Friday, May 08, 2009

Stress Tests and Buying Bonds

The stock market behavior of late smells of "insider trading".  It seemed obvious many already knew what the Stress Tests "results" would be.

A number of highly respected financial professionals have commented on how non-rigorous the tests were and how incomplete the released information was.

Geithner managed to create the virtual reality that the banks under tests of "stress" needed only x amount of money.  Senior bankers rushed to say a) they would be able to raise it to satisfy government criteria; b) the tests were overly "pessimistic" while clearly happy that the government had given them a pass, and c) they couldn't wait to get the government out of their hair so that they could continue their way of paying themselves.  

Isn't it curious none of the Wall Street bankers nor the boards of directors to whom senior management was held accountable had been told to take a walk the way Detroit executives had?  

Crony Capitalism is not just an Asian thing in some third rate developing country, is it? 

I have long argued Geithner/Summers' approach to avoiding a total meltdown was not to solve the fundamental problem of getting rid of toxic assets, changing Wall Street's out-of-control management and looking after taxpayer's interest.  

They bought Wall Street's argument that nothing was fundamentally wrong except confidence using in effect FDR's well-known homely:  There is nothing to fear except fear itself.  

More specifically, the toxic assets on the banks' books were, as claimed by bankers, worth a lot more than what they were because the "market" then was wrong in marking those assets down as reflected in the tanking of banks' shares on stock exchanges.  To this day we have no idea how much of that toxic stuff the banks continue to hold.

Geithner/Summers devised the Stress Test program to allow the banks not to have to mark to market their toxic assets.  Meanwhile Bernanke on the side was pumping trillions of money and credit commitments to flood the market with liquidity driving interest rate to near zero.

With money coming out of one's ears, so to speak, a number of things happened:  stock markets took off as money became "cheap".  Bond prices declined as inflation fears have taken hold.  Oil and Gold are on the rise.

The way forward is to put money in inflation hedges: gold, oil, other commodities and short bonds.  Stock markets will rise but watch out. This Geithner/Summers plan can be a trap.

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