Wall Street to Obama: the banks are insolvent

Filed in archive markets on January 21, 2009

So Wall Street has greeted the new President by plunging 4%, the worst ever performance on inauguration day and beating the previous record set by the hopeless herbert hoover.

Wall Street is telling Obama something: US are in bad shape, perhaps insolvent. The banks led the tsunami with appalling performances by Citigroup, Bank of America, JP Morgan Chase, Morgan Stanley and Well Fargo.

Dr Doom, economist Nouriel Roubini who predicted the economic meltdown has warned that the US banks are effectively insolvent. He has told told a conference in Dubai that US financial losses from the credit crisis may reach $3.6 trillion. "It means the US banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis," he said.

The problem is whether the Obama administration will be propping up zombie banks, at the expense of taxpayers and perpetuating the moral hazard issue.

The question is whether the zombie banks can earn their way back into solvency. Seeking Alpha's Bill Luby looks at the issue but as he suggests, propping them up remains problematic and is asking for trouble.