Bottom line,
the problem is that for those who are invested in European banks as stock
holders and depositors, if you wait too long, you're not going to get your
money back. Why not? Because unless the governments step in and
begin to step up the tax revenue they collect from their citizen taxpayers, they're
never going to have the money
with which to pay the banks who bought their bonds, and therefore the banks are not going to have the money
with which to pay their investors and
depositors.
This problem
is compounded by the fact that if you count the value of the bonds they've
purchased from these governments, then financially speaking, many of these banks are several times the
size of the economies of some of the governments whose bonds they've purchased. Therefore, the likelihood that all the
customers of these banks (i.e. their depositors and investors) are going to get
their money back is quite small. Hence the
coming run on European (and America's biggest) banks, and the coming crash of
the European economy (and possibly the US economy as well).
The potential negative consequences for America's biggest banks and the US
stock market
Bank of
America's beleaguered bank's shares crashed through the psychologically
important $5 mark yesterday, the lowest they've traded since March 2009. Other bank stocks including Morgan Stanley
fell even harder as investors fretted on renewed concerns about bank capital
cushions and "a darkening economic
outlook in Europe."
Back in
December of 2009, Bank of America was trading near $15 a share, a far cry from
the $5 at which it closed yesterday. The loss of two-thirds of its value far
exceeds the drop in other battered financial institutions like Citigroup,
JPMorgan Chase and Wells Fargo over the same period.
"This is
like a fire in a 10-story building," said a former Federal Reserve bank
examiner who now teaches courses on banking at Boston University. "It's
burning through each floor as investors dump their shares."
Financial
stocks fell by more than 2% Monday in the United States, leading the entire
stock market down. During the day, "the focus shifted to European sovereign debt
troubles, as the European Central Bank warned of a perilous year ahead. The sovereign debt crisis is colliding with
slower economic growth and a dearth of market financing for banks." Citigroup fell 4.7% and Morgan Stanley
5.5%. For Bank of America, which tumbled
4.1%, trading below $5 represents one more cause for concern this year.
Even the $5
billion investment in BofA by Warren Buffett this summer has failed to mollify
sellers -- Buffet has lost roughly $1.5
billion on the deal. Not surprisingly, "institutional money managers are quietly
dumping their losers before 2012 arrives."
Some observers had speculated that having its stock's value go below $5
would force some institutional investors to unload Bank of America stock and
they were right.
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