As I have blogged about the last couple times, the never-ending bailout serves the purpose of transferring wealth into the banking system in order to prop it up, prop up the markets, and prop up the economic power structure. I think that has been fairly obvious. Today we have a “smoking gun”, released with the Wikileaks cables. Hat Tip to Credit Writedowns.
From the WikiLeaks cables as published in the Guardian today regarding a meeting with the US Ambassador to the United Kingdom and the Bank of England Governor Mervyn King on 17 Mar 2008:
Systemic Insolvency Is Now The Problem
2. (C/NF) King said that liquidity is necessary but not sufficient in the current market crisis because the global banking system is undercapitalized due to being over leveraged. He said it is hard to look at the big four UK banks (Royal Bank of Scotland, Barclays, HSBC, and Lloyds TSB) and not think they need more capital. A coordinated effort among central banks and finance ministers may be needed to develop a plan to recapitalize the banking system.
Unblocking Illiquid Mortgage-Backed Securities
3. (C/NF) King said it is also imperative to find a way for banks to sell off unwanted illiquid securities, including mortgage backed securities, without resorting to sales at distressed valuations. He said sales at distressed values only serve to lower the floor to which banks must mark down their assets (mark to market), thereby forcing unwarranted additional write downs.
What does this prove? That it was widely known in government circles by the time Bear Stearns went bust that the global banking system was effectively insolvent – and that banks’ unloading garbage assets at inflated prices was seen as critical in preventing the whole global economy from collapsing. It’s good to see this confirmed in writing.
Read the rest of the Credit Writedowns post. I don’t need to steal their thunder. Suffice to say that the Emperor of the Treasury has no clothes.