In a follow-up to my post yesterday on the ECB reduction in advance rates on asset-backed securities, I would offer that the markets have now made it clear that liquidity, while nice, is not enough. What the system now needs is capital.

At the same time, I would offer that this morning's Wall Street Journal, which mentioned that Joe Russell was leaving Citadel, should be evidence enough that the missing capital won't be coming from hedge funds (or, I would add, private equity funds) any time soon.

(For those not aware, Mr. Russell was responsible for Citadel's admirable, albeit woefully early, investment in E*Trade (ETFC), which has lost the firm an estimated 35% on its investment to date.)

Similarly, I doubt TPG and Corsair feel great about their current holdings in Washington Mutual (WM) and National City (NCC). Finally, and at the risk of belaboring the point: Given Bank of America's (BAC) experience with Countrywide, I can’t imagine there are too many bank CEOs willing to step in to buy an institution in distress.

Early on in my notes for Minyanville, I offered that bottoms in financial services are defined by the moment when deals can’t get done.

Based on what I am seeing, I expect that the next logical step in our credit crisis will be an acceleration of bank failures, both in Europe and here in the United States, through which national governments will be called upon to provide, not liquidity, but real equity capital.




And Congress, which has until now relied on, to quote former Fed Chairman Greenspan, “the Fed's actions as a wondrous new font of seemingly costless federal funding -- a magical piggy bank," will find itself in the politically unattractive position of authorizing hundreds of billions of dollars to re-capitalize the FDIC and establish this crisis’ equivalent of the RTC.

Then, and only then, will private equity funds, hedge funds and financial institutions step up.

For those still wondering, knife-catching season is now officially closed.