Its Called Insolvency Stupid

The banks were able to pile all of their bad loan debts onto the backs of tax payers by claiming that it was all a liquidity crisis. The basic rationale was that current market conditions were problematic because of illiquidity not insolvency. This by God was the greatest slight of hand since the devil let us all know he didn't exist.

The prices for the sludge on bank balance sheets became temporally and artificially depressed by themselves along with investors trying to sell into a very illiquid market. As a result, these prices are erroneous and no longer reflect their true value. That if the government bought these assets much needed liquidity would be restored and credit markets can go back to screwing end users. OK. I put that last part in there, but you get the picture. The banks wanted to convey a message that liquidity was the problem. This way they can transfer crap to the tax payer and receive fresh dollars to lever up the system again. Then they can proceed to rape mark to market accounting.

http://tradersutra.blogspot.com/2010/04/living-dream.html

http://tradersutra.blogspot.com/2009/05/fasb-redux.html

http://tradersutra.blogspot.com/2009/04/financial-follies.html

http://tradersutra.blogspot.com/2009/04/great-financial-illusion.html

We all know that the credit crunch was an insolvency crisis. It was never about liquidity. The recession we just had and we continue to have is a balance sheet recession, not the inventory recession that the media seems to be obsessed with. Insolvency can't be fixed with short term subsidies. Insolvency is rectified by debt reduction, debt elimination, asset appreciation, greater capital levels, lower leverage, and time.

Short term subsidies like TARP, TLGP, and POMO only transfer credit risk from the banksters to the taxpayer and in the process the banks just continue their predatory parasitic behavior. The only reason the markets and asset prices have rallied is that the banks have shed their losses and transferred them to the taxpayer. Its the most epic moral hazard trade in the history of the world.

Greece is about to default. Europe is about to collapse, and equity markets keep rallying? The only way I can explain it is that investors have come to the understanding that government will always bail out financial institutions when they get into trouble. The primary dealers who are on both sides of the market collecting tolls, fees, and rebates just move equity prices higher incrementally. They pocket the gains and pay out huge bonus's. As long as markets keep rallying all is good. When markets unravel?

Voila!
The Fed lowers rates.
The Fed floods the market with dollars.
The Fed continues to buy worthless securities to soak up excess supply.

If things truly the fan? Don't worry. Government will be there to take the losses. This is the current situation in both European and US Markets.

When will the markets go back to normal? This question is best tried to answer by figuring out what normal actually is? Your guess is good as mine? Why aren't secondary markets being afforded the ability to stabilize markets? Because primary dealers are the secondary markets and they don't want to take losses. Isn't this what government is for?

This would be the best way for us to get back to a true normal market. Let the secondary markets try to figure out the true value of assets are. We will quickly figure out what the true values are, and the inference is that every single financial institution is insolvent. Most of the assets are truly crap. When markets do reboot we will know for sure. But currently banks are in a desperate race to the bottom trying to squeeze out the last drop of juice that's left in the lemon that is the US Economy. In the meantime the banks are still trying to uphold the status quo of little transparency, no regulation and or reform, massive accounting fraud, and general deviant financial behavior. Its preposterous to think under current market conditions that the market can fend for itself without government intervention and guarantees. Investors know this and most importantly Wall Street Institutions know this.

The world (INVESTORS) has no clue how to value companies anymore. There is no credible way to examine bank balance sheets. Accounting fraud along with government guarantees have made it next to impossible to do even the basic analysis that is needed for informed investment decisions. The world doesn't have the faintest clue how to manage and gauge risk. Any financial analyst or investment banker who can accurately tell us what is going on should be immediately brought to the nearest 7-11 to pick the lottery numbers.

There is so much distortion currently that it borders on the insane. We are in the Bizarro world where every single risk asset moves in the same direction. Correlation = 1. The only risk currently is the risk of not being on the bid side of the market. It should no longer be called the BERNANKE PUT or the GREENSPAN PUT, it should be replaced with the GREENSPAN/BERNANKE PUTZ! All this policy really does is to create bag holders out of tax payers. The only thing the Put ever created was obscene risk taking. The use of leverage has magnified the level of distortion that is out there.

When the market goes down for a day or to, its only a brief moment of clarity in the Bizarro World. Once the sane people are put back to sleep, the nutty people are free to run the asylum.

It seems that everyone is on the same side of the risk trade. Its a crowded elevator. Where are we in the building is the $23T question? I have said when market correlations are the same for every risk asset we are all in trouble. This is what the case is today. Gold up - Dollar down? No way. Stocks up - Bonds down? No way. Crude up - Stocks down? No way. This is a serious flaw in risk appetite. Markets sometimes go down as well, this is hard to believe for 25yr old algo programmers, but it does happen. What will happen when everyone goes to sell at the same time? The machines along with the quants control the market similar to 2007. Then we had the quant quake of August 2007.

http://tradersutra.blogspot.com/2009/07/markets-evolve-uncoilget-used-to-it.html

http://tradersutra.blogspot.com/2009/03/how-ltcm-enabled-sub-prime-meltdown.html

I foresee similar problems for this market. LTCM used unheard of amounts of leverage in complex trades. This only increased non linear distributions when those trades blew up. Its these non linear and asymmetrical components that are embedded in all financial markets that are being precisely minimized by not only the media but by the primary dealers themselves at the moment. Leverage by itself exposes itself to non linear distributions. This makes the system inherently flawed and skewed to crashes at given intervals.