I have written numerous times on these boards about how the US bailout policy has changed substantially since September 2008. In September: FRE and FNM common shareholders were crushed LEH was allowed to go bankrupt AIG common shareholders were crushed. Since then: C was bailed out on generous terms in November. GM was been given "loans" on generous terms in December. BAC was bailed out on generous terms in January. Despite these bailouts, C, BAC and GM are insolvent. For example, see http://www.bloomberg.com/apps/news?pid=20601087&sid=az.YFoCf9J_E&refer=home "Companies including Citigroup Inc., Wells Fargo & Co. and Bank of America Corp. still need $50 billion each of common equity, said Rajpal, 35, a former global financials research head at Morgan Stanley. He made the assessment before the U.S. government on Jan. 16 said it would invest $20 billion in Bank of America and guarantee another $118 billion of its assets. " http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aS0yBnMR3USk (Roubini article)
Articles about how US govt may not want to nationalise banks, because it would cause financial stocks to crash, and therefore the entire stockmarket to crash. So therefore they may continue to give away free money to banks by: (1) providing loans on generous terms, with very little dilution (eg. C and BAC and GM) (2) backstop losses on asset pools (eg C and BAC) (3) Buying toxic waste from banks, and paying ridiculously high prices for the toxic waste http://seekingalpha.com/article/115870-big-banks-what-s-their-endgame?source=yahoo http://www.nytimes.com/2009/01/19/opinion/19krugman.html?_r=1 http://money.cnn.com/2009/01/22/news/companies/banks_nationalization/index.htm?source=yahoo_quote So even though C and BAC (and others) are insolvent, it is unlikely they will be completely nationalised. Instead taxpayers will be forced to provide handouts as per the three types listed above.
So how does this affect my trading? 1. Being very careful about shorting US banks. Instead I am selling call options as a way of playing my bearishness. 2. Shorting RBS and LLOY, because the UK government seems to be less concerned than the US government about wiping out existing bank shareholders. 3. Selling GBP, as another way of playing the insolvent UK banking sector. 4. Long gold, because it can smell fiat currency depreciation. This is particularly true for the GBP and USD, the currencies of countries with several insolvent banks.