(Yes…all of this is making me very cranky. Good lord, can’t they just get it over with already and stop pretending everything will be just fine? There is no Tinkerbell.)

However… IMHO after a period of time their unstated bias becomes evident – bonds are sacred. It’s probably just a coincidence that they are the biggest bond company.

As we sort out who will take the losses from the whole financial deflation all of the players will (should) take some of the hit. The bank equity investors certainly deserve a haircut (how close can you shave?). The FDIC and its regulators deserve some slaps (although we know who will eventually pay for that). I am not sure why we should step up to protect uninsured depositors but hey, everyone else is getting a break. The taxpayers are being fined for the privilege of avoiding potential chaos.

So far so good, or bad as in this case. But… in all the talk about banking and capital and Mr. McCulley’s eloquent explanation of leveraging he neglected to mention a key factor in the demise of the giant banks. He mentioned the shadow banking system and their incestuous relationship with the big banks but he did not point out that much of their source of funding is from people like him. A community bank might be 90% funded with deposits but a Citi is about 50%. The rest comes from the sale of … you guessed it!… bonds and paper of various types. So when the supply of that regular source of funding froze we got a problem. We got liquidity problems first and those can be dealt with by turning the US government into the world’s largest pawn shop. Now, it becomes evident there is a real chance that the banks cannot make good on those obligations to their lenders. Too many bad loans. Nowhere does Mr. McCulley step up and offer that they should take a stint in the barber’s chair and get their trimming. No. More government infusions is the ONLY logical answer, he suggests. He has some big boys behind him ready to intimidate the decision makers. Who wants to annoy the government of China?

It seems to me that the largest bond company has more ability to do diligence than anyone, certainly more than the US government. Why don’t they take some responsibility and pain with all the rest of us? In this process of nationalization, temporary receivership or whatever term we finally choose I don’t see how we can protect bondholders at the expense of all the other parties. I know… bonds are different, but they are not without risk and these are risky times. If we let these banks incinerate themselves the bonds will certainly go down with them. Bonds occasionally fail and that gives the underwriters a strong incentive to get the pricing right.

Am I missing something?