Bancos centrales asustados buscan ganar tiempo, mientras sigue la desintegración

December 12, 2007 (LPAC)--The coordinated move by the major Western central banks announced today is a desperate attempt to maintain the fiction of solvency of the system. By announcing that they will make liquidity available and that they will expand the range of collateral they will accept, the central banks are trying to forestall the death spiral that would occur if speculators were forced to dump worthless assets on the market to raise cash. It is a political move intended to buy time, rather than a move which provides a solution to the financial crisis--a crisis for which there is in fact no financial solution, because the system is already gone. The nature of the problem was made clear in June, when lenders seized and tried to sell collateral from two failed Bear Stearns hedge funds. The lenders quickly discovered that the collateral could be sold for nowhere near the value the funds carried the assets at on their books, with buyer offering a reported 30-cents to 50-cents on the dollar. The lenders were forced to cancel the sales, not because of the losses they would take on the transactions, but because of the impact on the market as a whole of such an action.

Under fair value accounting rules, when market prices are available for identical or similar assets, those prices must be used when calculating the value of assets on your own books, while for assets for which no market price is available, mathematical models may be used to establish values. In the case of the Bear Stearns funds, the price assigned by the mathematical models were considerably higher than the market price, and had the sales continued, a market price would have been set which would have forced the downward valuation of not only the securities being sold, but all similar securities held by other institutions. Thus the sales were halted to protect the fictitious valuations, in order to prevent the financial system itself from collapsing. The central banks' actions today are designed to prevent such sales on a far wider scale, through increased lending to provide working capital and through absorbing some of the paper as collateral. Once the fictitious valuations--the financial equivalent of the emperor's new clothes--disappear, the bankruptcy of the system will be laid bare for all to see.