Earlier this week Citibank CEO Vikram Pandit leaked a memo which showed that the bank actually made a profit in the first two months of this year. This "news" led to a huge gain in the stock market.
Whew! Thank goodness all the worries about toxic assets on bank balance sheets is over. Now we can get back to passively investing in stocks that only go in one direction - up.
Not so fast! This has all the classic characteristics of a typical bear market rally - sharp but very short in duration. The value of toxic assets held on bank balance sheets will continue to explode like ticking time bombs.
According to the Bank for International Settlements, the world's total of all derivative instruments reached an incredible $700 trillion at its height. The American portion of this total was roughly $420 trillion or some 40 times America's annual production.
If only two per cent of these derivatives fail, it would amount to $14 trillion and $8 trillion of that would be the US share. Meantime, the estimated total capitalization of US banks is only $1.6 trillion.
US taxpayers have forked over roughly $2 trillion in bailouts so far, so that brings US banking capital up to $3.6 trillion. This still leaves a massive $4.4 trillion shortfall.
The stock market is not out of the woods (the bear's domain) yet.......
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