Friday, February 27, 2009

Why the Feds are feeding the zombies

Martin Mayer on the huge invisible house of cards in the sky hanging over the banking crisis (this is why they can't do anything but feed the zombies):

  Twenty years ago, Michael Milken of Drexel Burnham and a staff of razor-sharp Wall Street kids set up a hugely successful half-billion-dollar "bad bank" to rid Mellon Bank of its doubtful assets and distribute them to investors without any government support. The deal had a terrible press when new, but Mellon, Milken and the buyers of the stuff all did great.

  This well-understood process has not been available in the current crisis, mostly because some $30 trillion of credit-default swaps stand between the owners of the "troubled" loan and debt obligations and anyone's assessment of what they are "worth." Each of these hundreds of thousands of swaps is a sort of stand-alone bastardized insurance policy against the prospect that some loan will not be repaid. Anyone can and anyone does write these individual loan guarantees; anyone can and anyone does reinsure them. Source

Huff and puff and they’ll blow the house down, and they don’t want to do that.  But it’s only a matter of time, as the housing market is not coming back.  It’s the off-balance sheet stuff that needs illumination.

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