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The Treasury's Speed Bumps


It's likely the Treasury's moves, while intended to slow the rate of decline, can't stop the fall.

Editor's Note: The following piece was written by Minyan Peter, the author of such pieces as Digging Deeper into E*Trade and Credit Cycle Bottoms.

They say you can't time the market, but judging by Friday's news announcements, I am not so sure.

I don't know about anyone else, but the US Treasury's decision to announce a major initiative for sub-prime adjustable rate mortgages on the last day of the fiscal year for Goldman Sachs (GS), Lehman (LEH), Bear Stearns (BSC) and Morgan Stanley (MS) strikes me as anything but coincidence. (Quarter ends are the critical dates for calculating financial institutions' increasingly scrutinized capital ratios.)

In addition, I would add to the list of "timing is everything" announcements, Moody's decision to downgrade certain Citigroup (C) SIV's moments after Citi received $7.5 billion in capital from the Abu Dhabi government.

To be clear, I give both the Treasury and the rating agencies a lot of credit for their coordinated efforts designed to carefully let the air out of our enormous credit bubble. But I would also caution that the bold initiatives coming from the Treasury are likely to be nothing more than a series of speed bumps which, while intended to slow the rate of decline, can't stop the fall.

Already the $200 billion SIV cure-all has withered into an at best $75 billion stop-gap solution. And I expect that, notwithstanding the noble intentions of the public/private sector team working on the ARM project, their ultimate deliverable will be far less than hoped.
As a psychologist friend once told me, "As much as you care about someone and hope for their recovery, they ultimately have to fall until they find the floor." And so too it is with the credit market, as much as we may wish otherwise, it will ultimately need to find the bottom before it can be helped back up.
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