Monday, January 19, 2009

'The End Game'

Source: Money and Markets

"The notion that the U.S. government might even contemplate such a Herculean task is so naive and so preposterous, it doesn't even rise to the level of B-grade science fiction."

by Martin D. Weiss, Ph.D.   01-19-09

Just a week after Wall Street was still rejoicing with a great “Obama rally”…

And only hours before the new president takes the oath of office …

A larger, more menacing banking disaster has burst onto the scene.

Why? The fundamental reason is obvious:

Back in September, when Wall Street’s largest firms were feared to be sick or dying, the financial epidemic was largely limited to Wall Street. Most of the broader economy was still holding up. Except for housing and mortgages, the contagion had not yet hit Main Street.

Now, just four months later, all that has changed. Unemployment has gone through the roof in almost every industry. Nonfinancial firms are failing in large numbers. The entire economy has tanked.

Back in September, the big losses at major banks and Wall Street firms were limited primarily to mortgages and mortgage-backed derivatives. That was bad enough. But it was just the beginning.

Now, due to the sinking economy, the stated value of virtually every asset on the books of every bank in America is highly questionable. Whether you call this a severe recession, a depression or just an economic free-fall, the value of almost every bank asset is greatly overstated.

Even back in September, it was virtually impossible for any government, even ours, to muster sufficient resources to save the nation’s megabanks. The banks were simply too big. There were too many of them in trouble. Their losses were too large; their capital deficits too deep.

Now, with the losses spreading and mounting, the idea that, somehow, the government can save them all has been carried beyond the threshold of absurdity. Now, we are near the end game — and the government is likely to lose.

Ask yourself these basic questions:

  • Can the U.S. government save two of the nation’s three largest megabanks — Citigroup and Bank of America — despite the worst asset quality in their history and the worst economic collapse in a half century?

  • Can the U.S. government save these two banks while nearly every major investment bank, including Merrill Lynch, has already collapsed?

  • Can it pull it off even as thousands of large and small retail companies, air transport firms, auto companies and others file for Chapter 11?

  • Can it engineer this feat even as Europe and Asia sink into an abyss?

If your answer to these questions is “no,” you’re at odds with virtually the entire Washington and Wall Street establishment, whether Republican or Democrat, whether in the old administration or the new one.

Strangely, though, if your answer is “yes,” you’re out of synch with a reality that’s abundantly obvious to any objective observer...

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