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"You Can't Drink Yourself Sober": Financial Crisis Far from Over, Ritholtz Says

Posted May 14, 2009 12:34pm EDT by Aaron Task in Investing, Banking
Related: C, BAC, XLF, MS, WFC, KEY, PNC
The financial sector continues to bask in the afterglow of last week's stress test results and subsequent capital raises by numerous banks, with PNC and KeyCorp. joining the parade.

The fact bank stocks have rallied and many have been able to raise private capital is a positive, but it's folly to believe the crisis is over, says Barry Ritholtz, CEO of Fusion IQ and author of the forthcoming Bailout Nation. "You can't drink yourself sober and you can't leverage your way out of excess leverage."

Many big banks remain technically insolvent and "are only being held together by spit, bailing wire and tape," says Ritholtz.

Banks like Citigroup and Bank of America are being "propped up by the grace of Uncle Sam," which can't afford to let go because bad loans continue to rise and demand for credit is falling, says the money manager and Big Picture blogger.

The banking system needs more time, at least three to five years, to deleverage before it can be left to its own devices, Ritholtz says, suggesting only time can heal the sector's wounds.

That said, because the government is propping up "zombie" banks, you can't rule out the Japan scenario of a decade (or more) of economic malaise, he says.

Full disclosure: I was paid for some contributions to Ritholtz's book.

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