Banks to Fail Confidence Test

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It's been too easy making money betting against U.S. banks over the past year and a half. Fortunately, we're not tired of making money.

Chairman Bernanke certainly appeared to assure the market that its public-private partnership in banks will not lead to nationalization, but growing equity stakes in these institutions by the Federal Government can only serve to further dilute the common shareholder.

On Friday, Citigroup (C) shares plunged 30% at the open after terms of the U.S. government deal were revealed. Uncle Sam now has a 36% controlling interest in the once-largest company in the world as measured by market cap.

Lest we forget, these banks still own toxic assets that are losing value by the second.

We're staying vigilant on a glaring trend raking the financials. The shorts are moving from bank to bank, sending their shares spiraling lower at a furious pace. Their primary target, Citigroup, is fast approaching penny stock land, and Bank of America is almost there as well.

Higher-priced big banks that would seem to be the next targets would be Wells Fargo (WFC), US Bancorp (USB), and PNC Financial (PNC). Wells Fargo and PNC face additional stresses in digesting their respective acquisitions of Wachovia and National City Corp, respectively.

After Citigroup and Bank of America, we're expecting shorts to focus their energies on Wells Fargo and JPMorgan Chase (JPM) because of their new leadership in the banking sector. On February 23rd, JPMorgan announced they will slash their quarterly dividend from $0.38 to $0.05 per quarter, saving the bank $5 billion a year. We wonder if the investors and shorts took notice.

Are investors going to swallow Dimon's kool-aid about the bank being "solidly profitable" while admitting that at least $2 billion in credit costs and write-downs are likely for the period?

Federal Deposit Insurance Corp Chairman Sheila Bair is promulgating the "stress test" to weed out banks that require additional capital - those unable to secure it through private capital - to maintain an adequate tangible common equity ratio. Based on market perception, we are projecting Citigroup and Bank of America to be the weakest of the major banks in terms of TCE, with Wells Fargo (WFC), US Bancorp (USB), and JPMorgan (JPM) not far behind.

Former investments banks turned bank holding companies Goldman Sachs (GS) and Morgan Stanley (MS) have actually managed to increase their tangible common equity in 2008 through faster deleveraging.

Nationalization fears seem to be on the back burner, based on recent statements from the Federal Reserve and White House. But short sellers aren't going anywhere, and we're prepared to keep cashing in right along with them at the expense of the banks.

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