Financial Stocks: No One Believes Paulson (UBS)(MER)(C)(BAC)(MS)(WFC)(JPM)

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Henry Paulson seems like a very large and old Eagle Scout. He would never mislead, at least not on purpose.

He gave the impression as he announced that Treasury would dump $250 billion into nine financial companies that it would stop the hemorrhaging of deposits from the banking system by putting a lot of money into the industry’s pockets. His actions, he thought, made it keenly clear that capital was not an issue. Banks would have plenty on hand, even if they experienced substantial losses due to mortgage derivatives and a mind-boggling slowdown in the economy.

The system was hit with especially bad news from UBS (UBS), Citigroup (C), and Merrill Lynch (MER) all of which lost several billion dollars last quarter. The Swiss government even nationalized $60 billion of bad paper held by UBS. That should have given the global credit markets some relief.

None of the government actions seemed to matter much. Citigroup opened down 7% and it was already fairly close to its 52-week low. Merrill Lynch also dropped into the red and was joined by Morgan Stanley (MS), Bank of America (BAC), Wells Fargo (WFC), and JP Morgan (JPM).

Investors are quickly abandoning the idea that Treasury can save the banking system for two reasons. The first is that many analysts believe that housing prices could fall another 10% to 15% nationally. The second is that the overall economy is getting worse faster than almost anyone imagined it would. According to MarketWatch, "The Philly Fed diffusion index fell to negative 37.5 in October from positive 3.8 in September. Readings below zero indicate contraction. The decline was much larger than expected."

Paulson told his truth as he saw it. As things turned out, he was wrong.

Douglas A. McIntyre