Back on 25th March, I wrote in regard to the Geithner toxic asset PPIP scheme that:br /emspan style=”font-family:georgia;”‘The key issue isn’t investor appetite, but bank reluctance to face up to the true market value of their portfolios; less than 20% is currently marked to market, the rest at par or marked to model. Will they really sell into auctions that will explicitly confirm the inadequacy of their capital positions and undermine the credibility of their internal risk models?’/span/embr /Well, now we have our answer; they won’t. Astonishingly, the Treasury is quietly shelving the PPIP scheme, hoping that $100bn of equity issuance (including the imminent Citi deal) and the boost to earnings from a steep yield curve and economic recovery will somehow be sufficient to bolster bank balance sheets.br /br /That looks quite unbelievably reckless to me, and pretty much guarantees another solvency crisis sooner rather than later. Of the ten banks now returning TARP money, eight had been pressed by the government to take funds in October, amid efforts to shore up the banking system. Although some individual institutions now claim that they took the money unwillingly, government intervention was necessary to prevent the entire system from collapsing as trust between banks evaporated as they all held unknowable quantities of impaired derivative assets; we were literally hours from systemic financial meltdown.br /br /Even today most banks remain plugged into government life support systems. Central banks still provide generous collateral rules for borrowing, in an effort to provide banks with liquidity. Although some banks have managed to issue debt without government guarantees, the global banking system needs to refinance some $25.6 trillion of wholesale funding by 2011: without an implicit state back stop this would be impossible. And the value of banks’ assets is being sheltered by central banks’ asset purchasing programmes and in some cases flattered by more generous accounting rules. The fact is that the US has a dangerously undercapitalized banking system even now after huge equity issuance, that is being spoon fed by Fed policy to earn its way back to health. The risk is that there simply won’t be enough time before the next surge in write-offs from prime residential mortgages and commercial MBS hits those fragile balance sheets.br /br /strongemspan style=”font-family:trebuchet ms;color:#3366ff;”This article continues at /span/em/stronga href=”http://www.deadcatsbouncing.com/”strongemspan style=”font-family:trebuchet ms;color:#cc0000;”www.deadcatsbouncing.com/span/em/strong/astrongemspan style=”font-family:trebuchet ms;color:#33ccff;”br //span/em/strongdiv class=”blogger-post-footer”img width=’1′ height=’1′ src=’//blogger.googleusercontent.com/tracker/1897020887579135393-9191661925536744177?l=deadcatsbouncing.blogspot.com’//divdiv class=”feedflare”
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Last 5 posts by Sean Maher

• Who was Smuggling $134bn in US Bonds into Switzerland? - June 12th, 2009
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