Denninger: Turkeys all around

Today's state-of-the-markets read, from the straight-talkin' Karl Denninger [emphasis in original]:

Then there's this - apparent FDIC refusal to disclose REO auction results! It seems to me that a well-placed FOIA is in order, but is one really necessary? The fact of the matter is that underlying asset prices are still collapsing in the real economy, as the ability to take on more debt to support the bubblelicious values of yesteryear simply does not exist. The FDIC's refusal to disclose is a raw attempt to prevent the market from realizing the truth - these so-called "assets" are deeply impaired (at best) and there are literally hundreds of banks and other institutions (including most especially The Fed!) that have securities "backed by" these assets that are worth far less than their alleged "face" value.

Recognition of this will set off another leg down in this crisis and the regulators and Washington DC folks know it. They have spent over two years playing "extend and pretend" in the futile belief that valuations would recover by now - but they haven't. It is in fact mathematically impossible for them to do so as the net debt carrying capacity of the private sector has been exceeded.

There are about $10 trillion worth of mortgages outstanding in this country (according to The Fed Z1); of that well over half is linked to Fannie and Freddie. The actual underlying value of the homes linked to that debt was overinflated by roughly half during the years 2001-2007.

Deutche Bank has estimated that more than half of all homes with mortgages will be "underwater" by the end of next year. Hiding the reality of this calamity has become the mantra of the government and its agencies at this point - there is literally more than $1 trillion, and perhaps as much as $2 trillion, in additional residential real estate losses that are being hidden in the system right here and now, and The Government, either directly or via The Fed, is on the hook for the majority of it.

The IMF warned this weekend that a second bailout would "threaten democracy":

Dominique Strauss-Kahn told the CBI annual conference of business leaders that another huge call on public finances by the financial services sector would not be tolerated by the “man in the street” and could even threaten democracy.

"Most advanced economies will not accept any more [bailouts]...The political reaction will be very strong, putting some democracies at risk," he told delegates.

I hope you're prepared for that, because our government has intentionally lied its way through this mess so far. We have refused to force those who are holding paper at well above its actual value to recognize their losses (and indeed have made such a policy via accounting changes!), we have allowed The Fed to monetize $1.5 trillion dollars in bad paper (into which The Treasury immediately issued more debt in order to fund giveaways of various sorts, thereby instantly destroying any beneficial aspect that this program would have otherwise had), and we still have literal hundreds of trillions of "off exchange" derivatives with no accurate accounting of where the net exposure resides or in what amount it exists. ...

Read the whole thing here. He ends on this note:

Whichever the case may be someone is going to be proved critically wrong in the coming days, weeks and months. There are times for tremendous caution, and when asset prices are supported by secrecy and outright fraud the public would be well-advised to stay well away from exposure to those parts of the market that would lead to a 50% or greater loss in a near-straight line.

Unfortunately, at present, this is essentially every asset class - except perhaps copper-coated lead [i.e., bullets].