Bring Out Your Dead; Bank Zombies Will Eat Them

Jul.15.09 | About: SPDR S&P (KBE)

As I predicted last March, American banks are hoarding rather than divesting the so-called toxic assets. The volume of trading in non-agency mortgage backed securities is considerably lower than many traders might have expected.

That makes the stabilization of asset prices along with the stabilization of bank equity prices a self-referential argument: asset prices are doing well because banks (and other financial institutions) are buying them, and that reassures the equity market.

Rather than relying on distressed investors to bail them out, banks ARE the main distressed investors. After the suspension of FAS 157 banks have an incentive to hold rather than sell securities trading at low dollar prices.

The toxic waste never came out. The zombies are living quite happily on it. The banks will continue to tip back and forth between credit losses and elevated income from their distressed portfolios.