FBR analyst Paul Miller says stay the hell away from financial stocks until we know the specifics of the rescue plan. The devil is in the details. Also, the rescue plan does little to alter the fundamentals of the housing market, which remains weak and which most banks heavily rely upon for a large proportion of their profits and cash flow:
We still remain cautious on financials due to the lack of details on exactly how the plan will be administered. However, we do think the government plan is the step in the right direction, but there is no single solution to the problems in the financial sector, and they may not alter the continued poor fundamentals of the housing market.
…The price of asset purchases will be established through market mechanisms, such as reverse auctions, in which the government would purchase assets at a steep discount from solvent financial institutions through a bidding process.
The funding will be provided by the Treasury through the issuance of Treasury securities of up to $700 billion, or close to 6.2% of the approximately $11.2 trillion of mortgage debt outstanding. By comparison, according to the MBA, approximately 6.4% of mortgages are currently delinquent. Important details of this plan remain unclear, including the pricing mechanism, the amount of mortgage assets that can be sold by each banking institutions, and ultimately, the cost that these institutions would incur. Until we know exactly how this plan works, we remain cautious on the banking names.
Miller is particularly concerned that the price the Feds ultimately agree to pay for the troubled assets could end up being so low, few banks will be inclined to participate, especially given Representative Barney Frank’s determination to limit executive compensation for those participating in the program:
…In a worst case scenario, the purchase price of the mortgage assets would reflect the depressed current market values, and few would use the program because of the destructive impact on equity. It will all depend on the details. Furthermore, Representative Barney Frank, House Banking
Committee Chairman, has stated that he is seeking to limit executive compensation of participating institutions, which could deter them from participating. Many previous government plans to help stem the mortgage crisis have not had a significant impact because mortgage players found it costly to take advantage of these initiatives.
Business Insider Emails & Alerts
Site highlights each day to your inbox.