Proving our long-standing conviction that the only thing more certain than death and taxes is that policymakers will always succeed in making a bad situation worse, Hank’s big TARP tease has put the banking sector 2 months behind its nonbank peers in the process of balance sheet repair. While hedge funds and other nonbank financial institutions have been frantically selling assets and taking down leverage, the banks have sat tight. The promise that the toxic paper boring holes in their balance sheets would shortly be expunged had mooted the need to sell. To wit, bank holdings of MBS hit a new record high last week.
The upshot is that while hedge fund deleveraging is nearly complete, as implied by the massive reduction in total spec positions in any number of markets (like currencies), banks haven’t even begun.
~ Stephanie Pomboy, "Send in the Clowns," MacroMavens, November 20, 2008