When canny market actors such as Joe Lewis end up on the financial crucifix the bystander must wonder. It is possible Mr Lewis, in his 70s, has had his antennae dulled by the comfort of the Bahamian lifestyle. But that would mean China’s Citic Securities has been equally dulled by life in the workers’ paradise.

And now the Fed has decided, post Bear Stearns collapse, that even more largesse is required for the troubles at hand - this time including non-banks and allied to terms of greater secrecy.

This latter feature is both a sop to financials wishing to preserve their reputations which, for some curious reason, they collectively appear to believe are currently held in high esteem; and to stave off depositor/client scrutiny and exit.

The secrecy is, viewed in these terms, a deception upon shareholders and a symptom of a weak banking supervision regime. Banks in difficulty are being allowed to hide and roll over their solvency issues (where they can) in the hope that their catastrophic losses on assets held proves transitory with the underlying security at some future point marketable.

So far the opposite is happening and yet this behaviour is likely to continue until the Fed eventually comes up with a package soft enough to persuade the banks (and other financials who, like Bear will find an indirect way to access Fed support) to take it up anonymously.

Maybe the Fed just did that; but the opacity of the deal destroys confidence more than the fig leaf excuse of protecting banks’ operations merits. Here is the point: it is currently impossible for investors to determine which banks/other financials are solvent. Allowing all and sundry to tap Fed offers can only turn out to be a drag on the broader economy and delay final settlement. The final, long threatened, collapse of Bear is surely an indication of this.

Lack of transparency and official misinformation that this is only a liquidity issue are proving massively misguided and expensive. The insolvency menace has clearly been underestimated and there is little question central bankers will be back to the drawing board. But next time they will more likely be looking at large recapitalization rescues rather than the smaller ones prompt action would have been limited to in a stronger regulatory regime.

It is stretching belief to imagine the Fed has seen a single significant bank balance sheet written down to reflect economic reality before its assorted and hitherto ineffective soft loan package announcements. A problem thus unquantified cannot be solved.

Banks need recapitalization. That requires transparency - and that someone takes losses. Just ask your average shareholders like Mr Lewis and Citic. Buying time and pretending otherwise is wishful thinking.

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4 comments

  1. Charles Butler // 3/17/2008 01:45:00 PM
    This comment has been removed by the author.
  2. "Cassandra" // 3/17/2008 05:10:00 PM

    Rawdon,

    I beg to differ: reality is highly over-rated.

  3. RJHAdams // 3/17/2008 05:23:00 PM

    LOL,

    especially when you collide with it...

  4. RJHAdams // 3/17/2008 05:23:00 PM

    ...it bites etc etc.

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