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The Banks are Insolvent

Buy-out fund manager Mark Patterson won’t be high up on Tim Geithner’s Christmas card list this year. The chairman of MatlinPatterson Advisers says Geithner’s effort to stabilize the banking system through the TARP is a hopelessly ill-conceived policy that enriches speculators at public expense.

What makes Patterson’s comments particularly interesting is that he’s a TARP insider. He used TARP matching funds to buy Michegan bank Flagstar Bancorp. Patterson’s firm ended up with 80% of the Flagstar shares. The government managed to secure a mere 10% stake.

Patterson reckons Team Obama is only putting off the necessary day of reckoning by pretending the US banking system is still solvent. Speaking at the Qatar Global Investment Forum he had this to say about the government’s handling of the banking crisis:

It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100 billion of the $700 billion TARP funds. They think they’re doing this for the greater good of society.

When market participants like Patterson speak, we listen. First, these guys are not towing the government line. Second, they have skin in the market. This puts them in a different class than the mainstream commentariat. We call these people underground investors. And we do our best to bring you their money-making advice and market intelligence on a daily basis. Don’t bother looking for them on CNNMoney or on CNBC. You won’t find them there.

Patterson doesn’t believe we’re about to see a V-shaped recovery…

This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance.

Alpha hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well.

He also sees the economic crisis ending in a deliberate inflation…

The US government has thrown 29% of GDP at this crisis compared to 8% in the early 1930s. The Fed’s balance sheet has risen from $900 billion to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road.