Monday, 15 September 2008 00:00

One last time: liquidity is not the problem, it is the symptom Featured

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I really think that I will scream if I hear another pundit or regulator comment on how the injection of liquidity will help this or that bank or lending institition. Haven't we all learned by now that the problem is insolvency, not liquidity? The Fed has created an alphabet soup of lending programs, discount windows and mechanisms to provide literally unlimited liquidity to the banks, even the option to offer stock as collateral! That's right, the US government has become the world's largest broker dealer, offering margin lending for stock accounts, mortgage financing and M&A deal finacing and advisory.

From CNBC:

 Investors will wake up to see their portfolios shrunk compared to close of trading on Friday and there will be some panic selling in the U.S. market Monday morning, but the Lehman collapse is unlikely to bring any more investment bank bankruptcies, Dennis Gartman, founder of the Gartman Letter, told CNBC.

Isn't this what was said when Bear Stearns blew up?! 

Asked about the future for Morgan Stanley and Goldman Sachs, Gartman said "I think their names will not disappear, I think they will be viable businesses."

Why in the world would he think this? Viable businesses usually don't have multiples of debt used to buy rapidly depreciating assets used to support a miniscule equity base in a hostile macro environment that has not only taken out 60% of the competition but has significantly reduced or eliminated nearly all of the revenue and value drivers of the entire

Correlation to date 6/08
77.95% GS and MER
84.98% GS and LEH
69.57% GS and MS
Correlation before Securitization Crisis Starts (10/06)
91.26% GS and MER
91.57% GS and LEH
56.19% GS and MS

industry. Goldman and Morgan have the same assets in the same vehicles from the same trades by the same people who went to the same schools that trade in the same markets that Bear, Lehman and Merrill had.  Oh, that's right, Goldman is special. Look at the chart below. The same people trade the same products in the same products the same way to get the same results that power nearly the same stock price moves.

"We really haven't seen anything like this since 9/11, have we, nor have we seen anything like this since the Russian crisis nearly a decade ago," Gartman said. "The question really will be will we all sit back, take a deep breath, believe that daddy is here with the liquidity injections being sponsored by both Fed and treasury."

Many promoters of the concept of markets free of government intervention have criticized the emergency measures taken by the Federal Reserve to inject liquidity in the markets, notably the decision to accept shares as collateral for emergency loans, but Gartman said they were justified.


Read 8846 times Last modified on Tuesday, 13 January 2009 06:53
Reggie Middleton

Resident Contrarian Badass at BoomBustBlog (you can call me Editor-in-Chief)...

Disruptor-in-Chief at, where we're ushering the P2P Economy.