Dont Forget The Banks
Everything that has been done to calm the global financial system has been done to help the banks
. The US TARP, the Federal Reserves discount window, its low rates for an extended period of time, its quantitative easing program, the ECB/IMFs bailout of Greece and, most recently, their European Financial Stability Facility.
Unimaginable sums of money have been pledged to buy debt so that profligate countries and banks can continue to exist but the time is fast approaching when markets will no longer accommodate largesse and consider the administrations of these central banks to be irrelevant. At that time, the true and awful cost of the folly that Western economies engaged in for 15 years will dawn on us all.
Omega-Trading analysts believe that the Federal Reserve will have to divest itself of the trillions of dollars worth of mortgage backed securities it holds on its balance sheet before it can even begin to consider raising interest rates from their near-zero levels but that may prove more difficult than anyone is willing to admit. One used the following analogy to describe the situation facing the Fed and, indeed, the banks that hold MBS and the sovereign debt of the nations most at risk of default.
If we decided to go out into the market and buy up all the Yugo GVs (the Yugo GV was a European car so bereft of aesthetic appeal and engineering integrity, it fell apart as it was driven), we could mark its value to whatever we wanted on our balance sheet because we would own them all. If, however, we decided to sell them back into the market some 5 years later, what are the chances of finding buyers willing to pay us the value we had arbitrarily placed on them?
This, he continued, is the dilemma facing the Fed, the ECB, the Bank of England and any other central bank that has been actively buying up assets in the market to bail out the banks that made the cardinal mistake of purchasing them in the first place.
The analogy is certainly compelling and forces one to ask what will make the value of the assets the central banks hold approach anything like the value they place on them. For the most part, an upturn in property values as far as MBSs are concerned and a return to fiscal health for the sovereign debt in the case of countries like Greece or Ireland would be absolutely essential but doesnt it usually take years for property markets to return to pre-collapse levels and can anyone really see Greece returning its fiscal house to order in the next 5 years?
Omega-Trading analysts believe the central banks will lumbered with these debts for years to come and, with the housing market in the US and UK beginning to turn down again, how long will it be before banks are writing down the value of their holdings of mortgage backed securities. With the austerity measures being implemented in Greece, GDP is expected to fall dramatically and another recession looms for the nation. If the country defaults which it will isnt it a foregone conclusion that another credit crunch will ensue? The firms answer is a resounding yes.
Omega-Trading still warns its clients to avoid investing in banks as a sector and suggests extreme caution with individual banks, especially those exposed to real estate markets in the US or the UK and sovereign debt from Greece, Ireland, Spain, Italy and Portugal.
by: Robert Mitcham
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