Reggie Middleton's Boom Bust Blog

Well that's not good news. We were asked yesterday if the Day of Reckoning for the banks and brokers has been postponed by Fed action. The trouble is these Level Three assets aren't going away. The banks, the Fed, and the brokers hope that by letting these sleeping dogs lie, they will eventually wake up and not be any particular harm to anyone.

They hope that by stashing the loans out of sight, investors will stop worrying about them and get back to buying stocks. But three-day old fish doesn't get fresher or more appetizing just because you've hidden the refrigerator in the back room. Yet that seems to be the solution pursued by the Fed and the banks.

Instead of chucking out the garbage loans, the Fed wants to put all the garbage in a hermetically sealed room deep in the bowels of its offices in New York. But just because you can't see something doesn't mean it's stopped stinking.

Eventually, we reckon the Feds will approve of, or even create, new off-balance sheet vehicles for banks to keep these garbage loans in. The loans won't count against the bank's capital requirements. And like a bad memory, the bad loans will be forgotten, sequestered away in their own quiet little cavern like so much captured carbon dioxide.

But this unwillingness to deal directly with the bad loan problem and write down the value of level three assets does not bode well for the U.S. dollar or dollar denominated assets.

Dan Denning
The Daily Reckoning Australia