Two years ago, I talked to a Canadian bank and they swore to me that the subprime crisis which was surfacing in the U.S. at the time wouldn’t touch them. The bank’s shares have since fallen 40 percent. You can run but you can’t hide.

It’s not just guilt by association. Most banks with loans in construction, commercial real estate, corporate loans, and of course residential real estate, are dealing with a deteriorating loan book.

Credit was too easy for too long and now they’re paying the price.

The Canadian bank has more or less followed the S&P down. In the same period, Citigroup and Bank of America have lost over 80 percent of their value.

That Canadian bank was the last bank I recommended. And I got out while we were still ahead. I’ve since shorted banks (and made a lot of money), but generally I’ve stayed away from banks for two reasons:

1. I don’t trust them.

1. Their balance sheets can be deceiving. There are so many places banks can tuck away their money.

Banks are once again making the news. JP Morgan beat expectations last week. But Bank of America had to go to the government (again!) with its hands out. It got a $20 billion infusion plus another $118 billion to backstop their bad assets. Of course, that’s on top of the $25 billion they got last year.

The last bank rally of note began last July when four out of the five biggest banks beat earnings expectations for the second quarter. Had a bottom been reached? Many investors thought so.

Citi’s CFO said at the time that “the company was well-capitalized to weather further turbulence.” But major writedowns continued and bank shares dropped precipitously.

That didn’t stop analysts from calling more bottoms.

In September, during a mini-rally, North Carolina State economist Mike Walden said, “The bottom was reached with the Citi deal. And now Wells Fargo is looking at the financial-services sector in a positive way. This deal may represent a turning point in the industry.”

He was referring to the generous price that Wells paid for Wachovia compared to the much lower price Citi was offering. As it turns out, Citi was the more realistic player. Wells paid too much for Wachovia just as Bank of America paid too much for Merrill and way too much for Countrywide.

Wall Street’s propaganda machine was having none of that. Bank of America was saying that Countrywide would add to earnings in 2008 and Wall Street was agreeing. Listen to this: “Countrywide will go down as a good, bold acquisition.”  The company drinking the kool-aid held 55,000 shares in Bank of America.

Banks actually thought that they could make risk go away by engaging in some fancy financial engineering. Failing that, they thought that they could talk their way out of their mess. And, as a last resort, they suspected that the government would come to their rescue.

Bankers and politicians – hard to say who’s more arrogant. Politicians think they can legislate away economic cycles. The U.S. was in an economic recovery stage for the entire century. We were due for a pullback. But the government wants to cut it short and make it as painless as possible.

And the way to do that is to “save” the banks.

These may be good intentions. But in this case that old saying applies, “the road to hell is paved with good intentions.”

Massive government intervention hasn’t worked so far. But it will certainly bring another wave of bottom-calling this year. Don’t believe it.

The banks and the executives who lead them aren’t complaining. Amazingly, the government hasn’t forced the CEOs of the banks out.  They are leaking tens of billions of dollars. They’re still making obscene salaries, and that’s unacceptable.

Much worse is that, after handing banks $271.7 billion of TARP money on a silver platter, the government is still letting them play their little game of “hide the bad assets.”

The one thing that bothers banks more than losing money is everybody finding out about it.

Banks are the least shareholder and investor-friendly sector in the U.S. We have no idea how many billions of dollars worth of bad assets they’re parking with the Fed. They won’t tell us and the Fed is keeping mum. Fox and Bloomberg are suing to get this public information.

Hey, banks, you’ve got to come clean. Tell us the value of the toxic assets you’re holding directly or indirectly. What is their market value and how did you calculate it.

No more off-the-book special purpose vehicles or buried derivative holdings. And give us realistic projections of how much more of your portfolio will go bad next quarter and into the following year, and how that could impact your need to raise more capital.

Without this transparency how can we begin to invest in banks again? How can banks figure out which other banks to lend to? How can the government figure out how to disburse their hundreds of billions of dollars?

Instead of increased regulation, the new Obama administration should push for increased transparency. The government may not be able to legislate the banks back to health, but it can certainly make laws requiring them to give us more detailed information.

The weak or “bad” banks won’t like it. It would scare the last of their investors away. Other banks would stop lending to them. The government would have no choice but follow their lead and let those banks die. That’s the way it should be.

The government can’t save all the banks anyway. Let the private sector show the government what to do. It won’t stop the pain in the banking sector. But it’s the fastest way to get banks to lend to each other. And that should loosen up credit.

In the end we’ll have a smaller but stronger banking sector.

Source: Banks Need More Transparency, Not Regulation