Banking stocks and TARP …

… a bad, bad combination.

From the link:

New York University Professor Nouriel Roubini, who foresaw the credit crisis, heightened investors’ panic when Bloomberg reported on Jan. 20 that he estimated credit losses for U.S. firms could hit $3.6 trillion. Thus, the U.S. banking system—with just $1.4 trillion in capital—is “effectively insolvent,” Roubini said, according to Bloomberg. “The problems of Citi, Bank of America, and others suggest the system is bankrupt,” he added.

The supposed cure for this is the federal government’s $700 billion Troubled Assets Relief Program, or TARP, enacted late last year. However, a growing number of investors and analysts warn that the TARP program may come at a large cost to bank shareholders.

Banks get TARP relief only by giving the federal government preferred shares. On Jan. 16, BofA issued the government another $20 billion in preferred stock that pays an 8% dividend. In exchange, the government agreed to limit future losses on $118 billion in BofA investments, including a large amount of the portfolio acquired through BofA’s buyout of Merrill Lynch.

“Increased support by the U.S. government provides protection on certain problem assets,” notes Deutsche Bank (DB) analyst Mike Mayo, but “it also comes with more restrictions on [BofA] as a whole.”

Back to 2002

So to speak. I don’t want to be all doom and gloom here on the last day of the year, but this is some sobering news — 2008 saw the loss of six years of market gains. They’ll eventually come back, but the shocking part of this loss is the speed it happened and how it happened across the board.

Petroleum is way down despite the efforts of OPEC. Hedge funds? Investment banking?  Commodities? The only happy folks are those who shorted everything under the sun for the last half of the year.

From the link:

When the New York Stock Exchange closes later this afternoon, virtually anyone with money in stocks will have felt the punishing drop in the market.

The markets were headed for a higher close Wednesday, but overall, it was a very bad year to own stocks, any stocks — indeed, one of the worst ever. The Dow Jones industrial average will end the year down more than 34 percent, the worst year for the index since 1931, and the broader Standard & Poor’s 500-stock index more than 38 percent. Blue-chips like General Motors, Citigroup and Alcoa lost more than 70 percent of their value.

All told, about $7 trillion of shareholders’ wealth — the gains of the last six years — will be wiped out in a year marked by violent market swings.

But what is striking is not just the magnitude of the declines, staggering as they are, but also their breadth. All but 2 of the 30 Dow industrials, Wal-Martand McDonalds, fell by more than 11 percent. Almost no industry was spared as the crisis that emerged in the subprime mortgage market metastasized and the economy sank into what could be a long, gray recession.

Possible merger for Washington Mutual and Morgan Stanley

I think that would be something like making an omelet with two rotten eggs.

From the link:

It wasn’t too many years ago that some federal regulators fretted about the dangers of letting commercial banks merge with the big investment houses on Wall Street. But in the current financial crisis, those mergers might be the only thing that saves some of Wall Street’s most storied firms, such as Morgan Stanley (MS) and a troubled lender like Washington Mutual (WM).

Update — the Wall Street Journal is reporting a possible deal between Morgan Stanley and Wachovia.

From the link:

A Wachovia deal would unite two large American financial companies and potentially placate investors who believe investment banks need to be joined with deposit-taking institutions. But Wachovia’s own mortgage exposure could be a sticking point in completing a deal, and some analysts have questioned whether Wachovia is the right partner for Morgan Stanley.

Morgan Stanley’s Mr. Mack appeared at the regularly scheduled quarterly town hall meeting at 8:30 a.m., speaking to a packed audience at the company’s Times Square headquarters. The CEO, joined by Chief Financial Officer Colm Kelleher and fellow co-presidents Walid Chammah and James Gorman said the company is exploring many options including the Chinese investment and a Wachovia tie-up.

Sounds like Morgan Stanley is really in deep. Parts of the article not excerpted covered potential deals with Citigroup and China Investment Group. Mack is in contact with the SEC and the White House to try and stop shorting of Morgan Stanley stock. I think we’re getting to a point where some these collapsing companies need to be allowed to crater.

Here’s another list of potential partners for the failing investment bank:

Morgan Stanley has other potential international and domestic partners, including HSBC Holdings PLC of the U.K., Banco Santander SA of Spain, Japan’s Nomura Holdings Inc. or Bank of New York Mellon Corp.

Big bank bust up

Wow. Merrill Lynch agrees to be sold to Bank of America and Lehman Brothers files for bankruptcy. The piper is being paid in spades.

From the link:

In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection and hurtled toward liquidation after it failed to find a buyer.

The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments.

Lehman Brothers posts almost $4B Q3 loss

It’s a record for the firm since going public.

From the link:

Lehman Brothers suffered its worst quarterly loss since going public, reporting a loss of nearly $4 billion Wednesday, and announced a series of drastic steps aimed at reviving the beleaguered firm.

Among those changes were plans by the firm to spin-off part of its commercial real estate assets, sell a majority stake of its investment management division and slash its annual dividend.

Following a wild market session Tuesday in which Lehman (LEH, Fortune 500) shares plunged 45% to their lowest levels in nearly a decade, the investment bank said it lost $3.9 billion during the fiscal third-quarter, or $5.92 a share.

The results, which were released more than a week in advance to help quell fears about the firm’s underlying health, were the company’s second consecutive loss and exceeded Lehman’s $2.8 billion second-quarter loss announced in June.

Lehman Chairman and CEO Richard Fuld Jr. described the quarter as “one of the toughest periods” in the 158-year old firm’s history.