What no one will admit about Monday's rout

What caused the selling today? Some or most media pundits said Bank of America's (BAC) earnings. This is rubbish. Why? There are several reasons why Bank of America's earning were not responsible for today's damage.

Over the weekend, White House Chief of Staff Rahm Emanuel appeared on ABC's "This Week" and stated that the existing loan money given to the banks will be converted to equity. This will prevent the banks from asking for more money as they will not have to repay the loan. Rather the government now becomes a shareholder. This is good for us as a taxpayer but bad a shareholder. As a taxpayer, our money will have the potential to earn a profit. However, if one held stock in Citigroup (C) then they could be diluted by 36%. Not good as dilution is a negative to earnings.

A follow-up to this story appeared in Monday's The New York Times. We view the sell-off on Monday as the equity market voting this proposal down. The media on the other hand blamed Monday's selling on a mixed conference call from Bank of America (BAC) on top of a huge earnings beat. A week ago these earnings would have driven Bank of America higher like it did for Wells Fargo (WFC). However, the earnings release occurred on the same day as this new proposal and the effect was investors buying the rumor last week and selling the news.

The problem with the current administration is they are simply floating trial balloons and seeing the reaction from the market. The market does not like this approach and every time it happens the selling begins. Sooner or later the administration will get how to handle markets. Once again, the lesson taught to us by Arthur Lafffer holds true. On days of extremes in the markets look to Washington for policy decisions. Unfortunately, this was a bad decision.

Another reason for the selling was the delayed reaction to last week's bankruptcy filing from General Growth (GGP). One may never have heard of General Growth but its properties are famous and include Ala Moana Center in Honolulu, Water Tower Place in Chicago and Grand Canal Shoppes at the Venetian in Las Vegas. In total, their are some 1,500 malls.

This failure is among the worst ever seen by the U.S. real estate market. Too much debt was coming due and it needed to be restructured. The problem is the bond market is not back to normal and such an event could not take place. Vacancies have risen from 5.8% to 7.1% in the past year and revenues have dropped for many stores. Could Sears be next?

The above news validates that the credit crisis has not ended but now will enter the tougher phase of its life cycle, the workout. Never a pleasant event but clearly needed in all too many situations around the U.S. and world. Solutions that negatively impact shareholders will see equity markets suffer. Take note President Obama, Treasury Secretary Geithner and Dr. Summers.