Highlights include Citigroup (C), JP Morgan Chase (JPM), Bank of America (BAC), Huntington (HBAN) and Wells Fargo (WFC).

Perhaps One More Option Before Nationalization

The window of opportunity appears to be closing for financial institutions with respect to correcting their ills before the potential for some entities to be nationalized becomes a reality. With the government willing to increase its stake in Citigroup (C) up to 40%, this creates substantial doubt as to the ability of the company to remain independent.

As of this juncture, we would submit there still a window of opportunity for financial institutions to significantly self-correct.

First, financial institutions (with government assistance per our January 21, 2009 blog) would be required to rework a significant portion of the potential Alt-A and Option Arms loans not included in the government's proposal that could go into foreclosure over the next couple of years. These would include performing loans where the borrower has a bit less than the pristine 750 FICO credit score or higher currently required (nothing below 650).

Second, with considerably cleaner balance sheets, the 20 largest entities that accepted government assistance so far, would experience consolidation in groups of threes. Two of the three entities would divide the best assets of the each of these groups, and remain independent. The third would become private and remain to work through the less pristine assets of the group (without deposits).

This would be similar to the "good bank/bad bank" scenarios that occurred in the early 1990's. While it would take a number of years to work through the problem assets, it would not perpetuate the "zombie bank" syndrome and permit "vulture-type" investors the ability to invest in these 5-to-7 regional private financial institutions, versus one mega national bank.

In conjunction with the government's proposal, this would aid in a significant reduction in the level of non-performing assets presently. In addition, the securities ear-marked for the government's private investors partnership program would experience a substantial increase in valuation as the underlying loans would no longer be viewed at foreclosure valuation.

More importantly, it should stem a significant portion of the potential foreclosures, permit a reasonable level of the housing market to experience digestion, and help the stimulus program to gain traction.

Which financial institutions would survive and which ones would disappear? That will be for the regulators to decide. But clearly it would benefit the banking system and affect companies such as, but not limited to, Citigroup (C), JP Morgan Chase (JPM), Bank of America (BAC), Huntington (HBAN) and Wells Fargo
(WFC).