In These New Times

David Goldman

18th July, 2010

On July 13, when I posted my last note urging investors to avoid bank stocks, the BKX bank stock index closed just over 51; on Friday it fell to just over 46, a decline of almost 8%. Bank of America’s results showed just what the aggregate data should have made clear in advance: the collapsing loan books of banks makes them dependent on the thin gruel of the Treasury carry trade. With the collapse in yields during the past few weeks, the carry trade is harder and harder to bring off (58 basis points on 2-year Treasuries just doesn’t do very much). True, banks have shed bad loans, but they can’t find good ones, either. So the banks will continue their zombie existence indefinitely as the equivalent of public utilities, with occasional small crises to worry their shareholders. It’s just not worth being involved.