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The high leverage, low cost loans provided to buy the dead assets from the resultant bubble stemming from offering high leverage, low cost loans (just a year or two ago) will create another bubble that is destined to pop. The optimal solution is to let this current bubble pop. It appears that the powers that be really don't want the bubble to pop and fully deflate. The problem is that bubbles cannot be inflated in perpetuity. I think that's why they call them bubbles!

Pray tell, what happens to the toxic assets prices after the private sector overbids for them using excessive, low cost government leverage (or collusion, which is possible when the bank can turn around and sell a swap to the buyer to cover losses on the miniscule equity at risk) when those purchasers then attempt to resell them to normal buyers who don't have access to 6:1,  sub 2% leverage on a non-recourse basis (or the cooperation of the bank to cover their equity losses)? No banks or brokerages that I can think of are offering terms anywhere near this level. Will our government continue to play Global Prime Broker ad infinitum by supplying margin to everyone who asks for it, forever? Highly doubtful!

Well, just like with the subprime crisis, once reality hits the fan, and that cheap and easy credit is no longer available, asset prices will fall - and they will fall hard - just like they did last time. Just like they will do every time. It is the the nature of a bubble. They get popped! The market can rally all it wants on the news of this latest bailout, natural market price discovery has yet to take place, and when it does, downward pricing pressure will rear its ugly head again. Only this time, the assets will fall in price after the government would have spent $100 billion to $1 trillion to buy them, and eat up tax payer monies directly. Natural market price discovery is the endgame, and the only way the bear market turns to a real, full-fledged bull market. I can't give you timing on this, but I can give you the parameters.

Now, many may be saying that the assets are now off of the bank's books so they can resume doing business. Well, that statement first assumes that all banks will sell all of their assets at that optimal price. It also assumes that there is a lot of business to be doing. We still have too many banks crowding into the same markets for one, and most importantly in terms of lending, the only retail and corporate borrowers who are crowing for debt right now are the ones that shouldn't be lent to in the first place. Back to the bubbly days of giving people and companies credit that really shouldn't have it? How fleeting is YOUR memory? Think about it. If you are a very good risk and have the capital and resources to repay loans easily, have you thought about buying a new home lately? You have a lot of people who are in trouble trying to refinance, but then again they are in trouble aren't they? I don't see prudent banks rushing out to lend to them at attractive rates. The same goes for the corporate sector. There are a lot of GGPs out there who need loans, but who really wants to lend to them? They want to lend to Berkshire, who doesn't seem to be in the market for loans right now.

We also have the issue of what happens to the losses. No amount of chicanery, engineering or magic will eliminate losses. Losses are losses and they need to be taken. It appears as if an overbid for assets with losses embedded will simply transfer those losses to the winning bidder. If the winning bidder has a super sweet deal, with nearly no risk, financed by the tax payer, then the losses are transferred from the winning bidder to the tax payer. If there is no winning bidder, then the losses remain with the bank. If the bank and the bidder collude in hiding the losses through inflated prices that are made to look profitable, ex. Mega fund buys the assets from the bank at the Truth + X percent, then turns around and buys a swap from the bank paying off X percent +1 to cover their exposure (which in reality is a guaranteed loss), then things look hunky dory until the underlying assets and or the cash flows start breaking down. Then the losses become apparent somewhere, most likely to the detriment of the taxpayer.

You see, no matter which way you slice it, if there are substantial losses in the system it will surface somewhere and somehow - and there are substantial losses in the system. The market is rallying as if the losses have evaporated. This is a profit opportunity, but you will have to be able to swallow a lot of volatility (or be a lightning quick trader) and have a minimum 3 month to 1 year horizon. Even if the bank and the fund make it look all hunky dory, when the losses do surface and the tax payer ends up biting it, and it will be manifested in lower consumer expenditure due to lower discretionary income which will be felt directly and immediately by the banks and the banks biggest customers. Hence, the losses will come round robin.

My suggestion??? Let's stop playing these games and force those who created the losses to take them now and we can all get back to the business of being the world's pre-eminent global economic superpower. Otherwise, that title may very well be up for grabs.

I will have objective analysis of the most recent bailout plan and its potential upside and fall out very soon and will post it accordingly.