secmaven

The U.S. Credit Crisis: Major Paradigm Shift

The credit crises boiled over in March. If truth were known before Bear Stearns the other WS bankers, Morgan, etc. all had probably equally weak balance sheets from undisclosed asset write downs. Look at the way that cute little tax lawyer turned CFO played games at Lehman with their first quarter!

But James Canne did not play ball with his brothers on street in the Long Term Capital Management bail out years ago and they never forgot it. Now that the sharks have feasted on Bear and gotten a planned for direct tap to the Fed as a result, exchanging worthless collateral that they no longer have to write down on their books for Treasury bonds, no more brothers will have to be eaten. Somebody had to be the sacrificial lamb for the Street to survive by government subsidy and Jimmy and his crew was the most appropriate candidate.

If you take a look at the Fed balance sheet now you will see the replacement of 200 billion in government bonds with all sorts of garbage. But since the Fed is not subject to any mark to market rule, the bankruptcy of Wall Street (and that of the commercial banking sector) has been swept under the Fed's rug.

The question is whether the Fed's rug is big enough to cover the credit crises indefinitely. Certainly not in the long run, too much debt will have to be monetized to restore its government bond assets. But until the next election is over so a Republican is put back in the White House..yes!