krugerrands and silver Eagles -- the pantry is well stocked, too.

No, I'd considered the other possibilities as well, but sentiment seems to have turned in the last couple of days, so I thought we might see a convincing pullback, but like you say... .gov has deep pockets. In any case, I'd only buy the inverse fund after some technical confirmation, and even then I'd be skittish as a rabbit until I sold. Thanks for the help.
May 22, 2009 at 12:26 AM | Unregistered CommenterJames H
"I'll just return to my bunker and count my Krugerrands and silver Eagles -- the pantry is well stocked, too."

Indeed, you'll also need some farmland as that pantry won't last long what with the supply chain collapsing and all. Careful what you wish for...

"In any case, I'd only buy the inverse fund after some technical confirmation...."

That's what everyone does.

"...and even then I'd be skittish as a rabbit until I sold."

Yum. Tasty snack for the market. Please feed the market.
May 22, 2009 at 1:21 AM | Unregistered CommenterWizeUp
Should I just write Goldman Sachs a check, or would they prefer the Krugerrands?
May 22, 2009 at 2:11 AM | Unregistered CommenterJames H

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