Share prices are surging today on reports of a massive bailout of toxic debt by the US government, coupled with the ban by the FSA on short selling of financial stocks.
At the time of writing, the FTSE is up over 7%, the DAX up by almost 4% and the CAC up by 6%.
Talks are being held between the US Treasury Department and the Federal Reserve to examine proposals to move illiquid toxic assets, backed by mortgage debt into a government backed vehicle; ie they will be taken out of the balance sheets of the banks and financial institutions that created them.
In the event that this this scheme is put into action, this will be the largest bailout in American history.
The actions taken may well soften the blow from the fallout of the sub prime crisis. However, the market cannot be bucked. There is a massive repricing of risk being undertaken which will negatively impact the share prices of financial institutions and, by definition, their willingness and ability to take on risk.
No matter what governments do this repricing will happen and the effects will be felt by everyone, from the CEOs of the leading banks to the ordinary man in the street seeking credit to buy a car or home.
The market will not be bucked. The surge in share prices is in effect a dead cat bounce, not a long term rally.
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