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Under Pressure: Big Banks Slammed by Obama, Durbin

Aaron Task
Editor in Chief
Daily Ticker

There is unrelenting pressure on banks these days, both in the market and in political circles.

On Monday, President Obama and Sen. Dick Dubin (D-IL.) slammed Bank of America for its plans to institute fees on debit cards.

"This is exactly why we need this Consumer Finance Protection Bureau...why we need somebody who's sole job it is to prevent this kind of stuff from happening," President Obama told ABC News. "You can stop it because if you say to the banks, 'You don't have some inherent right just to - you know, get a certain amount of profit. If your customers - are being mistreated. That you have to treat them fairly and transparently.'"

Senator Durbin's comments were even more inflammatory. From the floor of the U.S. Senate, the Majority Whip encouraged Bank of America consumer to "vote with your feet [and] get the heck out of that bank," according to published reports. "Find yourself a bank or credit union that won't gouge you for $5 a month and still will give you a debit card that you can use every single day. What Bank of America has done is an outrage."

Predictably, the comments from Obama and Durbin drew a spirited response from the banking industry and Bank of America itself, which correctly noted "most of the major banks in the United States are moving toward assigning a charge for debit card use." (See: Why Debit Card Fees Might Be a Good Thing)

Henry and I are not friends of the banks, as longtime viewers know well. But we are sympathetic to the idea that Obama and Durbin misfired in their apparently coordinated attack on Bank of America. Just as Americans have a right to choose their bank -- and move banks if they don't like the services provided or fees being charged -- banks should have a right to charge for services if that's what the market will bear.

Meanwhile, the bank stocks are imploding, in case you hadn't noticed.

(Editor's Note: What follows was written by Henry Blodget for The Business Insider, and republished here with permission.)

Shades of 2008

Bank of America smashed through $6 barrier Monday and is now in the low-$5s. Citigroup has been cut in half. Morgan Stanley's back where it was in the depths of 2009.

Back in the financial crisis—the last financial crisis—the Treasury Department and the Federal Reserve were heavily and obviously involved in trying to make sure the banks didn't collapse, frantically negotiating behind the scenes and ultimately persuading Congress to approve the TARP.

This time, however, they've been silent and invisible.

Oh, of course, the Fed is still bailing out the banks every day with zero-percent interest rates, interest on excess reserves, and other programs that reward the banks just for being banks.

But beyond that, it's quiet in Washington.

So you have to wonder... behind the quiet exterior, are Tim Geithner and Ben Bernanke absolutely freaking out?

It's not clear why the stocks are getting demolished: The banks are supposed to be "well-capitalized" now.

Of course, they were supposed to be "well-capitalized" back in 2008, too, and that didn't stop their stocks from plummeting, and Lehman and Bear from going bust. (Everyone else would have gone bust, too, if the government hadn't stepped in.) So maybe they aren't actually well-capitalized.

At least one Bank of America analyst, Chris Whalen, thinks Bank of America is bankrupt—not from over-inflated asset values but from litigation exposure.

Morgan Stanley investors, meanwhile, say they are concerned that the company has enormous undisclosed exposure to Europe.

If there's one over-arching lesson of the 2008 crisis, though, it's that no one will ever know how well capitalized the banks are...until it is too late.

Either the sentiment will improve and the stocks will go back up, thus leaving everyone wondering what they were briefly worried about. Or the sentiment will continue to get worse, thus leaving everyone to increasingly freak out.

And the lower the stocks go, the more people will wonder what the government can and will do.

And it's a good question.

What can the government do?

Theoretically, they could initiate another bailout... but if they did that, 50 million Americans would storm the capital with torches and pitchforks.

They could express confidence in the banks' financial condition... but that would just be a signal for investors to run for the hills.

They could also, in theory, do what they should have done in 2008, which is seize the banks, write down their assets, recapitalize them, and re-float them—without tinkering with their operations.

This would be a bold and proactive move, one that would move the economy several steps closer to eventual recovery. It would also trigger screams of outrage (and lawsuits) from banks and bank shareholders and bondholders, all of whom, if the move was done correctly, would lose money. (Equity holders would get wiped out, bondholders would get haircut, and senior bank managers would get fired).

The government now has the authority to seize any financial institution it considers systemically important, and all the banks above certainly apply.

Actually using this authority, however, would require balls of steel.

It's not clear that anyone in the current administration possesses that.