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Kitchen Sink Misses; Regulators Seek Plan B


Asset values continue to fall.

We're all familiar with "Shock and Awe," the military doctrine based on using overwhelming force to paralyze the enemy and destroy its will to fight.

After reading Prime Minister Brown's equity infusion proposal, I was truly hoping to see the US seize the opportunity to once and for all demonstrate to the credit markets what great military forces have done on the battlefield and deliver sufficient "shock and awe" to turn the tide.

Alas, and with great regret, I would offer: "We missed."

Not that unlimited deposit insurance is a bad thing - or that rerouting $250 billion into the banking system as capital won't help. But neither is sufficient.

Already we're hearing from UK bank leaders that America let its banks off easy: We're nowhere near the dilution, nor the limitations on dividends, imposed on British banks. (In hindsight, my criticisms of Gordon Brown now feel unwarranted. In retrospect, at least he showed courage.)

Unfortunately, with each passing day, I see government after government throwing liquidity and guarantees at a growing credit crisis. One need only look at this week's earnings results to see that what started as a subprime mortgage problem has now spread throughout commercial loan portfolios.

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I'm increasingly worried about the mounting competition among governments to preserve and protect local financial system liquidity. And, as I've offered before, the game being played by the world's largest central banks isn't one in which emerging market economies can compete. (Specifically, I would watch India and Brazil.)

Further, it pains me to see great firms, like Wells Fargo (WFC), put on an equal playing field with the weak. Having allocated sufficient capital through the good times to hold a AAA rating in the bad, Wells has been effectively put in the penalty box for receiving (not taking) massive deposits from the weak (and at lower rates, no less).

While the government's action this week may slow this migration in the future, the missed reality is that the market knows -- and has always known -- who's weak and who's strong.

Are we better off because of the actions taken by the US government this week? Probably.

And the tail risk has probably been removed. But with mortgage rates rising last week by the most they have in 21 years, we still aren't getting at the real crux of our problem: Asset values (across all asset categories) continue to fall.

A long time ago, I heard a psychiatrist say "You have to fall until you find the floor. Only then can you work on rebuilding yourself." The same is true in markets.

Having failed at overwhelming force, I would recommend that global regulators now consider avalanche control. As I see it, there's a mountain of wet snow on the hill, and spring is coming. The sooner we get off the hill, the better.
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