this is from david galland of casey research. he also goes on to say the fed has already gone through more than half of the $1 trillion of treasuries on its books, the rest of its balance sheet now made up of mortgage-backed junk lent to it by banks.

This week Merrill Lynch finally bit the bullet and arranged to sell off about 60% of its Collateralized Debt Obligations. All in all, it sold trash which it had been carrying on its books for a face value of over $30 billion for an amount, depending on how you do the math, of between 22 cents and 5.7 cents on the dollar.

The actual amount is not so important as the fact that the CDOs actually traded hands, a fairly significant event for this phase of the crisis. It is significant for two reasons:

• It establishes a market price for the toxic stuff.
• It puts pressure on other firms clinging to fantasy CDO values to similarly begin unloading the stuff.

In the past, I have used the U.S. government’s forest fire policy as an analogy to the current problems. Namely, that the U.S. government’s decision years ago to put out every forest fire has led to a massive buildup in combustible undergrowth, exponentially increasing the odds of massive, virtually uncontrollable fires.
Similarly, the lobbying, glossing over, government handouts and generally ineffective ducking and weaving that the big financial institutions have engaged in as they try to avoid the righteous retribution coming to them for years of gross mismanagement and moronic miscalculation will only postpone, but not avoid, judgment day.

Merrill’s decision to stand up and take it on the chin (though still trying to obfuscate the actual financial damage through all manner of clever financial engineering surrounding the deal… including lending the buyers 75% of the purchase price), may… just may… begin the process of letting the fire burn.

http://caseyresearch.com/drpRoom.php...