First of all, I would like to point out the lying, deception and lack of fairness in this finacial crisis. The government, namely the Treasury department and probably the Congress have failed to come clean on who was and wasn't solvent in this matter. There has been this nonsense that the banks wouldn't lend to each other, when in reality, they have allowed huge NY entities to operation insolvent while trying to mask the problem. I have a hard time believing that either of the huge NY banks or any of the brokers, including Goldman Sachs have been solvent and most likely none of them are less than $25 billion below even. Thus they have all been engaging in business with either a negative net worth or below statutory capital. The whole matter has been masked under the topic of subprime mortgages, when in fact, subprime is just the tip of the iceberg and most likely not even the primary cause of this crisis.
It wouldn't take a rocket scientist to recognize that Citi was in trouble even 1 or 2 years ago. Their financials from mid 2007 revealed they were deficit $400 billion in fed funds. Any banker would quickly pick up on that idea and thus anything they might come out with in losses short of $400 billion was probably suspect. JPM is quite likely in the same boat, though they have been fed everything under the sun. I highly doubt Citi really gave in on acquiring WB, but that to attempt to fight that battle would open a can of worms that came out of something dead. WFC, which I don't believe is exactly on top of the world would make Citi prove their net worth and I doubt Citi was in as good of shape as WB and thus would be commiting fraud in the merger, but then again, I don't believe these guys recognize fraud.
The guarantees made to prop up the banks are not only unconstitutional, but criminal. The government should seize every one of them rather than make such promises. I would be for the government chartering a $700 billion capital reserve bank and getting matching capital and go into business against these bastards rather than agree to take the hit for what is likely to be trillions. I still say that they have spent a year trying to create enough smoke to get Citi, Goldman, JPM and a few other NY firms in out of the rain. For now, it appears they have succeeded.
How are they going to do this? I listened to Maria Bartaroma Tuesday and she had the opionion they were going to buy stock. I even saw it on the Prudent Bear board, but there won't be any stock buying. Buying the stock over the counter of banks wouldn't do anything to solve the problem. In fact, they might as well print up the money and throw it in the street as to buy stock in this fashion. It appears they are going the preferred stock way and in order to create the smokescreen I mentioned, they are going to act like all the big banks are required to give in and take this money. For 5% interest, they are going to get treasury bonds that yield probably around 4%, thus the net cost is going to be 1% or so. Beats hell out of Buffets deal for 10% to be used to buy securities that yield 4%.
The idea here is that there isn't going to be any money. The delusion is the Fed is going to print money and give it to the banks is just way out there. In fact, the government is going to make 1% out of this game of make believe. Though it is highly unlikely, they are also going to sustain a gain out of the stock of the banks, should they go up. If the banks go bust, the government gets their bonds back because they are in essense the guarantor.
What else this is going to do is open the door for all this Fed financing to be reversed. All the TAF's can be ended for the time being. If they continue, you can bet the liquidity crisis is on going and nothing has been solved. But, if we see the TAF cease and the interest rates go back to normal we probably have something the bulls would like. For one, I don't believe anything that keeps this bubble intact is going to be anything more than a bandaid. I don't care if they put in a trillion dollars. (amazingly they probably have and it is amazing we are talking about trillions around the world when such a number is so phenomenal that I would have never thought I would see it anywhere involving money but the Federal Debt).
What I see is more deflation coming out of this. The gold bugs, the action counters can't see this, but the interbank lending will do away with the double Fed action and remove bank money from the money markets. The money supply will shrink, not grow. Second, they will replace lost bank capital with treasury bonds, not cash. The banks can lend the money back in the overnight market if they like and the customers of the banks don't use a lot of cash unless there is a panic. I am not sure the banks are going to go out and lend a lot of money out of this because of what I wrote to start here, that they were massively insolvent. Some banks had a lot of money to lend because they had so much deposited from the overleveraged banks.
The idea that you can blow another bubble to replace the bubble that bust might work as long as there is another bubble. There isn't a bubble to replace the world real estate bubble. I have heard about Hong Kong real estate prices forever. I wonder how they can pay those prices or is it just something that sits there, as the US stock market has for years to draw money on as collateral with no recognition of the carrying costs or the rental market. I don't know many people that can pay $1000 a square foot or more for a place to live. $1 million for 1000 feet blows my mind, as that is $7000 or $8000 a month when you throw in maintenance and debt service. I didn't know Chinese made that much money. Ditto California and NY and Florida and now New England. The market is going to now show the bubble in the mentioned areas where the bubble hadn't burst yet.
I don't believe the government can go to market with an extraordinary number of bonds. The t-bill rates we are seeing now have more to do with the overflow of funds the Fed is pushing into the accounts of weak banks and financials than interest rates in general, as the suplus funds are coming back through the back door. It is amazing to watch an insolvent system operate.