By Simon van Norden

Today, we're fortunate to have Simon van Norden, Professor of Finance at HEC Montréal (École des Hautes Études Commerciales), as a guest blogger.

"Once you've seen one financial market crisis...you've seen one financial market crisis."

-- Attributed to Federal Reserve Board Governor Kevin Warsh by former US Treasury Assistant Secretary for Economic Policy Phillip Swagel in The Financial Crisis: an Inside View, March 2009, p. 4.

The financial crisis has set a lot of records so far; it's certainly the worst US banking crisis of my lifetime. Some, as suggested by the above quote, see such crises as unique events; each one is singular and there's not much to be learned about how to handle one from looking at past crises. For example, there's no precedent that I know of for a banking crisis involves the failure of the biggest counterparties for credit default swaps.

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“The crash has laid bare many unpleasant truths about the United States. One of the most alarming is that the finance industry has effectively captured our government”, says Simon Johnson, a chief economist with the International Monetary Fund in 2007 and 2008. In an article entitled “The Quiet Coup” in the May, 2009 issue of the Atlantic magazine he (with James Kwak) goes on to say that “if the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform and if we are to prevent a true depression, we’re running out of time”.

America is in financial crisis but instead of the financial oligarchy being broken up to permit essential reform they are continuing to use their influence to prevent precisely the sorts of reforms that are …

Overall, we continue to maintain a negative outlook on both U.S. and non-U.S. Banks in the near-to-medium term.

The new Financial Stability plan announced by the Treasury Secretary Tim Geithner fell short on the details and we think that the benefits, if any, will take a long time to come by. While the earlier programs launched by the government have helped alleviate the capital and funding concerns to a great extent, the efforts have not succeeded in restoring the lending activity at banks.

It remains to be seen whether these steps and others like them in other countries will be sufficient to restore confidence in the financial system and increase lending.

In the meantime, lower lending activity will continue to hurt the margins though the low interest rate environment should be beneficial to the banks with a liability sensitive balance sheet.

It still remains a bit

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“This program is intended to fundamentally and comprehensively address the root cause of our financial system’s stresses by removing distressed assets from the financial system.” Treasury Secretary, Hank Paulson, October 2008.

Until they finally create an entity to bundle toxic and mostly illiquid assets, the credit crisis will continue. Thus far, the Treasury has simply handed out tens of billions of dollars directly to banks whom remain reluctant to lend as the economy heads deeper into the financial abyss.

Back in October 2008 – at the height of the global crash – Treasury boss Hank Paulson provided hope that he would finally tackle the clogged mortgage-backed securities crisis affecting global capital markets. Investors demanded the creation of an entity to place bad assets under one roof. But the Treasury has since made a U-turn, changing its original plans.

Mortgage securitization is largely responsible for this crisis. Since 2001 Wall Street spearheaded a bull

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It's round two for the bailout bill. After sundown, the Senate will vote on a revised version of the bill Congress trashed on Monday.

Eric Roseman says the passing of the bill will not address the root of the banking crisis: asset price deflation. History teaches that this could takes years to reverse. Japan still suffers from a deflationary hangover from own real estate slump in the late 1980s.

This makes it hard to see a bull market in US stocks in the near future. Eric recommends assets that produce regular income... like high-quality corporate bonds.

Out comes the kitchen sink. The actions of this last week will go down in history as the end of the US as an economic superpower. I realize that’s a harsh view to take. And I love this country dearly. But the writing is now on the wall. The regulators—SEC, Treasury, Federal Reserve, and President Bush—have officially bankrupted this country, destroyed the dollar and guaranteed that our quality of life will be on the downward slope for the next decade. I’ve already commented at length on the Fannie/ Freddie deal. In a nutshell that intervention added $5 trillion—at least $1.2 trillion of which is garbage—in liabilities to the US balance sheet. And it: Didn’t solve the housing crisis—housing starts fell 6.2% in August (a 17-year low) while building permits fell 8.9%. Won’t boost the homebuilder industry—you can’t sell homes if banks are lending. Sure as heck ...

RBC Capital is moving their rating on Banking Sector to Overweight:Gathering of Powerful People: Thursday night Congressional Leaders, The Treasury Secretary and The Federal Reserve Chairman jointly announced a cooperative effort to get ahead of the credit crisis. The plan is expected to be delivered to Congress in the next 24 hrs:Expected Key Components of Plan: 1) Create a mechanism that would take bad assets off the balance sheets of all financial companies 2) create federal insurance for investors in money-market funds 3) ban short selling of financial stocks through year end.Resolution Trust Corporation (RTC) II: RBC anticipates a key component of the Treasury plan will be the creation of a govt. entity that will buy bad assets similar to the RTC in the late 80s-early 90s.The Devil is In Details: The headlines are very appealing to bank stock investors but the ...