Why the U.S. Banking System Remains in Big Trouble

Barry Ritholtz recently wrote an excellent article on why the U.S. banking
system remains in a particularly unhealthy condition contrary to the opinions
of Ben Bernanke, Tim Geithner, and apparently now Warren Buffet, after the
Oracle of Omahas announcement this morning that he purchased a substantial stake
in Bank of America (BAC). Ritholtzs article is presented below in its entirety.
Perhaps Mr. Buffet should have read this before investing in Bank of America,
notwithstanding the fact that BAC stock is up considerably this morning.
Moreover, perhaps Buffets misguided view of the banking system helps explain his
continued disdain for gold despite the fact that it has significantly
outperformed both the S&P 500 and Berkshire Hathaways stock over the past
decade. Big Banks: Under-Capitalized, Overexposed, Opaque The US banking sector
is not healthy. There is a fundamental misunderstanding about the Wall Street
bailouts amongst the public, and quite a few policy makers at Treasury and the
Federal Reserve: Somehow, they "fixed" the banking system. All it took was
few trillion dollars in liquidity and a few $100 billion dollars in
recapitalization, and all is now fine (I suspect some people at the Fed know the
Truth). In fact, they did nothing of the sort. The banking system was not saved;
The massive injection of liquidity temporarily salved the day-to-day operations
of banks, but they did not repair what ailed our financial institutions. Indeed,
pouring billions into nearly identical management teams that mismanaged the
risk, over-leveraged exposure, and drove banks off the cliff in the first place
was an invitation for another crisis. And that crisis now appears to be
arriving. And, its our own fault. Consider what was actually done in 2008-09,
and you will understand why none of the underlying problems have been repaired:
• Bank holdings: Remain stuffed with declining assets, primarily in Housing
and Derivative holdings. Another leg down in Housing could be nearly fatal. •
Transparency: Balance sheets are unnecessarily Opaque; Eliminating Fair value
accounting via FASB 157 did not fix balance sheet problems, but instead allowed
banks to hide them. • Capitalization: