BEATING THE BANKS

Now the greater party of Wall Street and Big US banks have been
underwritten, more or less formally, by the Fed the shine is back and
people are clearly recalling those days, a mere year ago when the banks
where pushing one other out of the way to declare greater profits. Banks
as a sector have lost 22 per cent in share value and apparently
investors think that's about as far as they will fall now the
underwriters have been summoned the form of the US taxpayer. Some of
course have lost in excess of $40% but, if one was to look at last
week's bank rally it might be imagined that the worst is over. Banks are
cheap, we hear. This is another reason why gold is struggling, with the
Fed guaranteeing all things, who needs gold. But one year doth not a
cycle make. Just a few weeks ago Lehman brothers, basking in the
security of Federal salvation (after rumors that it was almost exactly
equally exposed to mortgage losses as Bear) were comfortably over
subscribed in a public share offer. Perhaps one should think as follows.
A brown recluse spider bite can cause a nasty early sore then go away.
It may also cause a nasty early sore that grows until it seems to have
eaten half the extremity and created a puss filled yellow, black and red
sore with a attendant hole one could place a golf ball in. And then
worsen.
Bear Sterns might just be a nasty sore that is, as I write being swabbed
the area around it effectively sterilized and the moral medicine is
already coursing through the veins bringing a spring back to the step
and a healthy countenance to the US financial sector.

As reviewed in the pages last week the esteemed Charles Morris has just
published a book that call for a "Trillion Dollar Meltdown" assuming the
"orderly unraveling" of the credit-debt-asset market, a possibility that
few hold hope for. A trillion seems now to be a reasonable figure, the
Savings and Loans payout being somewhere in the $300 billion range.
Following hard on the release of this book came news that Fitch has
downgraded MBIA insurance arm. The future of that orderly unwinding is
tied up with the soundness of monoliners like MBIA, whose insurance arm
is the world's largest insurer of bonds. The downgrade was from AAA to
AA that's three levels. While the banks stock rose MBIA fell $.5%.
That the monoliners have been misbehaving and not attending their duties
has been well chronicled and this is a very large boot yet to drop.
Perhaps it's firmly on the foot and does not conceal a brown recluse
spider. I think it's the brown we should most be wary of but any recluse
spider might be avoided. And so for the moment might the banks. There is
little chance of them making anything like the money there were through
the glory days of this century and the damage done cannot be dispersed
by the magic wave of the Feds wand.
For the Fed is hardly a paradigm of virtue. The bank of last resort,
that it now is, or the taxpayer is, hardly inspires one to consider our
troubles have passed and a new dawn has begun. Morris's book leaves no
doubt. Sub-prime was just the first boulder in an avalanche that will
roil through 2008.

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