The story of 2008 was the selling of troubled financial institutions to stable, healthier institutions.  Bank of America began the process with the purchase of failing mortgage lender Countrywide Financial.  Countrywide was at the epicenter of the sub prime mortgage business and BofA believed they were getting a steal when they purchased a company servicing $1.5 trillion in loans for a mere $4 billion.

JPMorgan Chase was next in the process when it purchased failing investment bank Bear Stearns for a $2 a share,  at a time less than 10 percent of Bear Stearns’ market value.  This was followed shortly by their purchase of failed bank giant Washington Mutual.  

Right on the heals of the Washington Mutual sale came the ugly battle for Wachovia National Bank. Citigroup’s $2.2 billion bid ended up losing out to Wells Fargo’s $15 billion stock swap and merger.

Bank of America would get back into the scene with its merger/stock swap with struggling investment bank Merrill Lynch.  This would be followed shortly in the international scene with a $9 billion investment and 21 percent purchase by Mitsubishi bank to prop up U.S. investment bank Morgan Stanley and the British government orchestrated takeover of HBOS Group by Lloyds Banking Group.

The end result of all these shotgun marriages has not been pretty.  All of the purchasers are now in deep trouble.  Lloyds of London is now part of the British Crown as the government was forced to step in and bail them out in return for a majority position in the bank.  Citigroup, which lucked out in losing the Wachovia deal, is now on life support of its own.  Wells Fargo, which won the Wachovia raffle, is next to Citigroup in the ICU.  JPMorgan Chase is struggling to stay afloat with the Bear Stearns anchor dragging it down.  Bank of America, which made the biggest noise is now poised to be the biggest loser.

The financial institutions that accepted government loans (TARP loans) are faring little better than those that did not primarily because the TARP money doled out was a minute fraction of what was actually needed.  The $400 billion or so sounds like a huge amount but compared to $2 trillion the banking industry will actually lose, the bailout funds are akin to putting new tires on an old car so it can drive smoothly to the junkyard.  In fact the $2 trillion may be just a small portion of the total loses after commercial real estate is factored into the equation.

The biggest lie being foisted on the American public is that American taxpayers are going to end up paying to either buy up all the toxic assets (liabilities?) or by buying up the banks themselves.  The taxpayers are not going to be coughing up this $2-3 trillion.  Foreign investors will be when they purchase the U.S. debt.   All U.S. taxpayers will be paying is the interest on this debt.  It isn’t so much that the banks will be nationalized.  It is that the United States will be internationalized, owned by the world.

Unfortunately, the options available are extremely limited and none are palatable.  The government can do nothing but employ its stress tests and hope enough banks survived to make it to the recovery.  The government can use its funds to prop up moderately positioned banks and let the more troubled ones fail, again hoping that enough survive so the economy still has a financial sector.  The third option is to rescue the failing banks, whether that be by nationalization (government receivership or government ownership) or by simply capitalizing them with whatever they need.  This latter option means the government will put out the money and get nothing tangible in return except for a stable financial system (hopefully).

In the end the biggest WINNERS may be the U.S. taxpayers. They’ll be selling off their dysfunctional and broken down federal government to foreign investors who seem to have a lot more faith in U.S. Treasury bills and a lot less sense about what they are buying.  In return Americans get the capital to prop up the financial system. I Wonder how much a used Kennedy or Shelby goes for on the open market?