Bank of America Analyst Thinks Treasury Plan Won’t Work

Eric Martin reports for Bloomberg:

Investors should sell bank stocks after they rallied 12 percent today because the Treasury Department’s plan to buy toxic assets won’t stop profits from dropping, Bank of America Corp.’s Richard Bernstein said.

Removing devalued loans and securities from banks’ balance sheets is a short-term solution that will delay the problem’s ultimate solution, which is bank takeovers, Bernstein said. The government won’t be able to inflate the prices banks receive for selling bad assets indefinitely, he added.

“The history of bubbles shows quite well that financial sector consolidation is inevitable,” Bernstein, Bank of America’s chief investment strategist, wrote in a research note. “Financial stocks will be attractive when the government tries to speed up that inevitable process. However, to the contrary, the government continues to attempt to stymie that inevitable consolidation.”

I’m not sure I understand why he thinks we need further consolidation in our banking sector. Our existing big banks are already very big. That’s good for boosting executive pay, but it also poses systematic risks to the system. I think he may prove right in his diagnosis of the problems with the PPIP approach, but I think that solution’s backwards.

Meanwhile CAP’s Michael Ettlinger and David Min produce their analysis of the Treasury plan, setting it in context (which I think it important to understanding its appeal) but also outlining the pitfalls. They conclude that relative to nationalization or other alternatives “The path the administration has taken is probably more realistic than more drastic measures—whether it is ideal or not” which I think is probably right. At the same time, on climate and to some extent health care political reality is standing between us and the change we need already. It may be that we’ll have to add banking to that list.