on the state of financial affairs, stress tests and market rallies

I love it when people who should know better say stupid things. Professor Nicholas Bloom, for example. “We still don’t know the value of the toxic assets central to the banking crisis.”
Professor, there is no market for those assets. Their value is currently zero. Hence, the word “toxic”. No one has proposed a mechanism to remove their toxicity, because that toxicity is holistically contained in the design and structure of the instruments themselves. IT CANNOT BE REMOVED. Due diligence would have to be performed on each and every loan in each and every bundle that was securitized and sliced into bonds. A new, responsible rating would have to be applied to the parts and to the whole. The bond tranches, their prices and their promised returns would have to be reassembled, using the new ratings. Even if this were theoretically possible, lawsuits would prevent it.
Derivatives are a dangerous game. Deregulated, they quickly become trash. Business school professors need to start educating their students about this fact. Read Steinherr, Partnoy and Das.
Now, Geithner is desperately trying to inflate the value of these tumors from zero to some agreed-upon future market price by GUARANTEEING AGAINST LOSSES, and subsidizing leveraged risk. Therefore, ANY value the assets acquire will be artificial, while the fundamentals of the assets remain toxic. In other words, it’s short-term game time, again. This is beyond corrupt. It’s ‘pay no attention to the man behind the curtain’ time. Geithner is a fraud, committed to fomenting lies.
Most importantly, though, what the public is being prevented from doing is even examining the assets in detail, to see the nooks and crannies, the clever little options, be they American, Bermudan, or otherwise. We don’t know how many there are, or on whose books they lurk. That’s what the bailout of Bear was intended to prevent. Transparency. The failure of Lehman threatened to provide transparency, and the market reacted with horror.
But transparency is the only thing that will restore confidence and the only path to long-term health.
Lastly, false declarations of imminent recovery, like the one made by chief dissembler Larry Summers, or deceptive stress test results or earnings reports provoke the fear of missing the profit opportunity of a market bottom, and the bump up to the strike price that sellers desire to lock in gains. Banks are desperate for capital. Bear market rallies, with the government at your side, are useful in that regard.

— joe

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