The Unsteady Drumbeat

You can print all the dollars you want and invest them directly in Citigroup; nothing stops until the bad loans go away.

The economy underneath every major financial institution is crumbling like a sandcastle in a hurricane. GDP for Q4 is looking in the -3 to -5 range with lots of downside, employment figures have been shockingly bad, and earnings are going to be really ugly. There isn't a single performing asset class in debt, equity, treasuries. Investors are in full liquidation. Why?

Banks, the engine of our economy, are not lending money. LIBOR has come down and indicates less abject fear, but the volume of activity has not increased. If there's any lending going on, it's bank holding companies using the discount window.

Hank Paulson made an unforgivable judgment call by re-apportioning TARP funds as direct investments in banks. While initially hailed as an ideal solution, a number of important problems have emerged with that plan:

1.) Why bother getting cash from another bank if you can go right to the printer itself? The government's massive distortion of the interbank lending market cannot be overstated in scope. It has exacerbated the impact of the fear of "bad assets" taking down someone you lend to by creating a cushy alternative process!

2.) It's created an arbitrary system of winners and losers, where financials with no access to the funds are forced to become bank holding companies and smaller banks are brushed aside as Treasury tries to focus its limited (shockingly limited for 700B) resources on bigger, more "systemic" institutions.

This means that more stable, liquid small banks, once seen as the likely survivors in this mess, are getting slammed stock-wise because they won't be saved, which is scaring their bigger clients. We're stalling a run on big banks and fomenting one in local banks. Like I freaked out about a few months ago, FDIC may have a problem that is larger than its funds, and we're inviting that scenario.

3.) It hasn't prompted lending. Banks aren't lending because they're afraid that their contemporaries have bad assets on their books. With good reason, they do! TARP was supposed to change that. Instead, it's outright stated "There are bad assets and there are so many that we won't buy them because we don't have enough money." That's fucking horrifying, and Paulson is broadcasting that to the markets. What the hell? Even if he's right factually he's wrong strategically - if he'd have shut his mouth there's a chance the panic could have been resolved in a more orderly fashion.

Instead, we let people get scared and Citigroup got run on. Too bad "Bank of America" is already taken because that's what it's about to be. I wonder if the merger between it and the United fucking States will create any synergy opportunities?

4.) YOU DON'T CHANGE IT UP LIKE THIS! It's an unprecedented market out there; the government has, essentially, announced it's a got a 700B whack-a-bank hammer and I'm simply not going to invest until I know who's next. I have no idea if Hank Paulson is going to come on my television tomorrow and announce a Treasury default or the acquisition of Citigroup or The End of Foreclosure. How can I, as an investor, reasonably make investment decisions in this environment?

Personally I'm not putting a dollar in play until the banks write down every last L3 asset and structured debt obligation to a fraction of where it's at right now OR they have those assets graciously offloaded onto American taxpayers. Most people think investing is gambling and it normally isn't - but right now, thanks to Hank, it is. Right now, our financial system is Vegas without the waitresses, and nobody is going to touch it until order is restored.