THE MYTH OF "MARKETS RESPONDING" ...

From Naked Capitalism ...

U.S. banks are starting to report profits that have headlines reporting that "markets are responding" well to recent developments. Don't be fooled. This is where the financial sector's profits (and money) are coming from:

1. New Revenue is coming from buying into a government-managed money markets full of low interest rates that have led to new mortgage contracts. This means new income streams.

2. New "Unimpaired" Assets are coming from acquiring the "good assets" of failed banks and other collapsed financial institutions. These assets were essentially granted with government guarantees (like the guarantee of absorbing "legacy assets" that are essentially the toxic garbage banks don't want).

3. New Money and Other Guarantees are coming from the Troubled Asset Relief Program (TARP) that currently puts the U.S. taxpayer on the hook for trillions of dollars.

4. FDIC Low-Cost Funding for acquiring firms that the government will (or already has) assume(d) losses on.

In a few words, cheap government money, new "clean" clients from failed institutions, TARP guarantees, and FDIC backing are driving the "recovery" of the financial institutions. The reality is their accounting offices are simply reporting the good news of having free money and government guarantees dumped on their laps.

Think about this the next time someone crows about how well "market are responding" to recent developments.

- Mark