In 2007 Recovery Partners became engaged in a $500 million bad loan remediation in Asia. Working for certain Multilateral Financial Institutions, in part our activities determined early on that the Central Bank of this particular country had attempted to shore up financial problems in the agricultural sector by using its balance sheet to support unprofitable borrowings by private sector entities. The game had gone on for a few years but was doomed to crash. Unsurprisingly, the finances of this country and the private sector entities involved are in a now in a shambles.

This morning we heard that the Fed is attempting to shore up liquidity problems in the shadow banking system (i.e. bankruptcy-remote private sector asset backed funding vehicles) by extending its balance sheet further. It has now encumbered more than half of it’s almost $1 TRN in financial resources, by supporting re-purchases of assets that  are either non-financeable or non-priceable in the open market – in short, assets that are unsellable, unprofitable and illiquid.

Time to batten the hatches. This is going to get worse before it gets better.

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