Paulson Predicts Banks Are Done For, Shares Drop (AIG)(FNM)(FRE)(C)(JPM)(BAC)(WFC)

It has begun to dawn on investors. The news about Bank of America (BAC) and Citigroup’s (C) fourth quarter earnings is the beginning of the end of the private enterprise banking system in America. It may return in a few years, but not until the government decides it can sell the stakes it is accumulating as part of the financial bailout.

Henry Paulson today said that most of the second half of the TARP, the next $350 billion, is going to have to be sent to banks. If only half of that sum goes into the system to keep financial firms from failing, it will overwhelm their current market capitalizations. The government will own a large portion of the equity in the nation’s largest banks, whether that was it intention or not. What Barney Frank wants to do with TARP cash may become irrelevant.

Shareholders in banks are starting to catch on to their dilution problem. The stocks in BAC, JPMorgan (JPM), and Wells Fargo (WFC) are all down between 7% and 10%. The common stock of these companies is headed to the same place the shares of Fannie Mae (FNM), Freddie Mac (FRE), and AIG (AIG) ended up.

Douglas A. McIntyre

BAC, WFC, FNM, FRE, AIG, C, WFC, JPM