The Credit Crisis Continues

TW: Despite much happy talk and the clear ability of certain financial institutions (i.e. Goldman Sachs) to either exert tremendous skill or tremendous gaming techniques depending upon your perspective; our financial markets remain precariously weak.

There are many observers at this point who believe our government is essentially seeking to bluff its way through the credit crisis. It creates a bit of a quandry, if the bluff works the demand for reform will be minimized, if it fails we are all f'ed. Therefore, the odds of real reform of the sort that would actually minimize the risk of the next crisis seems small. Folks like the status quos especially those which benefit themselves and especially those which benefit the incumbent powers that be.


From Floyd Norris at NYT:
"...Despite the slight opening of financial markets since the winter panic eased, this country does not have a decently functioning financial system. It is the Federal Reserve and the Treasury that decide which financial companies stay in business, which is something you expect from a centrally planned socialist economy, not from the great bastion of the free enterprise system.

Many of the better-off banks were able to repay the TARP money to the government, but they remain dependent on F.D.I.C.-guaranteed loans. CIT would be okay, at least in the short term, if it could get such loans.

There has been a lot of hand wringing over the failure of the Obama stimulus plan to get the economy moving, but where attention is really needed is the failure to get the financial system going. That was never going to be easy, but the worst possible decision was to allow the banks to fudge their financial statements. The Obama administration did not lift a finger to prevent Congress from demanding such a move, which the Financial Accounting Standards Board made under duress.

It is not easy to be sure how much difference that made in financial statements, although it clearly allowed some banks to pretend their losses are less than they really are — at least as measured by market values. The banks claim those market values are ridiculously low, but they will not divulge exactly what assets they own, or where they value them.

We are back to a situation where no one knows which balance sheet can be trusted. In that climate, the easiest decision is to trust no one — or at least no one without a credit line backed by Uncle Sam. Citi is too important to fail, but CIT may not be.

What has been needed for a long time is a way to figure out how much toxic assets are worth, and to get them off bank balance sheets and into the hands of speculators with secure funding. Then the financial institutions, with solid capital and believable balance sheets, could go back to lending, both to the public and to each other. It is tragic that has not happened."
http://norris.blogs.nytimes.com/2009/07/13/rip-cit/